The Washington Metropolitan Area (District of Columbia, Maryland, and Virginia) is known as the DMV and is one of the greatest areas in the US to work and live.
Whether you are seeing a concert at Tysons Corner Mall, getting lunch from a food truck on the National Mall, or catching a game at College Park – the possibilities are endless!
The DMV also provides local businesses with a diverse and often affluent customer base hungry for any product!
And the mouth-watering dining experiences are everywhere. If you are hungry for classic regional foods or looking for cutting-edge cuisine, the DMV has you covered. There are Tysons Corner’s steakhouses, great seafood at that Wharf, and the best Salvadoran pupusas in Montgomery County. And, of course, there are great crab houses throughout the area, although Maryland wants bragging rights.
Both we get too hungry, let’s discuss the steps to forming a business in the DMV.
1- Choose a Name for Your LLC
The first step is choosing a great marketing name and then making sure there are no legal issues.
A unique and powerful name can become an invaluable asset, like Coke, Pepsi, Amazon, or Apple. But even large companies make branding mistakes with names. When General Motors introduced the Chevy Nova into Spanish-speaking countries – they soon learned that Nova translated into “no go,” and sales suffered.
To avoid trademark and other issues, make sure the name is not in use and is available.
A quick Google search and a review on the USPTO site will give you a good indication. You also need to check the availability in whichever jurisdiction you choose in the DMV area. And while your LLC will be resident in only one of the jurisdictions, check the other two to ensure there is no conflict as you do business in all three areas.
Also, in Maryland, an LLC name must contain: “limited liability company” or the abbreviation “L.L.C.,” “LLC,” “L.C.,” or “LC.”
In Virginia, you need “Limited Liability Company” or “Limited Company” or the abbreviations “LLC,” “LC,” “L.L.C.,” or “L.C.”
And in DC, you must include the words “Limited Liability Company” or the abbreviation “L.L.C.”
To check for name availability in the jurisdictions, you can go here for DC, Maryland, and Virginia.
2 - Get a Registered Agent
In all DMV jurisdictions, every LLC must have a registered agent to accept legal service should the LLC get sued or have any legal actions filed against it. The registered agent must be a resident of the jurisdiction and have a physical address within the jurisdiction.
Many owners of LLCs act as their own registered agents, which is allowed but usually not a great idea. For just a few hundred dollars per year, professional registered agent companies will accept legal service for you and make sure all your LLC filings on done on time. If you need help finding one, just contact us, and we will answer all your questions.
3 - File Your Articles of Organization
Your LLC is created upon filing your Articles of Organization with the jurisdiction. The Articles are the formal legal document you use to establish your LLC with the State or DC.
Articles of Organizations typically contain:
- The name of the LLC
- The name and address of the LLC’s registered agent
- the LLC’s initial principal office address,
- Often the signatures of the LLC’s organizers
The DMV’s requirements are similar but slightly different. Information about the Articles of Organization, and how to file them, can be found here for DC, Maryland, and Virginia.
The Operating Agreement is the formal document that explains how the members will run the business. It is the road map of how to operate the LLC.
You are not required to file an Operating Agreement for your LLC in DC., Maryland, or Virginia. However, we highly recommend it.
It helps the LLC members understand how to run the business. And it helps avoid arguments and lawsuits in the future by having clear answers to future questions, like:
- Death – What happens to the member’s share when they die? Does the company get it, or do the member’s beneficiaries receive it? Can the beneficiaries vote?
- Liability – Can all the members be held responsible for the actions of one member?
- Taxes – How are the taxes handled, and who has the authority?
- Sell or Keep – What if some members want to sell the business and others don’t?
- New Members – What if you take investment capital for a share of equity? Who decides how that works?
All of these questions, and more, should be spelled out in your Operating Agreement. And, since it never needs to be filed with the state, you can make it as detailed as your like.
There are Operating Agreement templates all over the internet. Some are good, and some are not. The real issue is how to make one that works well for your company, your members, and your future plans. If you need help with creating an Operating Agreement, just contact us, and we will answer all your questions.
4. Taxes and Regulations
Choose How Will You Be Taxed
Many business owners think that LLCs and S-Corp are the same thing. They are not.
An LLC is a state-created entity. An LLC is not a way a business is taxed. An LLC can be taxed as any type of business entity.
For example, an LLC with one owner, is be default taxed as a sole proprietorship (a disregarded entity), with two or more owners, the automatic classification is a Partnership (form 1065). An LLC can elect be taxed as an S-Corp or a C-Corp as well.
An S-Corp cannot be formed straight away. You have to form either an LLC or a C-Corp and if it changed over to be taxed as an S-Corp.
However, the District of Columbia does not recognize S-Corps formations, so they are taxed as C-Corps in DC.
Get the Proper Business Licenses
Almost all businesses operating in the DMV area need local business licenses. The cost of the license is inexpensive – and the risk of operating without them is severe. Check out the requirements here for DC, Maryland, and Virginia.
Don’t Forget Sales Tax
DC
DC imposes a sales tax of 6% on all tangible property sales and certain selected services. So, if your LLC is doing business in DC, you are responsible for collecting the appropriate tax, and filing forms and paying the tax to the District. Food and entertainment are taxed a bit more with soft drinks at 8%, restaurant meals at 10%, hotels at 14.95%, and parking motor vehicles in commercial lots at 18%. There are also several items that have sales tax in DC that you wouldn’t expect like:
- Landscaping services
- Maintenance of Personal Property
- Recruiting Services.
Check out this link for a full list. (will download as a PDF)
Like Maryland and Virginia, DC also imposes a use tax for purchases outside the District that are then brought in to the District. If your LLC is resident in Maryland or Virginia, and you are selling to DC residents, you will be a “foreign remote seller” and required to collect District sales tax.
Maryland
If you are doing business in Maryland, you are required to collect the 6% applicable Maryland sales tax (and 9% on alcohol). Generally, most goods are taxable, and most services are not. There are exceptions, of course, and the information can be found here. For example, food sold in grocery stores and prescriptions are not taxable. As of March 14, 2021, Maryland also applies tax to sale or use of digital product or code. This includes the sale of E-books, Live or prerecorded music or performances, and even subscriptions for electrical services.
Also, if your LLC is in a different state, but you are doing business in Maryland, meaning your clients are in Maryland – as an out-of-state vendor you will need to register with the Maryland Comptroller, collect and pay sales and use tax, and file Maryland sales and use tax returns.
Maryland interprets the phrase “out-of-state Vendor” liberally so get ready to pay those taxes after you look here.
Virginia
Unlike Maryland, the sales tax in Virginia is determined by the state rate of 5.3% on most items, and then counties can add more on top. For example, sales tax in Williamsburg is 7%, 6% in Central Virginia, but 5.3% many other places.
However, there is a flat statewide sales tax of 2.5% on food and personal hygiene products.
And, similar to Maryland, if you are an out-of-state vendor doing business with Virginia residents, you must register, collect taxes, file and pay
5. Filing Annual Reports
District of Columbia LLCs and foreign LLCs registered in the District must submit a report biannually with the Department of Consumer and Regulatory Affairs, along with a registration fee of $300.
LLCs doing business in Maryland must file an Annual Report and Personal Tax Return (Form 1) with the Maryland Department of Assessments and Taxation Personal Property Division. The annual filing fee is $300.
LLCs doing business in Virginia must pay a $50 annual registration fee.
Working in the DMV - Your Next Best Steps
Living in the DMV can be a special experience for everyone – growing families, young professionals, retirees, and more.
The diversity of the three areas makes for a great lifestyle.
And businesses in the area can be wildly successful.
But the regulations and requirements of three separate jurisdictions, plus the federal government, can sometimes seem a bit overwhelming as you try and keep up with the licenses, filings, income taxes, sales, taxes, and more.
It is almost impossible for anyone to keep up with it – and you don’t have to.
Let us help.
Your time is best spent growing your business.
We keep up with all the rest for you.
At CE Accounting, we don’t just file forms and crunch numbers. We analyze your business and your business goals to minimize your tax obligations.
We help your business grow and thrive.
We work and live in the Washington DC metro area and have clients locally and nationwide.
Call today and let us show you your next best steps for growing your business in the DMV.
“This article is not intended to give, and should not be relied upon for, legal tax advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of a qualified professional.”