Cambridge, MD asked in Business Formation for Maryland

Q: What is the maximum number of stockholders in a Maryland close corporation?

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1 Lawyer Answer
Mark Oakley
Mark Oakley
  • Rockville, MD
  • Licensed in Maryland

A: Maryland does not impose a limit on the number of shareholders of a Close Corporation, but practically speaking, because unanimity is required, and because the whole purpose of a Close Corporation was to allow small business enterprises consisiting of a few owners to essentially operate as a partnership with limited corporate liability (who formerly only had the option of being either a general partnership without limitation on personal liability, or a general corporation with all the expense and formality of boards of directors and observance or corporate formalities), the number of shareholders will naturally be small by definition. Tax-wise, the Close Corporation would ordinarily want to take advantage of a pass-through income entity under a Subchapter S election, which avoids the double taxation of normal Subchapter C corporations (first the corp pays tax on its profit, then the shareholders pay tax on the distribution of the profit as dividends). In order to do that, the Close Coproration cannot have more than 100 shareholders. Therefore, although the Maryand statute does not impose a 100 shareholder limit, in order to claim S-Corp status for income tax purposes, that is the practical upper limit. "Practical" is a relative term here, as the unanimity requirement in a Close Corp for major decisions (absent a unanimous shareholder agreement providing otherwise) means all shareholders have to be able to agree on everything, which is harder to do the larger the number of shareholders. Close Corporations predated the invention of Limited Liability Companies, and have largely fallen out of favor as less flexible and having less desirable attributes than an LLC. If you are contemplating starting a small business entity, you should thoroughly discuss the options with an experienced lawyer and your accountant before you make a choice as to the form of entity.

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