In many cases, a business gets off the ground with the work of a single owner operating a sole proprietorship. As the company grows and becomes more profitable, additional owners often come into the picture, which can necessitate a restructuring of the business. In Maryland, new business registrations are handled by the Maryland Department of Assessments and Taxation. However, by law, neither sole proprietorships nor partnerships are required to register. Instead, the conversion process is handled through internal partnership agreements and by amending any existing licenses to include the names of the new owners.
A sole proprietorship is a business owned by an individual. The business owner is personally liable for the debts and responsibilities of the sole proprietorship. There is no legal distinction between the owner and the business, meaning that any property or contracts owned by the sole proprietorship are also possessed by the owner. In Maryland, a sole proprietorship may be formed without registering with the state, so long as the business is in the name of the owner. However, depending on the type of business, the state may require the sole proprietor to apply for business licenses.
Partnerships are similar to sole proprietorships, except that a partnership is owned and operated by two or more people instead of one individual. Partners are personally responsible for the debts of the business; at the same time, partners have complete control over how the partnership is managed. Like a sole proprietorship, partners do not need to register with the state to start a partnership under the names of the owners.
Because both a sole proprietorship and a partnership can be formed without state registration, there is no need to make any sort of filing with the state to convert a sole proprietorship to a partnership. However, it might be tricky for a sole proprietor to begin sharing management duties with another individual. As a new partnership, you can draft a partnership agreement to establish the contractual arrangement between the parties. The partnership agreement may provide for how the business will be managed, who makes decisions, how profits will be distributed, and how the partnership may be dissolved.
State Registration and Taxes
If your sole proprietorship had any state or local registrations, such as professional or occupational licenses, or state tax registration, you must update the licenses to reflect your new business structure. Further, if you had a trade name registered for your sole proprietorship, you need to update the registration by adding the names of the new partners. Finally, if you had an Employer Identification Number (EIN) for your sole proprietorship, you must obtain a new EIN for the partnership.