As business owners we wear many hats and it is easy to overlook a task. Today’s article is a reminder to Maryland business owners to remember to file Maryland Form 1 – Personal Property Return.
Under Maryland law, business owners must file with the State Department of Assessments and Taxation (SDAT) an annual personal property return. See Md. Tax-Property Code Ann. § 11-101. The personal property return basically requires you to list business-owned tangible personal property. If the return is not filed, SDAT will automatically forfeit your business without a hearing or trial.
So why does it matter if you are operating a forfeited business? Here are three reasons why you don’t want your business to be forfeited.
1) You May Be Held Personally Liable.
One of the main advantages of owning a company is having limited liability protection. Limited liability shields your personal home, car and bank accounts from your business creditors. Operating a forfeited company can remove your limited liability protection exposing your personal assets to the reach of your business creditors.
2) You Can Be Criminally Charged.
Believe it or not, in the state of Maryland you can be criminally charged with a misdemeanor for knowingly transacting business in the name of a forfeited business. See Md. Corporations and Associations Code Ann. § 4A-919.
3) You Cannot File or Maintain a Lawsuit.
Let’s say that you own a bakery that provides catering for events. You land a contract for a big event bringing in a $25,000 catering contract. The day of the event comes and your company executes brilliantly. However, when it is time to pay the client refuses to pay. You are now forced to file a lawsuit to get payment. At trial, defense counsel moves to dismiss the suit claiming that your company is forfeited and lacks standing to sue. The judge agrees and your case is dismissed.
Under Md. Corporations and Associations Code Ann. § 4A-911(d), a forfeited LLC loses the right to do business in Maryland and the right to use its name. A forfeited corporation undergoes similar circumstances upon forfeiture but to a greater extent. See Id. at § 3-503(d). A forfeited corporation does not exist at all but a forfeited LLC does exist for limited purposes. A forfeited LLC’s contracts are still valid and a forfeited LLC can still defend a lawsuit. See Id. at § 4A-920.
In 2010, the Court of Special Appeals of Maryland had to decide whether a forfeited LLC had the right to file suit in the case of Price v. Upper Chesapeake Health Ventures, 995 A.2d 1054 (2010). The Court reasoned that the negative implication of the right to defend was that a forfeited LLC did not have the right to file or maintain a lawsuit. See Price at 1061. The Court held that “a LLC whose rights have been forfeited for tax failures still exists as an entity, but may only defend an action in court, not prosecute one.” See Price at 1062.
Moreover in an unreported opinion, the Court of Special Appeals of Maryland said if your LLC becomes forfeited after filing a lawsuit, your case will be dismissed because a forfeited LLC cannot “maintain” a suit. See Remus Enterprises, LLC vs. Freedom Equity, LLC, No. 2318, Filed: December 7, 2015. In Remus the Plaintiff was in good standing when the original complaint was filed but soon after became forfeited.
In conclusion, if you are a business owner you must file your annual personal property return with SDAT otherwise you lose the ability to transact business in Maryland, use your business name, file a lawsuit, and maintain a lawsuit. A forfeited LLC’s contracts are still valid and a forfeited LLC can defend itself in court.
Michael R. Plummer is a licensed attorney in Maryland. The purpose of this blog is to provide news and information on business and immigration law. This blog post is for informational purposes only and should not be considered legal advice. “Without counsel purposes are disappointed: but in the multitude of counsellors they are established.” Proverbs 15:22