When starting a business, one of the most critical decisions is choosing the appropriate business form. In Ohio, the business forms available are sole proprietorship, partnership, corporation, and limited liability company. When selecting your business form, it's important to consider the ease, or difficulty, in creating the entity; the obligations imposed to maintain an active enterprise; any issues concerning the management and control of the business; managing and limiting personal liability; and tax considerations. Moreover, as your business grows, sometimes it is also appropriate for your business form to change to better suit your evolving needs.
Sole proprietorships are businesses owned and operated by one person. While this is a very common business form, a sole proprietor bears risks which include personal liability on losses or debts and personal liability for their own acts and that of their employees. This liability can extend to include the sole proprietor’s personal assets, even those not obtained through the profits of the business or which pre-date the formation of the business. Benefits of this form are the ease to start and that sole proprietors are taxed just like any other person; there is not double taxation of business income and then personal income.
A partnership is an association of two or more persons carrying-on as co-owners in a business for profit and can be either a General or Limited:
- All partners are “general partners”
- Easily formed as no written agreement is required, however, it is strongly advised to have one.
- Unless otherwise agreed, profits and losses are split equally among the partners.
- Each partner has an equal right to manage and control the business.
- Additionally, each partner is personally liable for all partnership obligations.
- A general partnership does not pay taxes; instead, the partnership’s gains or losses are passed through to each partner based on his or her share.
- Consists of at least one “general partner” and one “limited partner.”
- A general partner manages and controls the business while limited partners have a passive role.
- A limited partner’s liability is limited to the amount of their financial contribution to the partnership
- General partners are personally liable for all partnership obligations.
- Limited partnerships are taxed just like a general partnership.
In Ohio, a corporation is a legal entity separate from the individual owners. The owners of a corporation are its shareholders. The shareholders elect a board of directors who, in turn, appoint officers to run the day-to-day operations of the business. Shareholders enjoy the benefit of limiting their liability to the amount of money he or she invested as well as having a voice in the management through the election process. However, corporations are more difficult to maintain as there are more legal formalities and regulations than those imposed on partnerships or sole proprietorships. Additionally, should the corporation fail to fulfill its duties the shareholders may be personally liable for the claims and debts of the corporation. Further, as separate entities, corporations are taxed separately and then the shareholders are taxed on their dividends. This is not true of the “S Corporation” which is taxed like a partnership.
Limited Liability Companies
A hybrid form of business is the limited liability company (“LLC”). LLC’s are taxed like a partnership (i.e. no double taxation) and the members receive limited liability for all LLC obligations to the amount of their financial contribution to the LLC. Moreover, LLC's are extremely easy to form and maintain compared to that of corporations. LLCs are formed by filing articles of incorporation with the Secretary of State and by entering into an operating agreement with the other members.
Selecting the proper form for your business is critical, as it affects issues like control, personal liability, taxes and other issues that directly affect the success of your business. Each of the business forms has advantages and disadvantages. Our law firm can review your situation to see which form is best for your business.
Contact an attorney at Triscaro & Associates today. Please call us for all your legal needs. We offer a full range of legal services to individuals, families and businesses, including personal injury, estate planning, real estate, family law and business matters. We are dedicated to providing the highest quality legal services at a reasonable cost.