In general, forming a business entity serves four purposes: (1) protecting business owners; (2) saving taxes; (3) providing certainty and structure to business operations; (4) presenting a professional image to customers and the general public.
(1) Protecting business owners:
Certain types of business entities, including corporations and limited liability companies, if properly established and operated, are distinct from their owners. Therefore, when made with a legitimate purpose, actions taken on behalf of such a business do not expose its owners to liability. However, a business entity does not shield from liability that arises from abuse of the business entity, personal guarantees, or other actions taken in a personal capacity or for personal benefit.
(2) Saving Taxes
Depending on the size, profitability, and expenses of the business at issue, an owner can save on taxes by choosing an appropriate business entity. It is strongly suggested to seek the advice of a tax professional prior to setting up a business.
(3) Structured Business Operations
Certain business entities require the enactment of provisions providing for internal governance of the business entity. These provisions (bylaws for corporations, partnership agreements for partnerships, and operating agreements for limited liability companies) provide structure to the business entity and prevent disputes between owners.
(4) Professional Image
A properly formed and operated business entity projects a professional image, thereby encouraging consumer confidence in the business and its products and services.
INITIAL STEPS
Properly organizing a business requires a significant amount of foresight and detail-oriented work. Failure to execute those actions properly can lead to problems as the business grows. With experienced counsel, filling out the necessary paperwork is relatively quick and easy. Additionally, experienced counsel can aid in navigating the process to choose the best entity for the contemplated business, which often requires analysis of complicated tax and legal matters. A variety of options exist for organizing a business in Ohio, including sole proprietorships, partnerships, corporations, and limited liability companies.
TYPES OF BUSINESS ENTITIES
Sole Proprietorship
A sole proprietorship is a business in which one person owns all the assets, owes all liabilities, and operates in his or her personal capacity. The advantages are that no formalities are required in either formation or operation and the business acts as a pass-through entity for tax purposes, thereby eliminating the double tax on business profits. The disadvantages are that a sole proprietorship offers no shield from liability and cannot claim certain tax breaks available to other types of business entities.
Partnership
A partnership is a voluntary association of two or more persons who jointly own and carry on a business for profit. Each partner is equally liable for acts and omissions of the business and each shares equally in the income, unless otherwise agreed by the partners in a partnership agreement. Partnerships come in three different forms: (i) general partnerships; (ii) limited partnerships; and (iii) limited liability partnerships. The primary difference between general partnerships, limited partnerships, and limited liability partnerships is that the latter two each have one “general partner,” who is liable for everything, and other “limited partners,” whose liability is limited to certain amounts.
Corporation
A corporation is a business entity having authority under state law to act as a wholly separate entity from its owners. Pursuant to state law, corporations have the rights to exist indefinitely and to issue equity interests in the business, which is called stock. A corporation is created by filing Articles of Incorporation with the Ohio Secretary of State. The owners of the corporation, called shareholders, create rules, or “Bylaws,” by which the corporation must operate.
Limited Liability Company
A limited liability company, or “LLC,” is a company that is characterized by limited liability, management by members, and limitations on ownership transfer. LLCs combine the flexibility of a partnership with the protection of a corporation. An LLC is a common tool for any business purpose. LLCs have the option of being treated as a sole proprietorship/partnership or a corporation for tax purposes.