If you are starting a new business in Ohio, it is important to understand the different types of business entities available, which Ohio business entity structure is right for your business, and the short-term and long-term effects of certain entity structures. An Ohio business entity can be created by an individual or a group. Each business entity structure has different advantages regarding simplicity, personal and business liability, transferability of ownership, cost, and taxation.
RKPT’s Ohio corporate attorneys can evaluate your situation, provide advice to help you choose the right business entity, advise how business entity selection will affect your personal role and stake in the company, and prepare the legal documents to make your new business a reality.
What Are the Most Common Business Entity Structures in Ohio?
In Ohio, the six most common business entity structures are:
- Sole proprietorship
- General partnership
- Limited partnership
- Limited Liability Company (LLC)
- S Corporation
- C Corporation
The business structure you choose will affect how profits are shared, personal and business liability, and taxation of the business and its owners.
Sole Proprietorship
A sole proprietorship is the simplest and most common form of business entity. In a sole proprietorship, an individual operates a business and reports their income on their personal income tax return. The business owner has complete control over the business, and there is no separate business entity. Administratively, a sole proprietorship is the most straightforward business structure to operate; however, a sole proprietorship does not provide business liability protection for the business owner, and liability can extend to the owner’s personal assets.
General Partnership
A partnership has two or more business owners. The business entity is legally and financially inseparable from the business owners, and the partners have unlimited liability to their personal assets. All partners are treated equally unless otherwise specified in the partnership agreement. Partners enjoy pass-through taxation, meaning profits and losses are reported on the business owners’ personal income tax returns. The business is only taxed at the partnership level when filing income taxes.
Limited Partnership
A limited partnership consists of one or more general partner(s), who control the day to day of the business, have the authority to bind the company, and have joint and several liability for the debts of the company. Additionally, there are limited partners who have no managerial control over the business and who are only liable for their investment in the business. Like a general partnership, partners enjoy pass-through taxation. A limited partnership is a simple business entity structure that can be easily dissolved upon the death or bankruptcy of a partner.
Limited Liability Company
A Limited Liability Company (LLC) consists of members and offers additional liability protection for each member while retaining many of the advantages of a partnership. Members receive membership interest in the company, enjoy pass-through taxation, and can elect to be taxed as a partnership. An operating agreement governs the relations among the members and between the members and the company, and includes provisions on the management of the company, restrictions on transfer of membership interest, and other formalities of the company.
S Corporation
An S corporation is a closely held corporation, LLC or partnership that elects to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code.
S Corporations, in general, do not pay income tax. Instead, the corporation files an informational tax return only, and passes through profits and losses to the shareholders who report such income or loss on their individual tax returns. In general, an entity is eligible for Subchapter S election if:
- If has no more than 100 shareholders;
- All shareholders are individuals;
- All of the shareholders are residents or U.S. citizens; and
- The Company only has one class of stock.
C Corporation
A C corporation is a separate legal entity that allows an unlimited number of shareholders and shareholders are not responsible for the debts of the company. A closely held corporation may have a single or a few shareholders, while publicly traded corporations can have thousands of shareholders. Shareholders typically do not manage the company, and instead, elect a Board of Directors who control the corporation. The corporation files its own tax return and pays taxes on its income. C corporations are subject to “double taxation,” where the corporate entity is taxed and shareholders pay an additional tax on the distribution of any dividends to shareholders.
C corporations offer the highest degree of liability protection for shareholders, and ownership can be transferable through the sale of stock; however, they are administratively more complex, requiring extensive record-keeping, operational processes, and reporting.
Contact RKPT’s Business Attorneys for Help with Business Entity Structure
Choosing the structure of a business is one of the most significant issues facing a new business owner. RKPT’s business attorneys have extensive experience advising and representing businesses of all sizes and at all phases of the business life cycle. We can explain the types of business entities and help you choose the business entity that will best suit the needs of your company.
To learn more, call (513) 721-3330 or contact RKPT’s business attorneys today to schedule an appointment to discuss your situation and how we can help.
