Types of Business Entities: Choosing The Right One for Your Ohio Business
Ohio business owners should carefully consider the types of business entities to determine the best arrangement to achieve their business goals. The business form is important; it can determine the amount of control, the taxation, and the owner’s liability.
The business entity definition helps understand the major features of a business type and the advantages and limitations in each type. Owners must be sure that they have the desired amount of legal protection. They must weigh the benefits and risks of each type of business to decide the best choice for their situation and goals. A good place to start is with the common types of business entities in Ohio and the widely-accepted business entity definition for each.
I. Defining Each Type of Entity
The sole proprietor is a business form in which the owner or proprietor makes the decisions and is personally liable for the debts, obligations, and liability.
Partnerships are groups of two or more owners that join together to do business. The laws of Ohio make each partner responsible for the partnership’s debts and obligations. The law holds partners legally responsible for the wrongful acts of the other partner or partners. These wrongful acts include violations of duties to other partners.
The Limited Liability Company is a type of business recognized by Ohio law. The LLC is responsible for its debts and obligations. The LLC form offers protection for the owners against debts, obligations, and claims.
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II. Forming the Business and Continuing in Good Standing
Under Ohio law, sole proprietors and partnerships do not need to meet any formal requirements. LLCs and Corporations must meet filing and organization requirements.
Proprietors can operate under the name of the owner or some other name. Proprietors must register their business name with the Ohio Secretary of State. A proprietorship can operate under the owner’s identification but must have an EIN if it has employees. A sole proprietorship can continue indefinitely. The law automatically dissolves the proprietorship upon the death of the owner.
Partnerships are simple and easy to form. Two or more persons can agree to do business as partners. Because there are no requirements and limits, partnerships need agreements to establish the rights and duties of the partners. Once formed, partnerships continue until the partners cease operating as a partnership. By law , a partnership ends by death or bankruptcy of a partner.
Limited Liability Companies must meet the below-listed minimum state formation requirements.
- File Articles of Organization with the Secretary of State
- Appoint and name a registered agent
- Obtain acceptance of articles and agent by the Secretary of State
LLCs usually need a set of by-laws to establish procedures for doing business and making decisions. LLCs are flexible and typically continue by following the procedures in their by-laws and changing them as needed.
Corporations must meet Ohio requirements for formation and continuing operations.
- File Articles of Incorporation for Approval of Secretary of State
- Appoint a Statutory Agent for Approval of Secretary of State
- Meet requirements for incorporators, the initial board, and the first meeting of the board
Corporations require must continue in good standing by following Ohio requirements for annual meetings of the Board and shareholders. They must meet requirements for filing annual reports. Corporations that fail to meet the rules may violate duties owed to the public and its shareholders.
Sole proprietors are personally liable for the debts, obligations, and duties of the business. Partners are also personally liable for the debts and obligations of the partnership.
LLC debts, contract obligations, and other liabilities of the belong only to the LLC. The members, managers, and officers are not personally responsible. The members and managers of an LLC are liable for their errors, actions, and failures to action.
The shareholders are the owners of the corporation, and, except as stated in the Ohio law, they are not personally liable for the corporation’s debts and obligations. Ohio law holds shareholders personally liable when they make agreements to do so.
IV. Taxes and the Types of Legal Entities
The basic tax treatment of the entities is an important selection factor. The major difference is whether the government taxes the income as business income or income of the business owners.
- Sole proprietors report income and losses on their personal tax returns like individual taxpayers.
- Taxation of partnerships is a pass through requirement. The partners must report the partnership income, loss, deductions, and exemptions on their individual returns.
- Taxation of Limited Liability Companies depends on choices made by the organization. They can be taxed as a partnership and pass through too individual owners or as an entity like a corporation.
- Taxation of corporations is on the entity and not the individual owners or shareholders. The tax laws set separate rates for corporations. Some corporations may elect to be an S corporation and pass through income and tax liability to its owners like a partnership. Most corporations are C-Corporations and must pay taxes as an entity.
When setting up a business or deciding on the business form, owners should consider the requirements for forming and continuing the business including costs. Control of the business is a vital consideration. The four types of business entities offer different degrees of control by the owner.
Sole proprietorships offer the highest degree of control on the owner. The proprietor makes the decisions for the business. Partnerships also have a high degree of inside control. The partners make the decisions. A written partnership agreement can establish terms like majority rule or unanimous agreement.
Limited Liability Companies or LLCs enjoy freedom to set-up and operate within the rules of the Ohio law. They are free to have by-laws to control the business, establish officers, and establish company management.
Corporations have strict requirements for shareholders and shareholder rights. The control of the corporation is usually in the common stocks and they control key parts of the business such as the directors and main officers.
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