Getting Past Partnerships

New businesses sprout up every day. From complex financial institutions to sidewalk concession stands, every business owner has grand designs for where the company is going. While starting a new business is an exciting proposition, it is important to consider the risks involved. Without the proper structure, creditors can go after personal assets to fulfill obligations of the company. To avoid this fate, many businesses chose to file with the state as an LLC or Corporation.

To determine the proper entity for your business, you should contact your attorney and discuss your business structure and future plans in detail so your attorney can choose the proper legal structure for your business. However, as a brief primer, here are simplified descriptions of the most common legal structures in Ohio:

1) Sole Proprietorship: Business entity owned by a single owner. Owner personally takes on all assets and liabilities of the company. Owner's personal assets may be attached to satisfy debts of business. Not subject to many laws and/or regulations concerning other business entities.

2) Partnership: Business entity formed between two or more partners. No filings with the state are required except in special circumstances (e.g. when real estate holdings are involved). While it is not required, many partnerships choose to reduce to writing agreements concerning profit sharing, duties of partners, sale of partnership shares, etc. Once again, personal liability attaches for business debts. Here the ante is raised by the fact that any partner can be held liable for another partner's actions.

3) Limited Liability Corporation (LLC): LLC's are "pass-through" entities, meaning the profits and losses of the business will be reflected on the income taxes of the owner. No separate tax filings are necessary. However, LLC's must file articles of incorporation with the state. Futher, most states have statutory requirements with which an LLC must comply to take advantage of the liability protection. Ohio has a number of statutory requirements, including maintaining certain records in the primary office (tax returns, etc.). These statutory requirements are nowhere near the requirements for S or C Corps. The personal liability protection, the pass-through tax status, and the relaxed statutory requirements combine to make the LLC an attractive entity for small business owners.

4) Corporation: The Corporation is the most complex of all the business entities. It becomes attractive when there are a number of principle investors involved and shares of stock will be issued. Incorporating provides complete protection from personal liability and creates a completely separate legal and tax entity. Statutory requirements range from the simple (shareholder meetings) to the complex (SEC filings and regulations).

Subchapter S election - The corporate entity can elect to be taxed on a flow-through basis through filing a subchapter S election. Losses and gains are reported directly on the individual tax returns.

A big advantage for Corporations is distributions or dividends are not subject to employment tax. This allows for flexibility in compensation of shareholders (salary v. dividend/distribution) depending on what the possible tax advantages may be.

Once again, if you are looking to start a business, contact your attorney! Each situation is unique and should be examined with a professional.