Ohio has a wide variety of organizational forms available for businesses. The nature of the business and current tax laws may determine the best choice of entity to be formed for the operation of a business. The following are some of the most common business organizational forms that should be considered:
- Sole Proprietorship
- General Partnership
- Limited Liability Partnership
- Limited Partnership
- Joint Venture
- Limited Liability Company
- Business Contracts
- Business Formation
- Commercial Leases
- Sales, Acquisitions & Business Operations
A sole proprietor is not a separate entity. The individual and the business are one and the same. It may operate under the owner’s name or a fictitious name which should be registered with the Secretary of State. The individual reports the profit or loss from the sole proprietorship on federal Form 1040, Schedule C. A sole proprietor must use the same tax year as the individual taxpayer. There is no separation between the sole owner’s personal affairs and business affairs. The owner owns all of the sole proprietor’s assets and is individually responsible for all of the debts of the business. A sole proprietor is also subject to self-employment taxes, which are Social Security contributions and Medicare premiums on the earnings of the sole proprietor.
A general partnership is an association of two or more persons to carry on as co-owners a business for profit. A partnership is an entity separate and distinct from its partners. A partnership is not required to file a statement of partnership authority with the Ohio Secretary of State, but may do so if it wishes to create a clear public record of the authority of certain persons who can bind the partnership. Each partner is an agent of the partnership for the purpose of executing its business. An act of a partner such as the execution of an instrument in the partnership name, for carrying on in the ordinary course the partnership business or business of the kind carried on by the partnership, binds the partnership. A partnership is considered as a pass-through entity and is not subject to federal income tax. The income, loss, deductions, credits, and gains will be passed through to the partners and reported on the partner’s individual tax return. A partnership must file a federal income tax return on Form 1065. The partnership is the “purest” pass-through entity in that there are virtually no circumstances in which an entity-level income tax will be paid. Partnership income will be taxed to the partners regardless of whether distributions are made.
Limited Liability Partnership
A limited liability partnership is a general partnership whose partners have chosen not to be personally responsible for the obligations of the partnership, whether arising in contract, tort or otherwise. A partner in limited liability partnership remains responsible for his or her own tortious conduct. This form of business operation has become a popular one for law firms and accounting firms. From a federal tax standpoint, a limited liability partnership may elect to be considered a partnership and taxed in the same manner as a general partnership. A limited liability partnership may also elect to be treated as a corporation.
A limited partnership is a partnership formed by two or more persons having as members one or more general partners and one or more limited partners. A general partner is responsible for the debts and obligations of the limited partnership. The management of the limited partnership is vested in the general partners. A limited partner is responsible only for the contribution agreed to in the limited partnership agreement. The limited partner has no right of management. If a limited partner does participate in the control, then such limited partner may become liable for the limited partnership debts and obligations as though he or she was a general partner.
A joint venture is an association of two or more persons or entities to carry out a single business enterprise for profit. The participants combine their property, money, skills, or knowledge. A joint venture is sometimes termed a “joint enterprise” or “joint adventure.” Normally, joint ventures are created by contract and do not contemplate a continuing relationship. The common characteristic of a joint venture is the common control by the participants over the means of accomplishing the given purpose. Generally, joint ventures are treated as partnerships for federal income tax purposes.
Limited Liability Company
In 1994, Ohio adopted RC Chapter 1705 which permits the formation of a limited liability company (LLC). A limited liability company is a hybrid entity that combines the limited liability attributes of corporations and the tax treatment of a partnership. Accordingly, LLCs formed under the Ohio law may be treated for federal tax purposes either as a partnership or as an “association” taxable as a corporation. The tax classification is dependent upon an election made by the LLC. A sole member LLC must be treated as a sole proprietorship and report all federal taxes on Form 1040 Schedule C. A sole member LLC is considered a “disregarded entity.”
For decades, the vast majority of businesses were formed as corporations. The development of the limited liability company has radically altered the number of businesses electing the LLC form. The Ohio Secretary of State reports that more businesses are formed as LLCs than as corporations. The Ohio experience is in accord with the national trend toward small businesses operating as LLCs.
A limited liability company is formed by filing the Articles of Organization with the Secretary of State. The Operating Agreement sets forth the key rights and obligations and profit and loss allocations. The owners are called “members.” Management of an LLC can be exercised by the members or “managers” which are analogous to directors.
A corporation is a separate legal entity separate and distinct from its owners. The corporation is structured as follows: 1) the corporation issues ownership interests (“shares”) to “shareholders;” 2) the shareholders elect the board of directors who are entrusted with management of the corporation; 3) the directors elect the officers who operate the corporation under the board of directors; 4) the shareholders, the directors, and the officers are generally not responsible for the debts and obligations of the corporation; and 5) the profits of the corporation are distributed to the shareholders in the form of dividends. A corporation may be no more than one individual as a shareholder with the same individual acting as both the sole director and holding the minimum number of required offices, e.g., president and secretary.
For tax purposes, a corporation is taxed as a separate entity at a graduated rate structure. Earnings and profit distributions (dividends) to shareholders are taxed as income to the shareholders. It is possible for certain corporations to elect S Corporation status which does not pay federal income taxes on the corporate level. An S Corporation is a pass-through entity similar to a partnership for income tax purposes.
A C Corporation is a separate taxpayer and must file a return on Form 1120 and pay tax on its income. A shareholder-level tax is due on the distribution of any earnings as a dividend to shareholders, giving rise to so-called “double taxation” of corporate profits. However, for many closely held businesses, the impact of double taxation can be mitigated by payments of salary, bonuses, and interest to employee/shareholders, subject to the IRS’s ability to challenge “unreasonable compensation” and to recharacterize purported debt as equity.
A distinction must be made between “C” corporations and “S” corporations. Both can be formed as Ohio corporations and may have identical provisions in their articles and regulations. The only difference is in the way these corporations are taxed for federal income tax purposes. C corporations, governed by Subchapter C of the I.R.C., are not pass-through tax entities. The income, losses, credits and deductions of the corporation belong to and are reported by the corporation. If the corporation’s income is distributed to the shareholders, either as a dividend or a distribution upon liquidation, the shareholders must pay taxes on the income received.
An eligible corporation may elect to be taxed for federal income tax purposes as an S Corporation. An S Corporation does not pay federal income taxes. Instead, its income, loss, gains, deductions, and credits are passed through to its shareholders in computing their individual tax liability. S Corporation status is available only to those corporations that have fewer than one hundred shareholders. Only individuals and certain trusts and estates may be shareholders. S Corporations may have only one class of stock, although it is possible to have both voting and non-voting common shares. The purpose of the S Corporation is to avoid the double taxation of earnings in a traditional C Corporation.
Contracts are important business tools that help address potential risks and define the nature of relationships. The business attorneys at ADW help clients solve and avoid problems through drafting, reviewing, and/or litigating a wide range of contracts.
The particular business entities people choose when putting together businesses can deeply influence their results over time. Our business attorneys regularly advise clients on how to choose the best entities for their particular goals and circumstances. We are happy to explain your options, as well as the benefits or pitfalls in choosing from the following entities: 1) Limited Liability Companies (LLC’s); 2) C Corporations; 3) S Corporations; 4) Professional Corporations; 5) General and Limited Partnerships; or 6) Limited Liability Partnerships. With so many options, our Columbus, Ohio business attorneys have helped hundreds of clients feel confident and comfortable in their decisions.
Whether you are a landlord or a tenant, our attorneys regularly counsel clients on commercial leases. An effectively drafted or negotiated lease can mean the difference between a thriving business and one with cash-flow problems. And if a commercial lease dispute does arise, the attorneys at ADW are happy to assist both landlords or tenants in effectively resolving their issues.
Whether you’re a contractor or a homeowner, our firm is happy to assist you with construction related issues. Contractors must perform all work here in Ohio in a workmanlike manner. Homeowners should be able to expect that. Contractors should also be paid for their work. We are honored to help both homeowners and contractors solve these issues.
Sales, Acquisitions & Business Operations
Operating a business is an exciting, yet complicated experience. Purchasing or selling a business can be even more complex. If you need assistance with operating, buying, or selling a business, the business attorneys at ADW are experienced in helping owners put together all the appropriate pieces of the puzzle.