The Lake County Women's Journal

Ohio Business Structures
What type is best for my company?

By: Jodi Littman Tomaszewski

Many women dream of starting their own business, but do not know where to begin. The first step is choosing a good attorney and a good accountant who can guide you through the start up process. Once you find legal and tax advisors that you are comfortable with, the next obstacle is determining how your business should be structured. This can be a daunting task given the multitude of choices available. Should you organize as a corporation, a subchapter S corporation, a limited liability company, a partnership, a sole proprietorship, or some other type of entity? The purpose of this article is to give you an overview of four of the common types of entities that are recognized under Ohio law and to outline a few of the advantages and disadvantages of each of them.

Probably the most common type of small business in Ohio is the sole proprietorship. As the name suggests, a sole proprietorship is owned by one person, and that person usually has complete control over the operations of the company. The sole proprietorship is the easiest and least expensive entity to form because there are no formal filings required with the Ohio Secretary of State to set up the business. The business can operate under the owner's name or under a fictitious name, in which case the fictitious name must be registered with the Oho Secretary of State. A sole proprietorship is what is known as a "flow-through" entity meaning that the profits and losses from the business flow through to the owner of the company. In other words, the company does not pay a separate tax. Instead, all profits and losses of the business are reported as income or loss on Schedule C of the sole proprietor's individual income tax return.

One of the major disadvantages of a sole proprietorship is that the owner of the company is personally liable for all of the business's liabilities. Consequently, if an unpaid creditor files a lawsuit, that lawsuit will be filed against the sole proprietor personally. This is because in the eyes of the law, the owner of the company and the company itself are one in the same. If the business defaults on its financial obligations, the owner's personal assets can be taken to satisfy the obligations.

The second type of legal entity that is available in the state of Ohio is the partnership. A partnership is defined as an association of two or more individuals to carry on, as co-owners, a business for profit. Like a sole proprietorship, a partnership is easy to set up because there are no formal filing requirements with the Ohio Secretary of State. However, it is very important for the owners of the company to enter into a written partnership agreement which is basically a contract between all of the partners which sets forth their duties and obligations. The partnership agreement should also address the procedures and rights of the partners in the event of a disagreement between the partners or a break up of the company. A lot of my clients do not recognize the importance of a partnership agreement because a majority of the time they are going into business with people that they trust. However, in the event that a dispute does arise in the future, having a partnership agreement that sets forth dispute resolutions can save the partners an enormous amount of costs and aggravation in the future.

Like the sole proprietorship, Ohio law does not distinguish between a partnership and its owners. Instead, the partnership and the company are viewed as a single entity under the law. An advantage of this is that a partnership does not pay a separate tax on its profits. A disadvantage of a partnership is that the partners are subject to unlimited personal liability for the debts of the company. Therefore, an unpaid creditor of a company can file suit against one or more of the partners to collect amounts owed by the partnership, and can take the partners' personal assets to satisfy unpaid debts.

The third type of business entity that is recognized under Ohio law is the corporation. A corporation is a legal entity that is separate and distinct from its owners, which are known as shareholders. This means that a corporation can sue, can be sued, and can enter into contracts. In order to set up a corporation, the incorporators must, among other things, file Articles of Incorporation and an appointment of a statutory agent with the Ohio Secretary of State. The shareholders of a corporation elect a Board of Directors which has the responsibility for making decisions for the company. The corporation should also adopt by-laws and regulations which govern the operations of the company.

One of the main advantages of organizing as a corporation is the liability protection it offers its shareholders. Shareholders are generally not personally responsible for the debts of the corporation. The primary disadvantage of a corporation is that, since it is a separate legal entity, it may be subject to double taxation. In other words, the profits of the company may be taxed at the corporate level, and then again when profits are distributed to the shareholders.

One way to avoid the profits of your corporation being taxed twice is to elect under the Internal Revenue Code to become a subchapter S corporation. This is a tax election that allows your corporation to be taxed as a "flow-through" entity similar to a partnership or a sole proprietorship. However, not all corporations qualify to make the subchapter S election. For example, there is a limit to the number of shareholders who can own a subchapter S corporation. There is also a deadline within which you must make the subchapter S election. This is why it is very important that you speak with an accountant and an attorney prior to setting up any of the entities discussed in this article.

The final type of business entity that is becoming more common in today's business world is the limited liability company. A limited liability company is a hybrid of the partnership and the corporation. It was created to offer business owners the tax benefits of a partnership and the limited liability benefits of a corporation. Therefore limited liability companies are taxed as partnerships, but the owners are generally not personally liable for the debts of the company. In order to set up a limited liability company the owners must file Articles of Organization and an appointment of a statutory agent with the Ohio Secretary of State. Additionally, the owners should also enter into an operating agreement which governs the operations of the company. Like a partnership agreement, the operating agreement should also include dispute resolution procedures.

Needless to say, there is a lot to think about when determining the structure of your new business. This is why it is so important to consult a good attorney and a good accountant at the outset, as opposed to after a problem develops.

Jodi Littman Tomaszewski is an attorney with the law firm of Dworken & Bernstein Co., LPA. Ms. Tomaszewski focuses her practice in the areas of general business, real estate and commercial litigation. Her practice includes assisting and counseling clients with regard to general business start up; mergers and acquisitions; commercial real estate sales and leasing; commercial development; and franchise law. Ms. Tomaszewski also represents clients in all types of commercial disputes at both the trial court and appellate court levels. Ms. Tomaszewski's litigation practice includes all types of commercial disputes, construction litigation, contractual claims and eminent domain litigation. Ms. Tomaszewski earned her law degree from Case Western Reserve University.