Legal entities in ohio: Before you begin a new business, it is important to know which type of entity is right for your business. There are four types of entities this article will address: a general partnership, a sole proprietorship, a limited liability company and a corporation. Below are the definitions of each as well as some of the considerations you should take into account when setting up your new business.
A. Definitions of Partnership, Sole Proprietorship, Limited Liability Company and Corporation
Partnership : A partnership is an association of two or more persons to carry on, as co-owners, a business for profit. See Uniform Partnership Act, § 6(1).
Sole Proprietorship : A sole proprietorship is defined as a form of business in which one person owns all of the assets of the business. Black’s Law Dictionary 1392 (6 th ed. 1990).
Limited Liability Company : A limited liability company is a business formed by one or more members wherein the debts, obligations and liabilities of the company, whether arising in contract, tort, or otherwise, are solely the debts, obligations, and liabilities of the company. See Ohio Rev. Code § 1705.48.
Corporation : An artificial person or legal entity created by or under the authority of the laws of a state. An association of persons created by statute as a legal entity. The law treats the corporation itself as person, which can sue and be sued. Black’s Law Dictionary 340 (6 th ed. 1990).
B. Requirements for Formation of Partnerships, Sole Proprietorships, Limited Liability Companies and Corporations
Partnership : A partnership is the easiest entity to form, because it has no formal requirements for formation. However, if you have a business with multiple partners, it is strongly recommended that you have a written partnership agreement.
Sole Proprietorship : Like a partnership, a sole proprietorship has no formal requirements for formation. This person can operate under the owner’s name or a fictitious name, which must be register with the Ohio Secretary of State. Employer Identification Numbers (“EIN”) are not required for a sole proprietorship without employees unlike all other entities.
Limited Liability Company : A limited liability company (“LLC”) is formed by filing Articles of Organization, an appointment of a statutory agent, and an acceptance of the appointment with the Ohio Secretary of State. See Ohio Rev. Code § 1705.04 and § 1705.06. An operating agreement is essential, but not required by statute.
Corporation : A corporation is formed by filing Article of Incorporation and an appointment of a statutory agent with the Ohio Secretary of State as well as by actions of the incorporator(s), shareholder(s) and director(s). A Code of Regulations and Share Certificates are also required for formation.
C. Requirements for Continuation of the Business for Partnerships, Sole Proprietorships, Limited Liability Companies and Corporations
Partnership : Like the formation requirements of a partnership, there are no statutory continuing requirements, but it is strongly recommended that you have a written partnership agreement. Unless otherwise provided in a partnership agreement, the partnership will be dissolved by the death or bankruptcy of a partner.
Sole Proprietorship : Like a partnership, there are no continuing requirements contained in Ohio law for sole proprietorships. A sole proprietorship is extremely flexible, but dissolves upon the death of the owner.
Limited Liability Company : This entity is extremely flexible. Most of the statute consists of default provisions, which apply in the absence of a written agreement to the contrary. There are no statutory provisions related to officers in an LLC, but an operating agreement or bylaws can create officer positions. LLCs often adopt bylaws to delineate procedures for meetings and/or provide for the management of the LLC.
Corporation : Ohio Rev. Code § 1701.591 lists the requirements with respect to annual shareholder and director meetings and the requirements related to having officers and a board of directors. This entity is extremely rigid in comparison to the other entities in that a corporation must comply with the requirements of the statutes.
D. Liability of Partnerships, Sole Proprietorships, Limited Liability Companies and Corporations
Partnership : Partners are jointly liable for the debts and obligations of the partnership. See Ohio Rev. Code § 1775.14. In addition, partners are liable for the wrongful acts and breaches of trust of the other partners.
Sole Proprietorship : A sole proprietor is personally responsible for all the debts and liabilities of the business.
Limited Liability Company : The debts, obligations and liabilities of a LLC, whether arising in contract, tort or otherwise, are solely the debts, obligations, and liabilities of the LLC. Neither the members of the LLC nor any managers of the LLC are personally liable to satisfy any judgment, decree, or order of a court for, or are personally liable to satisfy any judgment, decree or order of a court for, or are personally liable to satisfy in any other manner, a debt, obligation, or liability of the company solely by reason of being a member or manager of the LLC. However, a member or manager of a LLC could still be liable for the member’s or manager’s own actions or omissions. See Ohio Rev. Code § 1705.48.
Corporation : Except as provided in the Ohio Revised Code, Neither a shareholder of a corporation nor a subscriber to its shares is personally liable for any debts, obligations, or liabilities of the corporation in the absence of a written, enforceable agreement that is signed by the shareholder or subscriber and that specifically undertakes liability for such debts, obligations, or liabilities. See Ohio Rev. Code § 1701.18.
E. Tax Treatment of Partnerships, Sole Proprietorships, Limited Liability Companies and Corporations
Partnership : A partnership is considered a “pass-through” entity by the IRS. This means that the income, loss , deductions, credits and gains will be passed through to the partners and reported on the partner’s individual tax returns.
Sole Proprietorship : Profits and losses from the sole proprietorship are reported on the owner’s personal tax return, form 1040. A sole proprietor must use the same tax year as the individual taxpayer.
Limited Liability Company : An LLC has been described as a “hybrid” entity in that it combines the limited liability attributes of corporations and the tax treatment of a partnership. LLCS may be treated for federal tax purposes either as a partnership or as an association taxable as a corporation depending upon the election made by the LLC to be classified as a partnership or as a corporation. If no election is made, the entity is disregarded as an entity separate form the owner for federal tax purposes. Therefore, if properly formed, the LLC will have the tax advantages of a partnership, such as the pass through tax attributes of its income and distributions that are not in accordance with the ownership of the business. In addition, the owners of the business, known as the “members,” are sheltered from the debts and obligations of the company.
Corporation : A corporation is taxed as a separate entity at a graduate rate structure. Earnings and profit distributions or dividends to shareholders are taxed as income to the shareholders. Certain corporations may elect S Corporation status. S Corporations doe not pay federal income taxes on the corporate level. An S Corporation is a “pass-through” entity like the partnership described above for tax purposes. A C Corporation is a separate taxpayer and must file a return and pay tax on its income. A shareholder of a C Corporation pays tax on the distribution of any earnings as a dividend to the shareholders. This is called the “double taxation” of corporate profits.