Entity Selection

One of the most perplexing issues facing a new business owner is determining what type of entity or organizational structure is most advantageous in conducting business operations: A Sole Proprietorship? A Corporation? A General or Limited Partnership? A Limited Liability Company? The business owner must evaluate such a decision by considering business, legal and tax ramifications of entity selection.

A sole proprietorship is the conducting of business by one owner, typically utilized in small businesses. The sole proprietorship is not subject to any state filing requirements. Additionally, the business owner does not have to follow any formal operation procedures, such as creating corporate bylaws or conducting shareholders’ meetings. The disadvantage to operating as a sole proprietorship is that the business owner is subject to unlimited personal liability for the business’ debts. Also, if the business owner is unable to pay personal debts, the assets of the business may be used to satisfy such obligations.

A partnership is defined as two or more persons joining together for the purposes of conducting business for profit. Most Ohio partnerships take the form of either a general or limited partnership. There are minimal filing requirements for a general partnership. A limited partnership must file a partnership agreement with the Ohio Secretary of State, however. Unlike corporations, partnerships do not pay taxes on partnership earnings. Each partner is taxed on his/her percentage ownership interest. The general partners are personally liable for the debts and liabilities of the partnership.

A limited partnership is defined as a partnership consisting of at least one general partner and one limited partner. Only the general partners are personally liable for partnership debts and liabilities. A limited partner cannot actively participate in the partnership business. Accordingly, a limited partner is liable only for the amount invested in the partnership. There are exceptions, however: The limited partner is also a general partner; the limited partner actively participates in the control of the business; the limited partner knowingly permits his/her name to be used in the name of the limited partnership, unless that name is also the name of a general partner.

A corporation is defined as a legal entity that is separate and distinct from its owners. Ohio statutes detail formation and filing requirements of corporations. The owners/shareholders of a corporation are not personally liable for the debts and liabilities of the corporation. In addition to the high level of state regulations of corporations, the disadvantage of operating as a corporation is that such entity is subject to double taxation, the taxation of both the corporation’s earnings and the owner/shareholder’s individual earnings.

A limited liability company (“LLC”), consisting of members and/or managing partners, is a hybrid between a corporation and a partnership. For tax purposes, the law treats LLCs as partnerships. LLC members are identical to a corporation’s shareholders. LLC members are not personally liable for the debts and liabilities of the LLC. Similar to general partnerships, there are minimal filing requirements for an LLC.

Determining which choice is appropriate for you involves analysis of many different factors. Should you have questions about which entity is appropriate for you, please do not hesitate to contact us.

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