Business Structures Sport Benefits, Limits

(Originally published in The Business Journal)

The structure of a company can determine control of the business, frequency and amounts of income distributions, tax consequences, personal liability and more. So choosing the form of a new or existing business is very important.

Below is a brief description of the seven basic entity choices available under Ohio law and how they impact the above factors.

Sole Proprietorship. An individual operating a business without choosing an entity form is considered a sole proprietor. The sole proprietor makes all management and distribution decisions.

While a sole proprietorship has the advantage of pass-through taxation, which means the business’s income is taxed at the owner’s personal income tax rate, the owner is also personally liable for all of the sole proprietorship’s debts and liabilities.

General Partnership. Under Ohio law, where two or more individuals operate a business without having chosen a specific entity form, a general partnership is automatically formed. Absent a partnership agreement, management rights and distributions are determined by the default rules set forth in the Ohio Revised Code.

Like sole proprietorships, a partnership’s income passes through to the individual partners for tax purposes and the partners are personally liable for the partnership’s debts and liabilities.

Limited Partnership. A limited partnership (LP) is essentially a general partnership with the addition of one or more limited partners. However, LPs differ from general partnerships in three significant ways.

First, LPs must register with the Ohio Secretary of State. Second, a limited partner’s liability for the obligations of the LP is limited to the amount of his or her investment. Finally, limited partners are prohibited from exercising control over the partnership.

LPs must have at least one general partner. The general partner manages the business and remains personally liable for all of the business’s debts and liabilities.

Limited Liability Partnership. Limited liability partnerships (LLP) differ from general partnerships in two ways. Like LPs, LLPs must register with the Ohio Secretary of State. Further, the partners in an LLP are not personally responsible for the obligations of the LLP as long as the obligations did not arise out of the partners’ own negligence or wrongful conduct.

Professional Association. Professional associations are formed to render professional services.

A professional service is a service that can be performed only pursuant to a license, certificate, or other legal authorization (e.g. accounting, law, medicine, therapy, etc.). Professional associations must be registered with the Ohio Secretary of State.

Generally, the tax consequences, management rights, and owner liability applicable to Ohio corporations also apply to professional associations. However, an important exception prohibits individuals who are not licensed to perform the services rendered by the association from owning shares.

Limited Liability Company. Limited liability companies (LLC) also must be registered with the Secretary of State.  

The management rights, control, and amount and frequency of distributions of an LLC are determined by agreement in the company’s organizing documents. Owners, known as members in an LLC, have the option of pass-through taxation, or alternatively, taxation at the LLC level.

Members are not personally liable for LLC obligations.

Corporation. Corporations must also be registered with the Secretary of State. Management rights and control are exercised by a corporation’s board of directors and officers.

Directors are elected by owners, otherwise known as shareholders. Directors elect the corporation’s officers.

Corporate shareholders can receive income distributions in the form of dividends, the amount of which is determined by the directors.

Corporate income is taxed at the corporate tax rate. In addition, shareholders are taxed on the dividends they receive. Corporations meeting certain requirements can avoid taxation at the corporate level by electing to have company income pass through directly to shareholders.

Shareholders are not personally liable for corporate obligations.

In some circumstances, Ohio law provides for the conversion of one type of business to another.

Given the variety of choices available in Ohio, both business owners and aspiring business owners should understand the limitations and benefits of operating under a particular form.

Enyeart can be reached at jenyeart@hhmlaw.com or at (330) 392-1541.