Scott M. Kuboff, Esq.
Northeast Ohio Trial Attorney

Understanding Your Rights

Blog

UYR: What Business Form is Right for You

     So you’re thinking about starting a business or, perhaps, your business has grown and a different business form would better suit your needs.   Choosing the appropriate form for your business is a crucial step.   Factors such as ease of creating the entity, or difficulty in maintaining; management and control; taxation; and limiting personal liability need to be considered.  In Ohio, there are several business forms to consider:

  •  Sole Proprietorships:  Sole proprietorships are businesses owned and operated by one person.   This is a fairly common form of business and is extremely easy to form.   Moreover, the owner is taxed once on his or her earnings; there is no double taxation on the business income and then the personal income.   However, a sole proprietor carries a greater risk of personal liability for the obligations, debts, and losses of the business as well as on the acts or omissions of its employees.  
  • Partnerships:  A partnership is an association of two or more persons carrying-on as co-owners in a business for profit.   Partnerships can be either “general” or “limited.”
     
    • In a general partnership, each member has an equal right to manage and control the business.   Unless otherwise agreed, the profits and losses are split equally among the partners.   Moreover, each partner is personally liable for all of the partnerships obligations.  A general partnership does not pay taxes; instead, the partnership’s gains or losses are passed through to each partner based on his or her share.  Finally, although a formal agreement is not required to form a general partnership, it is certainly advised.
       
    • In a limited partnership, at least one partner will be a “general partner” – this partner manages and controls the business – and at least one “limited partner” – a partner with a passive role.   A general partner is personally liable for all of the partnerships obligations whereas a limited partner is only liable to the amount of their financial contribution.  Limited partnerships are taxed just like a general partnership.
       
  • Corporations:  A corporation is a legal entity separate and distinct from the individual owners: its shareholders.    The shareholders elect a board of directors who then appoint officers to run the day-to-day operations of the business.    Shareholders enjoy the benefit of limiting their liability to the amount of their financial investment and have a voice in the management through the election process.  However, corporations are more difficult to maintain as there are more legal formalities and regulations required than of other business forms.   Should a corporation fail to fulfill its legal duties, the shareholders may be held personally liable for the claims and debts of the corporation.  With the exception of “S Corporations,” corporations are, in essence, subject to double taxation: first on its business earnings and then the shareholders are taxed on their dividends.
     
  • Limited Liability Companies: A hybrid form of business is the limited liability company (“LLC”).   LLC’s are taxed like a partnership (i.e. no double taxation) and the members receive limited liability for all LLC obligations to the amount of their financial contribution to the LLC.  Moreover, LLC's are extremely easy to form and maintain compared to that of corporations. LLCs are formed by filing articles of incorporation with the Secretary of State and by entering into an operating agreement with the other members. 

    Selecting the proper form for your business is critical, as it affects issues like control, personal liability, taxes and other issues that directly affect the success of your business.  Each of the business forms has advantages and disadvantages.  Please feel free to Contact Scott to discuss each form and which form is right for your business.