I am a Toledo Ohio business attorney and I can help you create a new business entity to operate any type of business. There are many considerations bearing on the decision about what type of entity to use and an experienced Toledo Ohio business attorney can help you make these decisions. There are a number of forms of business entity available — sole proprietorships, general partnerships, limited partnerships, limited liability companies, S corporations, and C corporations. Although there are businesses in existence that use all of these forms, almost all new small businesses today choose to be organized as sole proprietorships, LLCs, or S corporations. These three forms are the most popular because they have features that are advantageous to start-up businesses and lack features that can be disadvantageous to such businesses.
Sole proprietorships are businesses owned by one individual that have not adopted another form of business entity. No formalities or filings are required to create or operate a sole proprietorship, so using a sole proprietorship to run a business is simple and inexpensive. Since many start-up businesses operate on a shoestring and have concerns about future viability, saving organizational and operating costs is attractive.
The tax treatment of a sole proprietorship is also attractive. The profit or loss of the business is reported on the owner’s individual tax return, so if the business incurs losses in its formative years, the owner will be in a position to offset these losses against other income.
Sole proprietorships, however, have two disadvantages. The first is that a sole proprietorship is available only if a business has one owner. If there are two or more owners, another form of business must be used. The second disadvantage is that the owner of a business organized as a sole proprietorship is personally responsible for all of the debts and liabilities of the business. If the business fails or if a customer or other person is injured by the operations or products of the business, the personal assets of the owner, including his or her personal bank accounts and investments, are at risk for payment of the resulting claims.
Limited Liability Company
Limited liability companies avoid both of the disadvantages of sole proprietorships. An LLC is an entity that is separate from its owners, so ownership of a business operated by an LLC can be divided between two or more owners, or an LLC can be owned by a one person. As a separate entity, the LLC, rather than its owners, is responsible for the debts and liabilities arising out of its business. If the business fails or if claims are made against the business that exceed its assets, the members may lose their investment in the LLC, but their personal assets are generally not at risk.
An LLC also provides the same favorable income tax treatment as a sole proprietorship. All income or loss of an LLC passes through the entity and is reported on the members’ individual income tax returns. If an LLC’s business incurs losses in its formative years, its members are in a position to offset these losses against other income.
The primary disadvantage of an LLC as compared to a sole proprietorship is that an LLC is more difficult and expensive to create. An LLC is created by filing articles of organization with a state, and annual reports must be filed to keep the LLC in existence. There are fees, and sometimes taxes, payable when an LLC is created and when it files its annual reports. These fees and taxes vary considerably from state to state.
Subchapter S Corporation
The advantages and disadvantages of an S corporation as compared to a sole proprietorship are similar to those of an LLC. Both S corporations and LLCs can have one or more owners, and both are treated as separate entities responsible for their own debts and liabilities, so owners enjoy limited liability. An S corporation is also more difficult and expensive to create and maintain than a sole proprietorship. But the process used to create and the processes necessary to maintain an S corporation are similar to those of an LLC. The costs of creation and maintenance are comparable for both types of entities.
Like a sole proprietorship and an LLC, the income tax attributes of an S corporation pass through to its owners and are reported on their individual income tax returns. There are, however, some differences in the tax treatment S corporations and LLCs, which is one reason that it is important to speak with a Toledo Ohio business attorney.
C corporations also provide limited liability for their owners and are comparable to LLCs and S corporations in terms of their costs of creation and maintenance. The big disadvantage of C corporations for small businesses, and particularly small businesses in the start-up phase, is that the income or loss of a C corporation is taxable to the corporation and does not pass through to shareholders. As a result, shareholders cannot use a C corporation’s start-up or other losses to apply against income received by the shareholders from sources other than the corporation.
The choice between business entities is best made by speaking with an experienced Toledo Ohio business attorney and by comparing the advantages of each and deciding which advantages are most important in your situation.
The following features must be considered when choosing a business entity:
- Tax treatment
No business entity is the best choice for all businesses—all have advantages and disadvantages which should be discussed with a Toledo Ohio business attorney. The form of entity that is appropriate for your business will depend upon which of these advantages is most important to you. For example, if you plan to seek outside investors who may have differing tax and cash needs, or if your business will pay out most of its income currently to the owners, you may want to select an LLC. On the other hand, if you do not expect to bring in outside investors and have a business that will retain substantial income for working capital or other purposes, the employment tax advantages of an S corporation may make that form of entity the logical choice.
I hope that I can assist you in getting started on the process of making the decision about the form of entity that is most appropriate for your business.
I can also help you if you are involved in a business dispute. If you are a minority shareholder in a business and want to know what rights you may have under an operating agreement that has already been established for a limited liability company that you are a member of, I can help you determine what rights you have under the agreement. Also, if you need to collect money from someone or another company that owes your company money because they have breached an agreement with you, I can help you.