If you are an entrepreneur in Aurora with an idea for a small businesses or an experienced business owner looking to set up a new entity, one of the first steps is business formation. As part of the business formation process, you must choose which type of legal business entity your new business will be. This can have important tax and management consequences, and it is important to choose the type of entity that will work best for you.
Types of Business Entities in Ohio
Persons who are starting a business can choose between several different types of business entities in Ohio, including:
1. Sole Proprietorship – In a sole proprietorship, one person owns all of the business assets and has total control over business management.
2. Limited Liability Partnership or General Partnership – A partnership allows multiple persons, called partners, to manage a business together and share in its profits. General partners are personally liable for all business debts; however, limited partners in a limited liability partnership (LLP) are only liable for business debts to the extent that they have contributed money or assets to the business.
3. Limited Liability Company (LLC) – Like a partnership, an LLC allows multiple persons to manage a business and to share in its profits. An LLC is run according to its articles of organization, which must be filed with the Ohio Secretary of State. Unlike a general partnership, members of an LLC are not personally liable for business debts.
4. S-Corporation or C-Corporation – These types of corporations allow several persons, called shareholders, to own a business together. A corporation is run according to its articles of incorporation, which must be filed with the Ohio Secretary of State. A corporation is usually run by a board of directors or board of governors, which are elected by the shareholders.
Tax Consequences of Choosing a Particular Business Entity
In addition to the differences in management structure discussed above, the type of business entity that you choose can have important tax consequences. One of these consequences is “double taxation.” Double taxation, which occurs primarily in corporations, is when a business’ profits are taxed once at the business level (business income tax) and then taxed again at the individual level (individual income tax). Because income tax in the United States is a bracketed system, how much the profits are taxed at each level will depend on both the business’ annual income and the individual’s annual income.
Partnerships and sole proprietorships are subject to “pass-through taxation.” These entities are taxed as part of their owner’s individual income tax. For a partnership, a partner must apportion business profits or losses to their taxes in proportion to the share of the businesses that they own.
Limited liability companies in Aurora can choose whether they wish to be taxed as corporations or as partnerships. This flexibility, in addition to the flexible management structure and limited liability, makes LLCs a popular form of business entity.
Of course, choosing the correct formation for your business, and understanding all necessary tax implication can be a difficult endeavor. If you need help with these measures or have any questions related to business or tax law, contact the Law Office of John C. Grundy today to discuss what’s on your mind by calling us at 330.637.9030. John Grundy has been providing quality legal services in the areas of Estate Planning and Business Law to individuals and businesses in Warren, Aurora, Youngstown, Cortland, Akron and all of Northeast Ohio for over 30 years.