Business Formation and Dissolution

Business Formation

Factors to consider when deciding what type of business structure is right for your company include flexibility, complexity, liability protection, implications for your taxes, permits and licensing requirements. The organizational structure also defines the roles and responsibilities within the business by clarifying who is responsible for what tasks. This will help the organization to run more efficiently.

Types of Business Formations

Sole Proprietorship
A sole proprietorship is simple to form and gives the proprietor complete control of the business. Business assets and liabilities are not separate from the owner’s personal assets and liabilities; therefore, the proprietor can be held personally liable for the debts and obligations of the business. Sole proprietorships are preferred for low-risk businesses and owners who want to test their business idea before creating a more formal business.

Partnerships
When two or more people want to own a business together, a partnership offers the simplest structure. Partnerships can be limited partnerships (LP) or limited liability partnerships (LLP). An LLP is like a limited liability company (LLC) in that all partners are granted limited liability protection such as personal assets if the LLC faces bankruptcy or lawsuits. Profits are passed through to personal tax returns, and the partner without limited liability must pay self-employment taxes.

Corporation
Corporations offer their owners the strongest protection from personal liability. The cost to form a corporation is higher than other structures and requires more extensive record-keeping, operational processes, and reporting.

S Corporation
An S Corporation is designed to avoid the double taxation drawback of regular corporations. The S Corporation allows profits and some losses to be passed through directly to the owners' personal income without being subject to corporate tax rates. Not all states tax S Corporations equally. Most recognize them the same way the federal government does and tax the shareholders accordingly. Ohio recognizes the federal S election regarding income tax but still requires S Corporations to pay the commercial activity tax (CAT). In addition, an individual S Corporation shareholder will owe tax to the state on their share of the company's income.

Attorney Contact: Marc R. Hertrick