Ohio economic growth in 2014: choosing your new business’s legal entity

2014 just might be a good year to start your new business in Ohio. The Dayton Business Journal in a March 2014 article reviews evidence that the state's business climate is on the mend after the recent recession.

The piece cites David Goodman, director of the Ohio Development Services Agency or ODSA, as giving state governmental policies credit for creating a friendly economic climate for business owners, resulting in three years of job growth and billions in investment.

Site Selection Magazine, which looks at "business expansion projects," has ranked the state of Ohio overall as second in the nation for "economic development"; Dayton, Ohio, as number 7 nationally in Tier 2 markets; and Cincinnati and Columbus in the top 10 in Tier 1 markets, according to The Dayton Business Journal.

Business entity formation

Given these positive developments, Ohioans considering establishing their own businesses may decide that this is the time to begin planning. One of the most important business law questions and first considerations of a new business owner is to decide what type of legal entity will be the best choice, considering business goals and matters of ownership, management, control, liability and taxation.

Ohio offers many business entities from which to choose. Some of the more common:

  • Sole proprietorship: the sole proprietorship is the simplest business form; the business and its owner are the same; no separate legal entity is created to run the commercial enterprise; taxes are dealt with on the owner's personal tax return; the business owner has title to the assets and is liable for the debts
  • General partnership: an Ohio partnership is formed by at least two people, creating it as a separate legally recognized entity; taxes are "passed through" the legal entity to be reported on the partners' individual tax returns; the partners run the business and are liable for business obligations
  • Limited partnership: a partnership with both general partners and limited partners, who only contribute financially to the business, but do not run it or become liable for the normal obligations of the business
  • Corporation: a corporation is its own separate legal entity from a taxation and liability standpoint; it is owned by shareholders, who hold shares of the business and are paid dividends based on corporate profit; shareholders elect directors to manage the business; directors elect officers to run the business; an "s" corporation is treated differently from a tax standpoint
  • Limited liability company or LLC: Baldwin's Ohio Practice reports that the LLC is the most common business entity in Ohio; a more modern business entity that normally protects its member owners from personal liability; Ohio law allows an LLC to be flexibly structured and managed according to its operating agreement; tax treatment varies depending on the characteristics of the LLC or election
  • Limited liability partnership: a partnership in which the partners are not individually responsible for business liability; may choose whether to be taxed like a partnership or corporation
  • And more

Business counsel important

An Ohioan thinking about a new business should consult with a business organizations attorney early in the process to set goals and understand all the options for business entity formation, including tax and liability issues. The lawyer can draw up all the required legal documents to establish the new business entity and oversee proper filing with authorities, as well as guide compliance with other laws.