Corporations
Corporations are generally formed for larger companies that wish to have centralized management and investors and owners who have very little control. The Corporation provides protection from certain personal liability for its officers and stock holders to the extent that the company is properly formed, maintained, and notice is given to the public that they are dealing with a corporation. Liability is spread out among the shareholders and is limited to their investment in the company. A corporation with 75 or fewer shareholders may be eligible as a Subchapter S Corporation, which provides for the flow-through of taxes to the shareholders, allowing for taxation at only one level, rather than at both the corporate level and the individual level. Subchapter S Corporations must be comprised of natural individuals, not companies, and can only have one class of stock. Because of these restrictions, Limited Liability Companies are a more popular choice for smaller businesses.
Limited Liability Companies (LLC)
Limited Liability Companies are a relatively new form of business entity; consequently, the case law dealing with them is sparse. Although the case law is limited, Ohio does provide significant statutory law with the rules governing formation, existence, liability, authority, and dissolution. Many of these rules are default rules that will govern the LLC if other rules are not provided for in the Operating Agreement.
The Limited Liability Company is often used by smaller businesses who prefer the personal liability protection of a corporation with more control over the entity by the owners. The LLC is also popular in Ohio because it allows an individual to elect whether to be taxed as a business entity or to simply be taxed at the individual level. Consequently, the LLC has the benefits of tax flow through to the individual (one-time taxation at owners rate) and limited liability of the individual for contracts, torts and debts of the LLC. An individual, however, remains fully liable for their own actions, and, under certain circumstances the corporate veil can be pierced to impose liability on the owners. To form this entity, proper registration paperwork must be filed with the Ohio Secretary of State. An attorney can assist you with registration, and can assist you in preparing an Operating Agreement and other corporate documents, such as buy-sell agreements, to form and structure your company.
Partnerships
A General Partnership is simply two persons carrying on as co-owners a business for profit. There are no filing requirements to form a General Partnership. In a General partnership, the partners may be personally liable for the contracts and debts of the partners that are incurred in the ordinary course of business of the partnership or with the express authority of the partnership. Individual debts of the partners, however, may only be subject to attachment against the individual partner's interest, and not the partnership itself.
Various types of partnerships provide limited liability, but this article will focus on the two most prevalent: the Limited Partnership (LP) and the Limited Liability Partnership (LLP), both recognized entities in Ohio. A LP is comprised of at least one General Partner and usually several Limited Partners. The General Partner is solely liable for the debt and actions of the LP. This can be a deterrent to many; however, one manner of limiting the liability of the General Partner is to make the General Partner a Corporation. The Limited Partners on the other hand have limited liability for the debts and conduct of the partnership similar to that of a member of an LLC. However, if the Limited Partner participates in the control of the company (statutory exceptions provided), then the Limited Partner is liable to individuals dealing with the Limited Partner with actual knowledge of his participation in the control of the LP. To form this entity, proper registration documents must be filed with the Secretary of State.
The other partnership entity is a Limited Liability Partnership (LLP). This form of entity is really a General Partnership that elects to be treated as a LLP by filing a Certificate with the Ohio Secretary of State. The entity accords all partners with protection from personal liability for the debts, torts, and acts of other partners, except to the extent of the partner's interest in the partnership. It is also more flexible than a corporation and grants the LLP the same tax treatment as a General Partnership. Again, as with any entity, individuals are liable for their own torts and for contracts entered into under their own name.
You should discuss with an attorney the various entities, including those not mentioned in this article, to determine which might be right for you. The rights and obligations of partners is largely governed by the Partnership Agreement, and should be drafted with care. Some forms of entities may have restrictions on the types of businesses that may be conducted under that entity form.