Many people starting or growing a business desire to properly organize that business as a legal entity. Usually, that desire stems from a goal to avoid debilitating “nuisance” lawsuits from customers or others who have may be unintentionally hurt or to organize in a fashion that avoids the payment of any tax obligations that are not absolutely necessary.
Some businesses have no legal “structure.” If such a business has a single owner, it is considered a sole proprietorship. If there are multiple owners (even of limited aspects of the business), the business is considered a general partnership. For sole proprietorships or general partnerships, there are no legal requirements (and remarkably, even written agreements are not required) unless a partnership owns real estate.
The biggest risks with use of a sole proprietorship or general partnership is that the owner of the proprietorship or all of the partners of the partnership are personally responsible for the liabilities of the business, even if the individual owner or individual partners personally did not commit the wrong that gave rise to the liability. Thus, a sole proprietor who hires an employee to deliver the company’s product would be financially responsible if that employee has an accident while carrying out the work that the employee was hired to do. Similarly, if a partner in a partnership causes an accident while working on partnership business, all partners of the partnership would be personally liable for the accident.
Of course, all businesses should have insurance, which would ideally cover most accidents. However, insurance may not provide coverage in every instance, especially if there is not a gap in the written insurance policy for the item or nature of the event, which gap precludes coverage; or the claim is larger than the insurance limit.
A business owner has many options concerning the legal structure of that owner’s business. Currently, the most popular business organizations are corporations and limited liability companies (LLCs). Corporations and LLCs offer almost identical liability protections. Both corporations and LLCs have full liability protection from any acts, omissions or accidents that occur in the course of the business, in the event that the liability insurance does not pay the claim (because of a gap in coverage or because the claim exceeds the insurance limit).
But LLCs are frequently better business structures than corporations for many reasons that almost always make LLCs the default business structure in Ohio. LLCs are immensely more informal than corporations and are much less expensive to organize and manage. LLCs can have one member — owners of LLCs are called “members” — or hundreds of members. LLCs are also not required to have annual meetings like corporations.
LLCs can be taxed may be taxed like partnerships, so the LLC is not subject to the “double taxation” of traditional C corporations. That attribute alone makes many small entrepreneurs or businesspeople seek out the LLC business structure, unless their accountant advises otherwise for other tax reasons.
Lee R. Schroeder is an Ohio licensed attorney who limits his practice to business, real estate, estate planning and agriculture issues in northwest Ohio. He can be reached at firstname.lastname@example.org or at 419-523-5658. This article is not intended to serve as legal advice, and specific advice should be sought from the licensed attorney of your choice based upon the specific facts and circumstances that you face.