Business Entity Formation
Business lawyers help individuals form business entities for two main reasons:
- Tax treatment
- Liability protection
The most common types of entities are:
- Limited liability companies (LLCs)
- S corporations
- C corporations
- Partnerships/limited partnerships
- Professional corporations
Except for partnerships, each of these business entities provides liability protection for the owner. In a partnership, however, each partner is fully liable for all aspects of the business.
The tax treatment differs depending on the type of entity you choose, the projected size of the business, your personal tax situation, and the participants in the business. For instance, S corporations are identical tax-wise to an LLC, but while only certain people can own stock in an S corporation, an LLC has no such restrictions.
As your business lawyer, Steve Sneiderman will interview you to assess your business needs, coordinate with your accountant, and explain the benefits and risks of the various entity options. Once you’ve decided which type of entity is right for you, Steve will complete the appropriate paperwork, including securing a tax ID number and filing the papers with the Secretary of State. He’ll also create a corporate record book for you and explain all the steps you’ll need to take to preserve your corporate identity.
Contact Steve Sneiderman today to begin forming your new business entity.
Limited Liability Company
A limited liability company (LLC) is the most flexible of all business entities.
Created 25 years ago, this kind of business entity combines the limited liability of a corporation with the governance, ownership, and tax treatment flexibility of a partnership.
The benefits of limited liability companies
- Governance: With a limited liability company, you’re not bound by the statutory obligations of a corporation. Anything that you and the other members of the LLC agree to is fine; corporations have more rigid rules.
- Ownership: While the tax treatment of an LLC is the same as for an S corporation, there are narrow restrictions on who can own S corporation shares. LLCs, on the other hand, offer virtually no restrictions on ownership, giving parties the freedom to seek alternative sources of capital for their business.
- Tax treatment: LLCs are taxed as a partnership, which means that the profits and losses of the entity pass through directly to the owners, and the entity itself does not pay any tax.
A limited liability company is the preferred business entity for most situations. It has no size restrictions—it can range from a single proprietor to 50,000 members. LLCs can also be legally traded on the public stock exchange. In addition, LLCs can have different classes of equity, allowing you to raise money more easily.
Business attorney Steve Sneiderman can help you form your limited liability company. Contact him today to get started.
An S corporation is a special type of corporation formed for specific tax purposes.
It is taxed as a partnership: The entity itself doesn’t pay taxes, and all the profits and losses pass through to the shareholders.
An S corporation is formed basically the same way as a C corporation: Your business lawyer helps you form the corporation, file your articles, get your tax ID number, and set up the corporate record book. The one additional step is filing a form with the IRS that qualifies the business as an S corporation.
One potential drawback is that the structure of an S corporation is limited; limits apply to:
- Number of shareholders
- Types of shareholders
- Classes of stock
Another potential issue is related to taxes:
The deductibility of certain expenses may be different than for other entities, so you’ll want to discuss this with your accountant.
If you’re considering forming an S corporation, business lawyer Steve Sneiderman will explain the details to you as well as discuss potential alternatives, such as an LLC, that may help you achieve similar results without the restrictions. Contact him for more information.
Although C corporations and S corporations are formed the same way, the similarities end there. The C corporation has none of the restrictions that apply to an S corporation:
- Number and type of shareholders
- Classes of stock
- Deductibility of certain expenses
While this may make the C corporation more attractive at first, the drawback is in its taxation: A C corporation has to pay taxes on its profits, and only after that can it pay dividends to its shareholders. For example, if a C corporation earns $100, it may pay $20 in taxes and then pay $40 of its remaining funds in dividends to its shareholders. These shareholders must then pay ordinary income tax (40% or more when you combine federal, state, and local taxes) on those dividends. That double taxation often makes C corporations a bad deal.
Smaller businesses, though, can manage their finances (through compensation, benefits, and other investments) to break even each year, and thus eliminate the corporate-level tax. This should put the owners close to the same position they would be with other entities, but it requires extra attention that may be better used elsewhere.
Business lawyer Steve Sneiderman can explain to clients when a C corporation is the right fit. For instance, if you want your business to go public on the New York Stock Exchange, it has to be a C corporation. In addition, C corporations offer some advantages in terms of deductibility of certain expenses.
Contact Steve today to learn if a forming a C corporation is the right choice for you.
Partnerships and Limited Partnerships
Since the creation of the LLC, partnerships have become a less desirable business entity option.
In a partnership (also called a general partnership), the partners do not benefit from any liability protection—each partner is fully responsible for all of the entity’s debts and obligations. A business law attorney can create liability protection for a partnership through the use of additional entities, but this is a complicated solution.
A limited partnership is a specialized entity that provides liability protection for certain members—the “limited partners.” It looks similar to an LLC, but it has two important exceptions:
The limited partnership must include a general partner who assumes all liabilities.
The limited partners have limited rights related to governance and operations of the business.
Limited partnerships were used frequently in real estate before the introduction of LLCs, which offer the same protection more efficiently.
Contact business law attorney Steve Sneiderman to discuss your options and determine if a partnership is the right choice for you. If it is, he’ll handle all the legal steps required to set up your partnership and position your business for success.
Professional corporations are special entities under Ohio law.
The designation was created many years ago to permit people practicing in specified professional services to enjoy certain tax benefits available only to corporations. At that time, the bodies that regulated these professions did not let their members incorporate, so the legislature stepped in and created this type of corporation for those fields.
Only parties licensed in the specified professions may own stock in a professional corporation.
These are the professions that may organize as a professional corporation under Ohio Revised Code:
- Certified public accountants
- Chiropractors practicing acupuncture through the state chiropractic board
- Occupational therapists
- Professional engineers
- Professionals in various branches of medicine
- Physical therapists
Because Ohio law now allows these types of professionals to form LLCs, C corporations, and S corporations, business law attorneys are rarely asked to set up professional corporations anymore. These more customary entities do not require the filing of a biennial report with the Ohio Secretary of State identifying all of the shareholders and certifying that each is licensed in his or her specific discipline. In addition to being an additional administrative burden (one that is easy to forget about), this requirement of a professional corporation also denies shareholders the anonymity granted to every other type of equity owner in the state of Ohio.
With the evolution of the tax and state corporate laws, it is unlikely that forming a professional corporation right for your business. Business law attorney Steve Sneiderman, however, is well versed in the pros and cons of this and other business entities and will analyze them with you. Contact him today to discuss the possibilities and find the right structure for your business.