Selecting a Business Structure
According to the Ohio Secretary of State, over 170,000 applications were made for new businesses in 2020. This means that every year, thousands of people are faced with the decision of how to structure their new business endeavor. Business entity selection is an important decision because it affects taxes, liability, and management.
In Ohio, the vast majority of farms are sole proprietorships. This is likely due to the ease of starting and managing a sole proprietorship. With a sole proprietorship, the business and the owner are one and the same, there is not distinct, separate entity. For those new business owners who do want a separate entity, the Limited Liability Company (LLC) is usually the entity of choice. The LLC combines the best attributes of a partnership and corporation. LLCs are a relatively new entity, only gaining popularity in the last 20 years. There are many partnerships and corporations still operating that were set up before LLCs were an available option.
The following are a few, general observations regarding new business structures:
- Sole proprietorships are the easiest businesses to start but provide no liability protection and can only have one owner
- LLCs have largely made partnerships obsolete. An LLC can have the same management and tax structure of a partnership but provide liability protection for all the owners
- LLCs are more popular than corporations due to the flexible nature of LLCs. Corporations generally must have a structure of shareholders, directors and officers. LLCs can be structured in almost any way that suits the owners
- LLCs can be taxed as a partnership or corporation
Below is a table that provides various characteristics of each type of entity. Review the table to determine which entity might be best for a new business endeavor. Also, be sure to consult with an attorney and tax professional to be sure the new business structure suits the needs and goals of the owner(s) and has the most favorable tax structure.