Deciding Between an Ohio Limited Liability Company and Ohio Corporation
Thinking about starting a new business in Ohio? Choosing between forming an Ohio corporation or Ohio limited liability company can be tricky. But identifying the factors that matter--and ignoring the issues that don't matter--makes the decision easier.
Factor One - Formation Costs and Processing Times
People sometimes worry about the formation costs, but in Ohio, setup costs turn out not to be a deciding factor. The Ohio Secretary of State charges the same fee ($125) for both corporations and limited liability companies.
The processing time for corporations and LLCs also mirror each other. Though the precise amount of time it takes depends on the volume of documents the secretary receives, typically it takes two to four days for your documents to get processed.
Note: You can also pay the Ohio Secretary of State for expedited service. For $100, you can get your articles of LLC organization or incorporation processed with 24 to 48 hours. For $200, you can get your articles processed with 12 to 24 hours. And for $300, you can get your articles processed within 4 hours. But, again, note that these times occur for both corporations and limited liability companies.
Summing up, then, the important point to make is that corporations and LLCs should be equivalent in terms of cost and time. Other factors, typically, affect the decision of whether you form an corporation or LLC.
Factor Two - LLC vs. Corporation Operation and Governance
Even though the cost of setup and the filing time don't differ for Ohio corporations and LLCs, the governance of the two entities differs significantly.
A corporation is traditionally designed for individuals to provide funds to a venture without being involved in the venture's operation. These individuals risk no more than their initial investment.
To deal with this reality, the stockholders supplying funds elect a board of directors; these individuals (often, but not always, major stockholders) meet regularly with and oversee corporate offers who manage the business. Furthermore, to make sure that everything works smoothly, the corporation usually works from a detailed set of corporate by-laws that provide the rules and protocols by which the business is governed.
Some common rules include requiring that notice of an annual stockholders' meeting be given a certain number of days in advance. Or that, in order to conduct business, the number of stockholders present and the share percentages represented need to reach a certain threshold.
In comparison, the Ohio state laws that create and authorize the limited liability company option intentionally make operation and management of the LLC easy. A limited liability company may be operated and supervised by the owners directly and rather informally in a manner that resembles the way partners run a partnership. Or a limited liability company's owners (called members) may appoint one member to act as the manager--and give that person full authority.
To generalize, the limited liability company option results in a very simple governance structure that may be totally appropriate for small family-owned ventures. And a corporation provides for much more formal governance such as may be only appropriate when a larger group of individuals band together to fund a bigger venture..
Factor Three - Tax Accounting Benefits and Complexity
Tax accounting represents another area where an LLC works differently from a regular corporation.
Ohio corporations must file both state and federal corporate tax returns. What's more, even Ohio corporations employing only a single shareholder-employer must pay wages and "do" payroll. Wihtout question, the heavy tax return preparation requirements of a corporation--even a small one--add up to a significant amount of accounting and paper work.
In comparison, an Ohio LLC with one owner may be treated as a sole proprietorship, an Ohio LLC with multiple owners may be treated as a partnership, and any LLC may elect to be treated as a corporation.
This tax accounting flexibility of an LLC delivers a couple of big benefits: First, the business can pick the easiest accounting approach if that's what's important. And, second, the business can pick the accounting approach that saves federal and state income taxes if that's most important.
Tip: The S corporation option is actually available to both Ohio LLCs and Ohio corporations. But note that in Ohio corporations do remit an annual franchise tax.
Factor Four - Legal Liability Minimization and Asset Protection
In Ohio, by design, both LLCs and corporations protect your assets and minimize legal liability. More specifically, both types of entity mean that someone who invests in the entity isn't liable for bad stuff that happens inside the entity merely by virtue of his ownership.
Note: Owners of a sole propietorship or partnership are, in fact, liable for the debts of the entity by virtue of their ownership.
Accordingly, the legal liability angle isn't really a factor you need to consider. You should get the same level of protection with either choice.
About the Author
Seattle accountant and writer Stephen Nelson is the author of Quicken for Dummies, QuickBooks for Dummies and two downloadable incorporation guides for Ohio businesses and entrepreneurs: Forming an Ohio Corporation, available at http://www.scorporationsexplained.com/doityourself_OhioSCorp.htm and Forming an Ohio LLC http://www.llcsexplained.com/doityourself_Ohio.htm
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