Business Formation Counsel

Legal Structure of a Business

Choosing the legal structure best-suited to your business is critical. We always begin by taking the time to understand your short and long term business goals so we can help you select the appropriate legal framework for your business.

Get started on your business formation strategy with a consultation with one of our Business Law attorneys.

The most common forms of doing business are: sole proprietorship, limited liability company (LLC), corporation and partnership. Each of these structures has benefits and disadvantages.

Sole Proprietorship:  This is, by far, the simplest business form. Essentially the business is an extension of the individual owner, even if it is operated under a trade name. The net income, after expenses, is taxed to the owner. The greatest disadvantage is that the owner and the owner’s assets are exposed to claims of creditors and/or persons who may be injured by business’ activities.

LLC:  The LLC has become the most popular form of doing business. A properly formed and maintained LLC offers limited liability to its owner(s), i.e. In most instances, the owner(s) and owners’ assets are not subject to the LLC’s creditors and others having claim against it. There are exceptions; however, particularly where the owner(s) sign personal guarantees or, potentially in instances where the owner(s) violate certain laws like Ohio’s Consumer Sales Practices Act.

In addition to providing limited liability, another advantage of an LLC is that once it is formed, there is little, if any, ongoing maintenance cost. Unlike a corporation, LLC’s are not required to have annual meetings or general minutes. Generally, the LLC pays no taxes on its income; rather, the income passes through the LLC and is taxed to the owner(s) at his/their individual tax rates.

Sub-chapter S Corporation:  Like an LLC, a Subchapter S corporation offers limited liability to its owner(s) and does not pay tax on its income, but rather acts as a pass through entity. The corporation’s shareholders, however, are required to hold at least an annual meeting or take action by unanimous consent and document the actions in the form of minutes.

Partnership:  There are numerous forms of partnerships, but the most common for two or more persons is a general partnership in which each partner owns a certain percentage of the business. Income is distributed according to these percentages. While a general partnership provides some protection to its owners, in that creditors and claimants must first look to satisfy their claims from the partnership assets, the personal assets of the general partners may be exposed.