When opening a business, you must consider several different factors while
choosing the appropriate business form. In Ohio, businesses are separated
into several categories, including:
- Sole Proprietorship
- General Partnership
- Limited Partnership
- Limited Liability Partnership
- Limited Liability Company
Sole Proprietorships and General Partnerships
Sole Proprietorships and General Partnerships require no filing with the
Secretary of State. While this option may seem attractive to those who
are averse to bureaucracy and “red tape,” Sole Proprietorships
and General Partnerships create a significant level of personal liability.
This personal liability could cause you to lose your own assets, not merely
the business assets, should a law suit be initiated against the Sole Proprietorship
or General Partnership.
A Limited Partnership requires a filing with the Secretary of State indicating
who the General Partners are and who the Limited Partners are. As in a
General Partnership, General Partners in a Limited Partnership maintain
the same liability risk while the Limited Partners are protected from
losing personal assets that were not used to invest in the business. However,
with the status of Limited Partner, additional limitations apply. The
Limited Partner is not permitted to participate in the day to day management
of the Limited Partnership. Should the Limited Partner attempt to manage
the Limited Partnership, the liability protection that he received from
the Limited Partner status disappears.
Limited Liability Partnerships
A Limited Liability Partnership requires a filing with the Secretary of
State and provides protection for each of the partners, regardless of
whether he participates in the daily management of the business.
Limited Liability Companies
A Limited Liability Company was developed as a method of merging the benefits
of both partnerships and incorporations. As can be read in the following
paragraph, Incorporations require regular filing to remain in compliance
with state and federal law. To mirror a partnership, Limited Liability
Companies have members rather than the shareholders of Incorporations.
Members are the owners of Limited Liability Companies and govern the daily
business in whatever manner determined in the Operating Agreement. The
Operating Agreement, while not required to be filed with the Secretary
of State, acts as a binding contract between the members establishing
their duties, responsibilities, and obligations to the Limited Liability Company.
An Incorporation creates the greatest liability protection but also requires
the greatest efforts to ensure compliance with federal and state regulations.
Incorporations are generally divided into two separate classes, Private
and Public. A private Incorporation, shares are not sold on the open market.
Private Incorporations can also be closely held, this lessens some of
the yearly filing requirements but also heavily restricts the ability
to transfer shares. Public Incorporations are traded publicly, generally
through a stock exchange such as the New York or London Stock Exchanges.
Incorporations generally are required to filed independent tax filings
each year as well as partake in Annual Meetings in which the financial
status of the Incorporation must be disclosed and the financial records
available to each of the shareholders.
These business formats are appropriate business forms and legal in the
state of Ohio. However, to determine the best business form for your individual
situation, it is best to discuss your particular business and the risks
associated with each business form with an attorney.