Creating an LLC in Ohio
If you are starting a business, or if your business is ready to grow to a new level, you may have considered forming a Limited Liability Company (LLC). A limited liability company has two main advantages: 1) Its members' liability for actions taken on behalf of the company is limited only to the members' investment in the LLC; and 2) the LLC has flexibility when it comes time to pay income tax.
The first advantage to establishing an LLC is that the LLC's members' liability for actions performed on behalf of the company is limited only to the members' equity in the company. In a sole proprietorship, if an employee of the business is sued for an action taken during the scope of employment, the sole proprietor can be personally liable for the damages arising out of the employee's conduct. If the sole proprietor owns real estate or has cash, a creditor of the business can not only recover business assets, but the personal assets of the sole proprietor. Conversely, in an LLC, a creditor of the company only has a claim against the company's assets. If the business fails, the members' personal lives don't necessarily need to follow.
It is possible for a sole proprietor -- even a single individual without employees -- to conduct business as a Single-Member Limited Liability Company. An LLC is formed by filing Articles of Incorporation with the Secretary of State of Ohio. The filing fee is nominal ($99). In doing so, the business may, but is not required, to establish a starting date, a termination date, and a stated purpose. The business also needs to appoint a statutory agent, the person who is authorized to accept legal papers (such as a lawsuit) on behalf of the LLC. An LLC might typically appoint a local attorney as its statutory agent. In the event of a lawsuit, the attorney is able to take immediate action to protect the company's interests.
To be afforded the limited liability protection of an LLC, it is necessary that the company disclose to the public and hold itself out as an LLC. Therefore, the State of Ohio requires that in its name, it must include "Limited Liability Company," "Limited," "LLC," "Ltd.," or similar language. It is also extremely important that the company's members not commingle personal assets and debts with company assets and debt. If an LLC operates in name only -- that is, if its members treat company assets as personal property -- then a creditor might assert a claim to "Pierce the Corporate Veil." In doing so, the member or members, may become personally liable for the LLC's actions if the company's assets are not apparently distinguishable from the members'. When filing Articles of Incorporation, it is also important to establish an Operating Agreement. An attorney can draft such an agreement, which governs such matters as distribution of equity, voting, capital contributions, tax provisions, management, insurance, officers, transfers of membership interests, and termination of the company.
An LLC's second major benefit is its flexibility in taxation. The LLC can be taxed as a sole proprietorship, a partnership, or it can elect to be taxed as an S-Corporation. The benefit to electing to be taxed as S-Corporation is that members can become employees of the corporation and in doing so, only pay self-employment tax on what is considered to be "reasonable compensation", but not on separate distributions that the company makes to its members. The IRS is very mindful of this provision, so it is important to work with a tax professional to carefully determine what constitutes reasonable compensation.
Oftentimes, when a business is established, its founders are quick to start working and the business's organizational structure becomes an afterthough. Setting up an LLC is an important consideration when forming a business, whether your business is a start-up or ready to grow to a new level. Creating an LLC is simple, inexpensive, and offers its members' assets protection from company liability, and provides a tax savings when the members prepare their income tax returns. Feel free to contact the Attorney Boyd Law Office, Ltd. for a free initial consultation.
-John A. Boyd
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