Forming An Ohio Corporation Vs. An Ohio Llc

Setting up a new business or investment venture in Ohio

? Interested in minimizing your taxes and maximizing your legal protection? Well, almost surely, you're considering the incorporation versus limited liability company question. And probably scratching your head, too! Fortunately, you can usually come to a good understanding of the two choices and the trade-offs with each by considering four key factors:

Factor One - Formation Costs and Processing Times

Luckily for Ohio entrepreneurs, setup costs are not a deciding factor. Both corporations and limited liability companies cost $125 to file with the Secretary of State.

Furthermore, in Ohio, processing times for corporations and limited liability companies also mirror each other. Not surprisingly, the precise time it takes the Ohio Secretary of State to process formation documents varies depending on the number of other entrepreneurs filing articles. But typically you're looking at two to four days for processing once you've delivered or mailed the articles.

Note: It is possible to expedite this processing by paying extra fees. For an extra $100 your formation documents will be processed within 24 to 48 hours. For $200, your documents will be processed within 12 to 24 hours. And for $300, your documents will be processed within 4 hours.

In short, both corporations and LLCs should be equivalent in terms of cost and time to set up. Other considerations will drive the decision to incorporate or form an 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.

By an accident of history, a corporation (including an Ohio corporation) creates a framework for individuals who won't be involved in a venture operationally to provide funds to the venture and risk no more than their initial investment.

To accomodate these needs, the stockholders who supply the funds elect a board of directors to meet regularly and oversee corporate officers. In order to make sure that the business runs smoothly, the corporation usually works from a set of corporate by-laws that determine how 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 contrast, the laws that create the limited liability company option in Ohio are intended to make operating the business easy. An LLC may be operated and supervised directly by the owners, much in the way partners run and own a partnership. The LLC's owners (or members) may also appoint one member to act as the manager, thus giving 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 - Taxation Issues

Another area where a limited liability company differs from a corporation is the tax accounting.

An Ohio corporation requires both Ohio state and federal corporation income tax returns. Furthermore, an Ohio corporation also means that the corporation must pay wages to people who work in the business--even if the only people working are the owners. It's probably an obvious point, but the requirement to prepare federal and state corporate tax returns and process payroll often represent a significant complication in the business's accounting.

In comparison, an Ohio limited liability company has the option of being treated as a sole proprietorship if there's only a single owner, as a partnership if there are two owners (including a husband and wife), or 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.

Note: One option that, curiously, is available to both Ohio corporations and Ohio limited liabilities is the S corporation. An S corporation is really a set of tax accounting rules and conventions that both regular corporations and limited liability companies can use. An S corporation pays no federal income tax. Note that in Ohio corporations (including S corporations) do pay either an annual franchise tax or commercial activity tax.

Factor Four - Protecting Assets and Reducing Legal Risks

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: In a sole proprietorship or partnership, owners are liable for the debts of the entity merely by virtue of their ownership.

Therefore, legal liability protection isn't really an issue to consider when making the LLC vs. corporation choice; you should get the same level of protection either way.

by: Stephen Nelson

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