MSN Law Office

Entity Formation and Structuring
Columbus, Ohio

Entity Formation and Structuring
Columbus, Ohio

Entity Formation and  Structuring
      LLCs
      Nonprofit Organizations
Co-Ops
Social Enterprises
B Corps
Close Corporations
S Corps
Operating/Shareholder Agreements
Advisory Boards
Nonprofit Governance
Tax-Exempt Status
Succession & Disaster Planning
Dissolutions

Formation and Governance

PRACTICE AREAS

Entity Formation and Structuring

Do you want to get paid to do what you love?
Are you worried about exposing your personal assets to the risks of owning a business?
Do you want to raise money to start or grow your business?
Are you ready to be taken seriously as a business and not just a “hustler” or hobbyist?
Are you seeking freedom from your current situation that you hate (your job, your boss, your career)?

Then, it’s time to start your business and pursue your passion!

When should you form your business entity? As early as possible!

  1. Before taking on any significant obligations or exposing yourself to any substantial risks, i.e., signing contracts/leases.
  2. Before hiring various service providers and/or independent contractors.
  3. Before raising money, even from family and friends. Otherwise, you are inadvertently creating a partnership and the question of who owns or owes what is subject to everyone’s memory, misinterpretation, and mood swings.

Common Business Entity Types

There are four common types of business entities you can consider when starting your business: sole proprietorship, partnership, limited liability company (LLC), and Corporation (C Corp). The LLC is the most common choice for new and existing businesses of all types and sizes.

Sole Proprietorship

A sole proprietorship is a business owned by one person. It is the default option when you start a business without any business partners and without filing anything with the Secretary of State.

But as a sole proprietor, you are personally responsible for everything, including all of the debts and obligations of the business. A sole proprietorship is not a separate legal entity, and for that reason alone, it really isn’t an entity anyone should choose. You’ve started a business, but you haven’t limited your personal exposure should anything go wrong.

So if there is a disgruntled customer or client who hasn’t received the promised goods or services, they would have the legal right to sue you. Or if the business owes a supplier or vendor money, that supplier or vendor could sue you for the debt. And if you lose those lawsuits, you stand to lose your personal assets. This is why we always recommend that you establish a business entity (usually an LLC) before you simply start operating your business.

General Partnership

Like a sole proprietorship, a general partnership is the default entity for two or more people who go into business together for a profit.

Each partner is still liable for everything that goes on in the business, including anything the other partners do or fail to do, whether the partners knew about it or not. And this liability is what we call “joint and several,” meaning a business creditor can attempt to recover the entire debt from just one business partner. That business partner would then have to sue their other partners to get them to contribute their fair share. So if your business partner takes on more debt than the business can afford, the business’s creditors can come after your personal assets for the entire obligation and likely will if they get the sense that you are the money behind the operation.


Of course, every business partnership should have a partnership agreement, and it should address how the partners want to handle worst-case scenario situations such as this. But like the sole proprietorship, this default choice of entity is really no choice at all.

LLCs

Forming a limited liability company or LLC is probably the most common choice of business entity for entrepreneurs and business owners.
The reason is because every member (the legal term for owners of an LLC) enjoys limited liability for the debts and obligations of the business, while still being able to participate in the management of the business (at least to the extent allowed by the LLC’s operating agreement). If an LLC incurs a debt, then the LLC—and not the members who own the LLC—is the only legal “person” responsible for paying back that debt. This is true even where the LLC only has one member.

Corporations

Forming a limited liability company or LLC is probably the most common choice of business entity for entrepreneurs and business owners.

Corporations raise money by selling stock in the corporation, even small closely held corporations. Shareholders have the same limited liability as members of an LLC. If a corporation is sued or owes a debt, the shareholders generally can’t lose any more than their investment in the corporation.

There are two reasons why corporations have fallen out of favor with small to mid-size businesses. First, corporations are required to observe certain corporate formalities. For example, corporations are typically run by a board of directors that must follow corporate bylaws. The corporation must have regular board meetings and shareholder meetings. Someone has to keep meeting minutes and make sure that there was a quorum present for the meeting so that business could be lawfully conducted. Corporate resolutions may need to be drafted and approved. If the corporation fails to observe these formalities, then the corporate veil can be pierced and the shareholders can lose their limited liability protection. LLCs are preferred because they are not required to conduct business in such a formal manner.

Second, corporations have a double taxation problem. Unlike an LLC, a corporation pays taxes on its profits each year. Then, when the corporation distributes profits to the shareholders in the form of dividends, the shareholders have to pay taxes again on their dividends. In an LLC, the limited liability company doesn’t pay taxes on its profits. Instead, the members pay taxes on their share of those profits.

Other Business Formation Issues

The vast majority of business entities will be formed as one of the 4 entity types above. But clients often ask about other possibilities that aren’t technically business entities that you can form with the Secretary of State:
It’s very important for entrepreneurs to understand the difference between their legal entity type and their tax status. Contrary to popular belief, an S Corp is not a legal entity; it is only a tax status.
You cannot create an S Corp with the Secretary of State. An S Corp, by itself, does not offer any limited liability protection. Instead, an S Corp is a tax election filed with the IRS that allows the business (which might be a general partnership, an LLC, or even a corporation) to pass the profits, losses, deductions, etc. to the owners for federal tax purposes. Typically, businesses will elect S Corp tax status if it allows the business owners to save money on self-employment taxes. Electing S Corp tax status should only be done in consultation with your accountant.
A social enterprise is a business that seeks to do both good and well. In other words, a social enterprise is typically driven by a motive to do some good in the world while also making money.

This “hybrid” approach is becoming increasingly popular. There are a variety of ways to structure social enterprises, and they can be organized as either a for profit business (as one of the entity types above) or a nonprofit organization (typically a nonprofit corporation).