The first step in forming an Ohio business is deciding what legal entity to use. Generally, business entities include: corporations, limited liability companies, partnerships and sole proprietorships.
Which entity is best?
Sole proprietorships and partnerships are the easiest to form, but are almost never recommended. Except in isolated circumstances, these entities offer no personal liability protection. Without personal liability protections, the owners of the company are at risk to the creditors of the business.
The only advisable options for a startup or established business are either an LLC or corporation. There are many different considerations that are evaluated when considering whether to incorporate or form an LLC.
We offer an initial consultation to assist in evaluating the pros and cons to each type of entity. The following is a list of the advantages and disadvantages.
Taxation considerations when selecting an entity
- An LLC and S-corporation only have one level of taxation; but an S-corp has numerous restrictions on profit distributions.
- A C-corporation is taxed at the corporate level and shareholders are also taxed on the profits distributed (Double Taxation).
- An owner of an LLC, active in the business, will pay self-employment tax on profits.
- The shareholders in the S-corporation, active in the business, do not pay self-employment taxes on their salary from the company.
- Profits from an S-corp must be distributed pursuant to the shareholder’s interest in the company.
- An LLC allows the owners to distribute profits in any manner they choose regardless of capital contributions.
- A limited liability company can pass loss through to the members’ individual tax return.
- A C-corp can only deduct losses against gains of the entity; but those losses may be carried forward.
- An LLC can elect to be taxed as a corporation; a corporation cannot be taxed as an LLC.
Employee benefit considerations when creating a company
- C-corporations are able to establish incentive stock option plans and employee stock option plans with more favorable tax treatment than an LLC.
- A C Corporation can deduct the cost of employee fringe benefits such as accident and health plans, group term life insurance, transportation plans and cafeteria plans.
- An LLC cannot make fringe benefit deductions in the same manner as a corporation.
As with all tax considerations, you should address your current revenue and tax planning with your accountant on a quarterly or semi-annual basis.
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