Starting a Business: Essential Steps and Legal Structures You Need to Know

Congratulations on becoming a business owner! This journey is challenging yet rewarding. Let's guide you through the essential steps to launch your business successfully.

Choosing Your Business Structure

Businesses can be organized in many different ways. The most common types of business structures are sole proprietorships, partnerships, limited liability companies (LLCs), and corporations. There is no one-size-fits-all solution for what you should choose. 

Sole Proprietorship:

• A simple structure where one individual owns and operates the business.
• There is no legal distinction between the owner and the business entity.
• There is no required filing with the State to create the business and no required internal documents.
• The downside to a sole proprietorship is that you are personally liable for everything related to the business.
• If the business makes a mistake, your personal assets (your house, checking account, etc.) are all at risk and can be used to satisfy the liability.
• You do not need a separate business-only checking account for your sole proprietorship.
• As a sole proprietor, you can represent yourself in court.
• You report all income generated from the business on your personal taxes.
• As a sole proprietor, you can only have one business owner.

Partnership:

• Partnerships require more than one person to have an ownership interest in the business.
• A partnership operates similarly to a sole proprietorship, where you are personally liable for the business; however, you share this liability with the partner.
• Each partner is jointly and severally liable for the business, which means they are 100% liable for the business, even if they only own a small percentage.
• Partnerships are not required to be registered with the State of Ohio or the federal government.
• Income generated from the business will be on each partner’s tax return.
• Any partner can represent the partnership in any court.
• There are also variations of a partnership that limit liability.

Limited Liability Company:

• A limited liability company (“LLC”) is a separate legal entity.
• It is treated as a separate person apart from its owners by the law.
• As a separate person, LLC’s must be represented by attorneys in court and administrative proceedings.
• Owners of LLC’s have “membership interest” in the LLC and are called members.
• To create an LLC, you must file Articles of Organization with the Ohio Secretary of State.
• LLCs provide the owner(s) of the LLC protection; the business’s liability is only the business and personal assets cannot be used to satisfy the LLC’s debts or obligations.
• Creditors can get to the LLC owner’s personal assets if the creditor can ‘pierce the corporate veil’ or can show no formalities were followed.
• LLC formalities require the business to have separate checking accounts apart from the individual owners, have separate business-only credit cards, and take other steps to keep from commingling personal and business assets.
• LLCs should have an operating agreement that outlines who owns the company, what votes are needed to make decisions, and what happens if an owner dies, but it is not required.
• LLCs can obtain an EIN number, but it is not required.
• LLCs can be taxed as a pass-through entity (like a sole proprietorship or partnership) or like a corporation.
• If the LLC wants to be taxed as a corporation, it must make an S or C corp election with the IRS.

Corporations:

• Corporations are separate legal entities from their owners, meaning corporations are treated as separate persons by the law.
• Corporations must be represented by attorneys in court and administrative proceedings.
• Owners of corporations own ‘stock’ in the company and are called stockholders.
• To create a corporation, you must file Articles of Incorporation with the Ohio Secretary of State.
• Stockholders’ liability is limited - only corporate assets can be used to satisfy corporate liability. The exception is if a creditor can pierce the corporate veil or show the corporation followed no formalities.
• Corporations are required to hold, at a minimum, annual meetings, have bylaws and keep records of all meetings/decisions of the company. T
• he formal requirements of meetings and documentation are much more comprehensive than those of an LLC.
• Corporations must obtain EINs.
• Corporations are taxed as a corporation without any flow-through tax options.

Obtain an EIN Number

An EIN number is an employer identification number. An EIN is the equivalent to a person’s social security number for the business. It distinguishes the business from every other business, even those with the same name in a different state. EINs are obtained by the Internal Revenue Service. For all entities except corporations, an EIN is not required, though recommended.  EINs are used when filing tax returns. It is also used when working with other businesses to buy or render services so the other entities can accurately report their income streams. If you do not have an EIN number for your business, you must provide your social security number. To ensure a layer of protection for your personal information, it is recommended to obtain an EIN when engaging in business. 

Obtain any state licenses

Every business type is different and has different state-specific licenses. The most universal license is a sales and use tax license (sometimes called a “vendors license”). If you sell a product or service subject to a tax, you must register your business with the Ohio Business Gateway. The OBG is an online portal that allows you to report and pay sales and use tax electronically. 

Other licenses may be required, depending on the type of business you are opening. To determine if you need a license from the State of Ohio check the Licenses and Permits website. If a federal government regulates your business, you may also need to obtain a federal license.

Starting your business is a significant step. Choose the structure that best fits your vision and needs. Good luck on your entrepreneurial journey!