Ohio Farmer

How to choose best business structure type for you

Country Counsel: Limited liability companies are the most popular.

Robert Moore

April 23, 2020

3 Min Read
Landscape of cornfield at dusk
BUSINESS STRUCTURES: While partnerships and corporations are the traditional entities, the limited liability company (LLC) has been the entity of choice for the last 25 years.Nicholas Smith/Getty Images

Ohio has around 10 different business entities to choose from. Each has unique characteristics that make a big difference between the entities. Knowing some of these characteristics can help you pick the best entity for your business.

The two traditional business entities that have been around for many years are the partnership and the corporation. A partnership has the advantage of being relatively informal and easy to set up. In fact, partnerships can be established without anything in writing. Generally, two or more people sharing profits is enough to have a partnership.

The biggest disadvantage of a partnership is liability exposure. Each partner has full liability for the partnership, each partner and each of the other partners.

A corporation has the advantage of liability protection. No shareholder (owner) of a corporation has personal liability. Liability incurred by the corporation is not transferred to the shareholders.

A disadvantage of a corporation, for most, is that it is more formal. A corporation must issue shares of stock and usually have a board of directors and officers. However, some people might like the formality.

Consider tax structure

Tax structure is a very important consideration when selecting a business entity. A partnership has pass-through taxation, meaning the partnership does not pay income taxes; rather, each partner pays taxes on his share of the profits.

A corporation can be taxed as a C corporation or an S corporation. Without going into a lengthy dissertation, corporate tax structure can help reduce income tax for the shareholders. However, taking assets out of a corporation will often trigger taxes.

A rule of thumb is that corporations will save taxes along the way, but partnerships will not create taxes when taking assets out or dissolving.

Limited liability companies

While partnerships and corporations are the traditional entities, the limited liability company (LLC) has been the entity of choice for the last 25 years. In 2019, about 88% of all new business entities registered in Ohio were LLCs. The LLC combines the informality of a partnership with the liability protection of a corporation. Also, an LLC can be taxed as a partnership or corporation. LLCs are almost always the best entity to set up today.

There are also a few limited partnerships and limited liability partnerships around. These entities provide more liability than a partnership, but they still leave at least some of the partners exposed to liability. The LLC has made limited partnerships and limited liability partnerships obsolete. In fact, anyone owning one of these entities should consider converting to an LLC.

Why choosing correct entity is key

An example of why it is important to select the correct entity is real estate in corporations. In the 1980s and 1990s, a significant amount of farmland was put into corporations. Before LLCs, landowners had to decide between the better tax treatment partnerships provide for landowners and the liability protection of corporations.

Some of those who chose corporations now face having land in a corporation that was purchased for a low price (compared to now) but has since appreciated in value. Taking the land out of the corporation now will trigger the corporation, and maybe the shareholders, paying tax on the appreciation in value. Today, we would likely not put real estate in a corporation, but rather in an LLC taxed as a partnership. The LLC provides the liability protection but does not trigger a tax if the land is removed or sold.

When establishing a new entity, an LLC will usually be the best entity to choose. However, there are a few situations where a corporation or partnership might be better. Be sure to consult with your attorney and accountant when deciding which entity to choose.

Moore, an attorney, is with Wright & Moore Law Co. LPA. Contact him at 740-990-0751 or [email protected].

About the Author(s)

Subscribe to receive top agriculture news
Be informed daily with these free e-newsletters

You May Also Like