Small businesses make up 99.6 percent of all Ohio businesses. In fact, 32 – 46 percent of small business employment in Ohio comes from Hamilton County alone. While creating your own business can be incredibly rewarding, it can also be overwhelming. Often times, knowing how and where to start can be the biggest challenge.
One of the most important decisions for a new business owner is determining the legal structure of their new company. This is something that should not be taken lightly and should be done with sound counsel from experts.
There are several very important factors to consider setting up a new business: Liability, taxation, location and record keeping. From there, determine which of the various entities best fits the ultimate vision of the company:
- Sole proprietorship – A business in which there is a single owner who is personally responsible for any debts.
- Corporation – A company or group authorized to act as a single entity.
- Partnership – Formal arrangement between two or more parties to manage and operate a business.
- Nonprofit – An organization that’s purpose is not to make a profit.
- Limited Liability Partnership (LLP) – A partnership in which some or all partners have limited liabilities.
- Limited Liability Company (LLC) – A company or organization in which an owner or owners cannot be held personally liable for any debts.
While a business can operate as any of these entities, the owner may chose to file taxes as a C Corporation (C Corp) or pass through entity like an S Corporation (S Corp) or LLC/Partnership. A C Corp is required to report the organization’s annual profit and loss to determine the taxable income and then file taxes as the entity. This can often lead to a higher corporate tax.
As an S Corp or LLC/Partnership, revenue from the entity passes through to the owners or shareholders, who will claim it on their personal returns. This helps ensure that the role of employee and business owner is separate and that the two roles are taxed differently.
However, with the recent Tax Cut and Jobs act of 2017 (TCJA) C Corps will actually see a significantly reduced tax rate from 35 to 21 percent. Because of this, it may actually be a great time for veteran business owners to reevaluate their entity structure and its impact on taxes.
No matter the age of a company, owners should always take into consideration the full picture of the business, not just the numbers. Working with a lawyer and Certified Public Accountant (CPA) from the very beginning can help reduce liability and set a business up for long-term success.
Our professionals are experts in helping small businesses decide which business entity they should be. If you would like to discuss your situation or have additional questions, give us a call 859-331-1717.
