The Use of Limited Liability Companies in Ohio

The use of LLCs have become very prevalent by business in Ohio. LLCs are popular because they combine the limited liability features of a corporation with the flexibility of a partnership. Under prior law, the only way to limit one’s liability for the misdeeds of others in your organization was to form a corporation. But, the use of a corporation also required s ver structured adherence to certain rules required by Ohio’s corporation law, plus a bifurcated tax structure that, sometimes, resulted in double tax to the owner of the company.

A Brief History

Corporations are “artificial” entities that are permitted under Ohio law. As a business entity became larger, with attendant increased liability issues, the use of a corporation permitted a business owner to shield himself from personal liability for the debts of the corporation and a shield from personal liability in the event of some catastrophic event that was not covered by liability insurance.

Of course the use of a corporation also presented structuring requirements that necessitated mandated meetings of directors and shareholders. In addition, the use of a corporation necessitated the filing of a separate corporate tax return, aside from the individual return filed by the owner of the company.

The consequence in failing to follow these rules was the possibility of piercing the corporate veil and holding the shareholders personally liable for the debts and liabilities of the corporation.

A number of years ago, Congress recognized the unfair nature of a tax structure that resulted in the double taxation of small businesses and permitted such corporations to make an “election” to be taxed as an individual. This became the so-called “Sub-chapter S corporation.” After the election, instead of filing a corporate tax return, the corporation filed an informational return with the IRS, but distributed what were called K-1s that distributed the income of the corporation (both distributed and undistributed) between the shareholders based upon the numbers of share they owned. But this election failed to address the underlying issues involving the mandated meetings and other structured requirements of a corporation.

Recently, a number of states, including Ohio recognized this problem and introduced the concept of the Limited Liability Company. The establishment of an LLC permits the benefits inherent with the limited liability of a corporation combined with the flexibility and lower tax burden of a partnership or individual.

The LLC in Ohio

Ohio’s law incorporates this philosophy of limited personal liability while allowing lower tax consequences. Forming an LLC is quite simple in Ohio. As in the established of any artificial entity, there are forms that need to be completed. But once executed, the LLC becomes a self-perpetuating entity requiring little structuring as is required of a formal corporation.

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