If you are looking to start an LLC (limited liability company) in Ohio, and don’t know how to, then you have come to the right place! There are a few notable steps for you to pay attention to which will cost you greatly if you fail to do so.
Things such as an operating agreement, registered agent service, an Employer Identification Number (EIN), and much more will be explained throughout this guide.
In layman terms, you will need to liaise with the Department of State of Ohio and Ohio Department of Taxation to legally form a limited liability company, and have a proper business structure beforehand. It is just as simple as that.
This guide will bring you through the different types of business structures and also the entire process of forming your LLC step-by-step. So let’s begin!
Sole proprietorships are the simplest type of all the business structures. Most of the time, an entrepreneur with a small business in Ohio will utilize this business structure before expanding or growing into other business structures, most commonly LLCs or partnerships.
Sole proprietorships are simple in the sense where they have less legal restrictions, while still retaining a profit. However, sole proprietorships also have unlimited personal liability when it comes to the debs and liabilities of the business, and termination of the business occurs upon the death of the sole proprietor.
General partnerships are formed after the agreement of each partner involved. The agreement should include contribution of each partner, the distributions of profits and losses as well as the terms of termination. If a written agreement is not drafted, all partners are presumed to have equal shares in the losses and profits of the business.
A general partnership has unlimited personal liabilities for the businesses debts and liabilities. A limited partnership is formed when there exist one or more limited partners in combination with one or more general partners.
Limited partners have limited personal liability. On the other hand, there are alternative forms of a general partnership known as the LLP and the LLLP which involves filing with the Bureau of Corporations and Charitable Organizations of the PA Secretary of State.
LLP and LLLP statuses impart general partners with limitations and additional protection for personal liabilities from the businesses debts and liabilities.
Corporations are the most complex business structure. It is highly advised that the paperwork for incorporation be viewed by a legal advisor. This is to ensure that all legal consequences are considered before starting a business.
Corporations limit the liability of the owners based on the shares held by individual owners. Death or transfer of shares does not affect the corporation, unlike other business structures. Corporations require detailed record-keeping and regulation as they have double taxation for profits.
Dividends earned are tax on an individual level. There exist two types of corporations in Ohio, namely C corporations and S corporations. Both of which have different rules, with C corporations allowing federal income tax rules for determining income and S corporations following Ohio income tax rules for determining income.
What is an LLC?
An LLC is a non-business partnership with at least one person limitedly answerable for the business’ legally binding responsibilities and different types of liabilities. The structure of an LLC shows more similarity towards a corporation than to any other types of partnerships available.
An LLC can be formed with at least one owner, which allows them to operate as an LLC instead of a sole proprietor which limits the owner’s personal liability.
An LLC as compared to a corporation is very much different. An LLC will have managers who oversee all operations instead of having a board of directors and officers.
Furthermore, an LLC also has members instead of shareholders. These members are investors who can be considered as the owners of the company. These people can be individuals from various corporate bodies. These are the people who own a part of the company through the subscription of shares.
Limited liability companies are different in general. People who start an LLC are owners of a sole proprietorship who wishes to grow and expand their business. Hence they convert their business model from sole proprietorship to a limited liability company.
There are many benefits for the owner of a sole proprietorship who wishes to expand their business to convert it to a limited liability company.
Steps needed in setting up an LLC in Ohio
Step 1: Selecting a viable name
The first step to forming an Ohio LLC is to select a viable name for your LLC.
The name selected for the Ohio LLC must be unique and distinguishable from existing registered businesses in Ohio. Be sure to choose a catchy name which complies with Ohio’s State of Department naming requirements.
Having a catchy name for your Ohio LLC will also render it easier to remember and searchable by your future clients.
Selected LLC names may be checked for availability at the Ohio Department of State business name database. In compliance with Ohio law, the selected LLC name must contain the phrase or words “Limited Liability Company,” “Limited,” or “Company”. There are some acceptable abbreviations of the phrases or words (Ltd., Co.).
In contrast, the selected Ohio LLC name must not contain words or phrases that would confuse said LLC name with the name of a government agency (State Department, Treasury of State, FBI, Department of State etc.). There are also restricted words such as “Bank” and “Attorney” which will require additional paperwork to be done if you are looking to have such words.
If the company name is available and a future Ohio LLC wishes to reserve a name after checking the availability of said name from the Ohio Department of State business name database, they may reserve the desired name with the Ohio Secretary of State for a maximum of 120 days. Reserving a name can be done by filling a Name Reservation Form with the Ohio Department of State.
It is also advised to check if the selected Ohio LLC name has an available web URL in the event the LLC owner wishes to make a business website, which enables the Ohio LLC members to reserve the domain name to prevent it from being used by other entities.
Step 2: Appoint a Statutory Agent in Ohio
To start an LLC, a statutory agent, also referred to as a registered agent must be appointed in the state of Ohio. The statutory agent can be a Ohio resident above the age of 18 or a business entity that has agreed to accept legal documents on behalf of the LLC.
The appointed statutory agent or registered agent must have a physical street address within the state of Ohio (PO Boxes are not valid). Ohio LLCs have the option to use their personal home addresses, the address of a relative, the address of a friend or the address of a Commercial Registered Office Provider (CROP), given that they all have physical street addresses in Ohio.
It is advised to use the address of a CROP as the appointed statutory agent or better known as, a registered agent to keep the personal address of the owner off public records.
Step 3: File an Article of Organization
In order to register your LLC, the next would be to file the Articles of Organization with the Ohio Secretary of State. This can be done via an application online or by postal services. The Articles of Organization is often referred to as the Certificate of Formation or Organization.
The articles of organization are important documents that must be handed up to the Ohio Secretary of State in order to legitimise the formation of the Ohio LLC.
The articles of organization must include the name of your LLC, appointed registered office, the names of all members, an effective date for which the Ohio LLC is formed and the list of services which your LLC will be providing.
It is worth mentioning that the Ohio secretary of state has a filing fee for the articles of organization. The articles of organization filed to the Ohio secretary of state must be accompanied by a docketing statement as well.
The accompanying docking statement should include the name of the Ohio LLC, the name of the individual responsible for initial tax reports, a description of the Ohio LLC’s business activity, the Federal Tax Identification Number (FEIN) / EIN and the LLC’s Fiscal Year End (FYE).
Both the articles of organization and docketing statement can be sent to the Ohio secretary of state via mail or online. The article of organization and docketing statement is an important document to legitimise your LLC formation process
Step 4: Write up an LLC Operating Agreement
Although it is not a requirement, it is highly advisable and a good practice that the Ohio LLC members draft an LLC operating agreement. The agreement is solely an internal and legal document, meaning it does not require filing with the Ohio secretary of state or the Ohio department of state.
The operating agreement of an Ohio LLC acts as a document to establish the power, duties, liabilities and obligations of each member of the LLC. This document serves as an outline for the ownership and operating measures of an LLC. Members of an LLC do have the option of not drafting an agreement.
LLCs which do not draft an agreement run the risk of being insufficiently equipped to reach any settlements regarding misunderstandings over management and finances. A comprehensive and legitimate operating agreement ensures that business owners are all on the same side while also reducing the risk of overall future conflict.
The Ohio LLC would be required to follow Ohio’s default operating agreement if an operating agreement is not drafted among members. Hence it is strongly advised that the LLC organizers draft an operating agreement to ensure smooth operations.
Step 5: File for an Ohio LLC Employer Identification Number
The EIN, sometimes referred to as a Federal Employer Identification Number (FEIN) or even Federal Tax Identification Number (FTIN) are nine-digit numbers assigned by the Internal Revenue Service (IRS). EINs are used when opening a business bank account, filing and managing federal and state taxes and when hiring employees.
If the owner of a sole proprietorship intends on expanding and growing their business into an LLC, they are required to obtain a new EIN in compliance with the IRS.
Ohio LLC owners can receive their EIN for free from the IRS. Obtaining an EIN can be done online or via mail by the IRS. All LLCs with employees are required to have an EIN. Ohio LLCs with more than one owner is required to have an EIN as well.
Step 6: Maintaining the Ohio LLC
Maintaining the formed LLC in Ohio is the next important step after Ohio LLC is formed. It is recommended that members of the LLC maintain good standing with the state of Ohio for as long as the LLC exists. Members of the LLC are able to apply for a certificate of subsistence when the LLC is still in existence as a matter of record in the Office of the Department of the Commonwealth.
Information regarding steps on how to obtain the certificate of subsistence can be found on the department of state website. Members of an LLC are also advised to keep personal and business finances separate as to avoid confusion during sorting. By doing so they are ensuring that they will not be personally liable for any business debts and liabilities.
Furthermore, in order to maintain your Ohio LLC after you have successfully formed it, it is advisable that you separate your personal and business assets. By separating your personal and business assets, your personal assets such as your home and car will not be at risk if your Ohio LLC is sued. If your personal bank account and business bank account is mixed, you are at risk of losing all your assets, and this is termed as piercing the corporate veil.
How to maintain the Corporate Veil
Now you may be wondering, how do I maintain the corporate veil? Which is why we will be covering the things that you should do to keep your LLC out of trouble. Let’s move forward. A corporate veil is the general rule of thumb in law which states that a business entity can protect its owners from incurring any sort of liability personally.
All the debts incurred from the owner’s business will not be transferred over to him personally. This protection, in the context of varying business entities, acts as a shield for small business owners who just formed their LLC. This explains why it is so important.
However, starting up your LLC is not alone sufficient enough to ensure that you have the protection you need for your business. Creditors may be able to pierce the corporate veil if they are found in the following situations:
- The company has not enough funds
- The company and the owners do not carry a separate identity
- The company was found to have been involved in fraudulent activities
Therefore, it is important that you have the adequate start-up capital to cover all your future liabilities so that future creditors will not be able to sue you personally. Creditors who are looking to sue will always try and look for loopholes for them to get their money.
Capital aside, during your business days, it is important that you document all of your company proceedings for future references. You must also make sure to avoid signing agreements or documents without fully understanding the entire document to avoid future unwanted legal issues.
Dealings of the company should be carried out solely under the name of the company. Authorized members of the Ohio LLC must vary when they sign the document in order to clarify that your personal assets are a separate entity from your business.
Furthermore, you should always stay away from fraudulent activities to ensure that your company is not at risk of being sued. Companies that have been found to have been involved in fraudulent activities will often find themselves more vulnerable to lawsuits.
What are the benefits and drawbacks of forming an LLC in Ohio?
The benefits of starting an LLC are as follows. LLCs generally do not need the extensive upkeep and recordkeeping of a corporation. The members of an LLC are not personally liable for business debts and liabilities if you separate your personal and business assets.
Furthermore, the LLC itself is not taxed as it is considered a pass-through entity unless the members of the LLC request to be treated as a C corporation. The drawbacks of starting an LLC would include the initial cost of starting an LLC being costlier than sole proprietorships and partnerships.
Besides that, members of the LLC are required to pay high federal self-employment taxes. LLCs are also not able to issue stocks and hence they are not ideal for fundraising. Lastly, a high annual fee is incurred for LLCs in Ohio which have a high member count.
Drawbacks aside, forming an LLC in Ohio is a great option as it offers a balance between tax flexibility and legal protection for small business owners, not to mention how easy it is to form one in Ohio.
Alternative: Using LLC Formation Services in Ohio
What if someone in the state of Ohio doesn’t want to go through the hassle of doing the research and filling up the legal work needed to form an LLC in Ohio. What If an individual or group of individuals wish to start an LLC in Ohio, but do not want to go through the hassle and the trouble of filing everything by themselves?
Well they do have the option of getting assistance from company formation services with a statutory agent or registered agent service included!. There is an abundant number of options when it comes to choosing a company formation service.
Looking at the companies that are able to help with forming an LLC in Ohio would not limit our choices but it does give us some options to work with.
Among the most popular company forming services that help with LLC formation would include but is not limited to ZenBusiness, Incfile, LegalZoom, Legal Nature, etc. Questions might arise as to how using a company formation service is beneficial and what are the associated risks.
Among the benefits of using a company formation service, time conservation is one of the important ones. When forming an LLC by ourselves, we would end up searching for forms and documents to fill out. Even after doing extensive research, it is likely that we would miss out on a form or two. This can be easily prevented by using a company formation service.
Furthermore, most company formation services guide the owner on how to go about settling their first annual requirements. By settling these annual requirements, paying the fees on time, the individual using the company formation services can rest easy knowing that they are not risking the possibility of receiving a legal penalty for a late submission.
Learning from the first time will ensure future company owners are ready to handle the maintenance of their own companies for future years.
There are few if not no downsides to using a company formation service. The main drawback is the cost of hiring the company formation service as engaging a statutory agent does not usually come cheap. If the individual(s) are not willing to pay the cost, they can of course opt to fill out the legal work themselves.
In conclusion, it would be safe to say that opting to use a company formation service is the fastest and safest way to form an LLC in Ohio. Choosing to use a company formation service also leaves more time and manpower to focus on the business instead of the logistics of forming the LLC itself.
Hopefully, this article has helped you in your pursuit of forming an limited liability company in Ohio. Though the article has mentioned key points that will help you along the journey to start your business in Ohio, it is recommended that you contact a legal advisor in Ohio on how to proceed with the legal work required.
Contacting a legal advisor in Ohio will ensure that your business in Ohio is compliant with your current state’s laws as well as a hasty application process, engage a statutory agent and LLC formation service if you can afford them!
Frequently Asked Questions (FAQs)
What Is The Differences Between a Domestic Ohio LLC and A Foreign LLC?
Limited liability company LLC is referred to as a “domestic LLC” when it conducts business in the state where it was formed. For instance, a domestically formed business Ohio is a form of LLC. Meanwhile, a foreign limited liability company LLC is commonly formed when an existing LLC looking forward to form an LLC elsewhere in another state which requires business licenses and permits.
Starting a business correctly doesn’t have to be difficult. With over 15 years of experience consulting new businesses and start ups, Matthew is probably the best person to help you set a strong foundation for your business.