Your attorney is a very special part of your business planning team. We can assist you in organizing your company as a limited liability company, corporation, partnership, or other business entity. We can handle your business litigation, merger, acquisition, or any of your shareholder agreements, including that very important buy-sell agreement. The business entity you choose will impact the protection that you receive for your other personal assets. Let us help you with your decision.
Choosing a Business Structure: Corporation or LLC?
Many confused clients have approached our law firm regarding the proper choice of entity for his or her new business. They are perplexed because they have received conflicting advice from numerous acquaintances. One person told them that a limited liability company was the way to go. Another person told them that any new venture should be a Sub-S corporation.
Generally, it is safe to say that our hypothetical client is being steered in the right direction when they are told to form a business entity that provides a full liability shield for their personal assets. However, in choosing an entity, the client should consider the significant differences between corporations and limited liability companies under Ohio business organization laws.
In general terms, limited liability companies are easier to form and organize than corporations. They are formed by filing Articles of Organization with the Ohio Secretary of State and are usually operated under a written agreement commonly referred to as an “operating agreement”. A limited liability company has “members” as opposed to “shareholders” in a corporation.
Limited liability companies have a simpler management structure than a corporation. Its members may manage the company, while a corporation may have shareholders, directors, officers, as well as employees.
Limited liability companies are easier to operate and maintain. Corporation law requires that the shareholders hold an annual meeting, but the laws concerning limited liability companies do not.
Limited liability companies may provide greater asset protection than corporations. The collection remedies of a limited liability company member’s judgment creditor as they relate to the member’s ownership interest in the company may be limited to the so-called “charging order”. To the extent the membership interest is charged, the judgment creditor has the rights of an assignee of the membership interest. Therefore, a judgment creditor would only have the right to receive distributions of cash and other property and allocations of profit, losses, income, gains, deductions, credits or similar items to which the member would have been entitled. Thus, the creditor obtains no voting, agency or other non-economic rights of the member.
On the other hand, corporations have distinct advantages other limited liability companies. Corporations have an established history of familiarity with Ohio law. Ohio’s corporate law has been in effect for many decades, while Ohio’s limited liability statute was enacted in 1993.
Corporations also provide greater protection for minority owners. Unless the corporation’s Articles of Incorporation are amended to eliminate cumulative voting rights, the shareholder has the right to accumulate its voting power for the election of directors. In other words, each shareholder may give a directorial candidate as many votes as the number of directors to be elected multiplied by the number of his or her votes, or the shareholder may distribute his or her votes on the same principle among two or more candidates. This provision is not within the Ohio limited liability company statute. Also, the statutes provide that during insolvency there are limitations on any distribution or dividend, and there is a statutory liability of directors and shareholders for unlawful loans, dividends or distributions.
The choice of entity for an Ohio operating business generally boils down to the well-established corporation versus the relatively new limited liability company. The attorneys at Dungan & LeFevre Co., L.P.A. can assist you in your decision and the structuring of your business entity.
if you have any further questions about how we can help you with your business transactions, contact us.