BUSINESS LAW

It's important to start your business on the right foot. Part of doing it right is forming the best business entity for your enterprise, using the most efficient tax strategies, and following the complicated rules and regulations to succeed.

Articles of Incorporation and Corporation Agreement

A corporation is a legal entity recognized by the State of Ohio as a group or a single individual of people formed together for a purpose. Generally, the purpose is to act in any lawful manner for profit, but many corporations form for non-profit activities such as charities, churches, associations, and other social clubs.

In Ohio, a corporation must file certain paperwork to be recognized as a separate and legal identity from the people that form the corporation (the incorporators). This filing may offer some protection from other creditors and vendors and isolates the shareholders' assets from the corporation itself. This is useful in the event that the corporation is sued; the personal assets of the shareholders will likely be protected from the lawsuit against the corporation of which they are shareholders of. This is referred to as the shareholders' liability limited to their investment.

  • Articles of Incorporation

    The Articles of Incorporation is a document that is filed with the State of Ohio's Secretary of State that identifies the name of the company, the address of the company, the number of shares issued and outstanding, and the incorporators who own the company as shareholders. This is a required document for the company to be recognized as a separate and legal entity from the incorporator individuals themselves.

  • Operational Agreement

    One of the documents that a corporation should draft is called an Operational Agreement or Bylaws, (in Ohio, these are referred to as a company's Code of Regulations). This document sets out the basic rules and operating procedures of the company. It will state when and where the board meetings are held, who the officers might be, the process for electing new officers and directors, who is eligible for voting and on what issues, how the company compensates the officers, and who has what rights regarding inspecting the books and duties and rights within the corporation. The Agreement does not need to be filed with the State of Ohio but should be kept with the company itself in its internal administration location, along with the minutes of meetings and other important company documentation.

Types of Corporations

  • Limited Liability Company (LLC)

    A common type of corporation formed in Ohio today is called an LLC. An LLC shares attributes of both a partnership and a corporation. It is a separate legal entity as a corporation, but it shares much of the favorable tax attributes as a partnership. The shareholders in an LLC are referred to as members, and there can be either one member LLC's or many member LLCs. The LLC can be for-profit or non-profit and are generally the easiest type of business entity to form and maintain in Ohio. Perhaps the biggest advantage to an LLC is that there isn't an unlimited liability of a member as there is with a general partner in a partnership. This protects the members as a corporation behind the "corporate veil" from individual liability with the favorable and ease of tax treatment offered by forming a partnership.

  • C-Corporation

    A C-Corporation is a business formed under state law and is a separate legal entity that is taxed and subject to both state and federal income tax. A C-Corporation provides liability protection for its shareholders and can offer different classes of stock. One issue with the shareholder owners of C-Corporation is what is known as "double taxation." This is in reference to how the shareholder owners are taxed. First, they are taxed at the corporate level when the corporation itself is taxed on the income earned by the company. Secondly, the shareholders themselves are taxed on the dividends attributed to them once the profits are paid out to the shareholders. This type of entity organization does have advantages depending on the plans and circumstances of the incorporators.

  • S-Corporation

    A company is formed per State rules and is by default treated as a C-Corporation until the company elects to be treated as an S-Corporation on its tax return. An S-Corporation has tax advantages over a C-Corporation since it is generally referred to as a "flow-through" or "pass-through" entity. This description of being a pass-through entity means that income and losses of the corporation actually pass-through to the shareholders to their respective ownership percentages; the company itself does not pay taxes on its income. The main advantage of this is that it eliminates the federal income tax at the corporate level, thus removing the double taxation effect of the C-Corporation. There are, however, stricter regulations with regard to maintaining an S-Corporation (S-Corp), and if any requirement is not met, the IRS will remove the S-Corp status of the company, and it will revert to a C-Corporation.  This is generally an undesirable result.

Cross-Purchase Agreements/Buy-Sell Agreements

Buy-Sell arrangements are a common type of succession planning for companies. The agreements have many advantages such as: setting the price at which the company will be sold, providing stable succession of management and control of the corporation, decedents are assured that their plan will succeed, and providing a steady market for a closely held stock that normally wouldn't be marketable.

Life insurance is preferably used to find the Cross-Purchase agreement. This ensures that there is capital available for either the corporation to buy the shares from the stockholders in redemption or for the shareholders themselves to have the available capital to buy the shares from the selling party. Disability insurance can also be used if one of the shareholders is unable to continue working in the company due to a disability; the insurance will be available to fund the cross-purchase by the remaining stockholders.

There are generally three types of Buy-Sell Agreements: Stock Redemption, Cross-Purchase, and a Hybrid.

  • Stock-Redemption

    A stock redemption is an agreement between the stockholders and the corporation itself in which the stockholders agree to sell the stock back to the corporation. This type of arrangement is generally the most simple, and the corporation usually has more resources to complete the transaction.

  • Cross-Purchase Agreement

    A cross-purchase agreement is an agreement between the individual stockholders in which the stockholders agree to sell their stock to other stockholders. This type of arrangement is nice in that the stock should get an automatic step-up in a tax basis and is treated as a capital gain.

  • Hybrid

    A hybrid agreement is an agreement between the stockholders and the corporation in which the stockholder agrees to first offer to sell their stock to the corporation and then to the other stockholders. This arrangement allows the corporation to redeem stock for an amount that may qualify for exchange treatment.

YOUR BUSINESS LEGAL STRATEGIES

  • If you are running a business and don't have protection in place, both your business and personal assets could be at risk.
  • Are you in a partnership with others? Do you have a plan if one of you gets hurt, sick, or dies unexpectedly? Make a clear plan now for your legacy.
  • Limited Liability Company, S- Corporation, C-Corporation, Sole Proprietor, DBA: 
  • Which is right for you? It depends. Find out now.
  • Having a succession plan for your business is critical in the event you become disabled, sick, or die. Who will continue the business? How will the bills get paid if you can't work?
  • The right business entity combined with the most efficient tax strategies could save you thousands in Social Security or max out your retirement plans.
  • It may be possible to change your business entity into one that is more efficient. Options are available to start saving while limiting your liability. Your business is your legacy.
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