Choice of entity refers to choosing the legal form for operating your business. A business may be operated as (1) a corporation; (2) a general partnership or limited partnership; (3) a limited liability company (LLC); or (4) a sole proprietorship. Each state has its own laws for the formation, operation, and maintenance of these business entities.

The primary considerations in choosing the best form for operating your business are (1) protecting your personal assets from the liabilities of the company; (2) tax strategies designed to deduct early losses, avoid double taxation, and convert ordinary income into long term capital gain at a lower tax rate; (3) an entity that will be attractive to potential investors and lenders; (4) an entity that allows you to offer equity incentives to employees (stock options); and (5) the cost of forming the entity and properly maintaining it—including filing the required documents with state agencies.

In Ohio, the choice of entity for operating a business is an important decision that affects liability, taxation, investment attractiveness, employee incentives, and administrative requirements. The options include a corporation, which offers liability protection and is conducive to raising capital but may lead to double taxation; a general or limited partnership, which provides pass-through taxation but varies in liability protection; a limited liability company (LLC), which combines liability protection with pass-through taxation and is flexible for management and profit distribution; and a sole proprietorship, which is simple to establish but offers no personal liability protection. Ohio law requires different formation documents for each entity type, such as articles of incorporation for corporations or articles of organization for LLCs, and has ongoing maintenance requirements like annual reports. Tax considerations, such as avoiding double taxation and optimizing for early losses or capital gains, are also critical. Additionally, the ability to attract investors and lenders, offer equity incentives to employees, and the costs associated with forming and maintaining the entity should be considered. An attorney can provide guidance on the best entity choice based on these factors.