Business Law and Formation
Business Law
Business law covers the entire field of law required for a business to operate. The
initial legal step for any business involves business organization and choosing
what type of legal entity to form. Business law also includes employer/employee
issues and conforming to local, state, and federal rules and regulations.
Incorporation
A corporation is a legal entity that can exist separately from its owners. Creation of a corporation occurs when properly
completed articles of incorporation (called a charter or certificate of incorporation in some states) are filed with the
proper state authority, and all fees are paid.
Types of Entities
The types of entities include Sole Proprietorship, Corporations and Partnerships. Below is a brief summary of each
entity. The Law Offices of Christopher J. Shellito, Esq., LLC can assist you in determining the best entity to meet your
purposes, needs and goals.
Sole Proprietorship
A sole proprietorship is a business that has not incorporated which is owned by one person. If you start a law practice
with no partners and do not incorporate, then your law practice is considered a sole proprietorship. As a sole proprietor
you are required to obtain an occupational license in the city and/or county where your office is located. Generally, you
must apply in person for the occupational license. In a sole proprietorship, there may be an unlimited number of
employees, but there is only one owner. If there are any employees in addition to yourself, you must apply for a Federal
Employer Identification Number issued by the Internal Revenue Service. This is like a social security number, but for a
business. You apply for a Federal Employer Identification Number by filing Form SS-4 with the Internal Revenue Service.
Technically, a sole proprietorship is not considered a separate legal entity, and there is no legal separation between
you as the sole proprietor and your business. In a sole proprietorship, you are financially responsible for all liabilities of
your business, and all of your personal assets are subject to seizure or lien by creditors. This is one of the major
drawbacks to operating your law practice as a sole proprietorship.
Note that by operating as a sole proprietorship, you forfeit certain tax advantages that are available for certain other
entities. For example, with a sole proprietorship you cannot lower payments for social security tax and medicare tax (as
you can with an S corporation).
Corporations
A corporation is a legal entity separate from its owners, and may have an unlimited number of shareholders. A major
advantage of any corporate form is that it limits the personal liability of the owners for claims against the corporation.
Additionally, as a separate entity, a corporation has unlimited life, extending it beyond the life of its owners. Creation of a
corporation occurs when properly completed articles of incorporation are filed with the appropriate state authority, and
all fees are paid.
Ohio Revised Code Section 1701.37 requires that each corporation shall keep correct and complete books and records
of account, together with minutes of the proceedings of its incorporators, shareholders, directors, and committees of the
directors, and records of its shareholders showing their names and addresses and the number and class of shares
issued or transferred of record to or by them from time to time. Violations lead to civil fines as well and a loss of the
liability protection the corporation was intended to provide. This is the most often violated provision amongst small,
closed or family operated corporations. It is essential for a corporate entity to maintain the formalities required by law.
The Law Offices of Christopher J. Shellito, Esq., LLC can assist the corporation to maintain these formalities.
Business law covers the entire field of law required for a business to operate. The
initial legal step for any business involves business organization and choosing
what type of legal entity to form. Business law also includes employer/employee
issues and conforming to local, state, and federal rules and regulations.
Incorporation
A corporation is a legal entity that can exist separately from its owners. Creation of a corporation occurs when properly
completed articles of incorporation (called a charter or certificate of incorporation in some states) are filed with the
proper state authority, and all fees are paid.
Types of Entities
The types of entities include Sole Proprietorship, Corporations and Partnerships. Below is a brief summary of each
entity. The Law Offices of Christopher J. Shellito, Esq., LLC can assist you in determining the best entity to meet your
purposes, needs and goals.
Sole Proprietorship
A sole proprietorship is a business that has not incorporated which is owned by one person. If you start a law practice
with no partners and do not incorporate, then your law practice is considered a sole proprietorship. As a sole proprietor
you are required to obtain an occupational license in the city and/or county where your office is located. Generally, you
must apply in person for the occupational license. In a sole proprietorship, there may be an unlimited number of
employees, but there is only one owner. If there are any employees in addition to yourself, you must apply for a Federal
Employer Identification Number issued by the Internal Revenue Service. This is like a social security number, but for a
business. You apply for a Federal Employer Identification Number by filing Form SS-4 with the Internal Revenue Service.
Technically, a sole proprietorship is not considered a separate legal entity, and there is no legal separation between
you as the sole proprietor and your business. In a sole proprietorship, you are financially responsible for all liabilities of
your business, and all of your personal assets are subject to seizure or lien by creditors. This is one of the major
drawbacks to operating your law practice as a sole proprietorship.
Note that by operating as a sole proprietorship, you forfeit certain tax advantages that are available for certain other
entities. For example, with a sole proprietorship you cannot lower payments for social security tax and medicare tax (as
you can with an S corporation).
Corporations
A corporation is a legal entity separate from its owners, and may have an unlimited number of shareholders. A major
advantage of any corporate form is that it limits the personal liability of the owners for claims against the corporation.
Additionally, as a separate entity, a corporation has unlimited life, extending it beyond the life of its owners. Creation of a
corporation occurs when properly completed articles of incorporation are filed with the appropriate state authority, and
all fees are paid.
Ohio Revised Code Section 1701.37 requires that each corporation shall keep correct and complete books and records
of account, together with minutes of the proceedings of its incorporators, shareholders, directors, and committees of the
directors, and records of its shareholders showing their names and addresses and the number and class of shares
issued or transferred of record to or by them from time to time. Violations lead to civil fines as well and a loss of the
liability protection the corporation was intended to provide. This is the most often violated provision amongst small,
closed or family operated corporations. It is essential for a corporate entity to maintain the formalities required by law.
The Law Offices of Christopher J. Shellito, Esq., LLC can assist the corporation to maintain these formalities.
S Corporations
An S corporation is a corporation that has elected a special tax status with the IRS. This tax treatment allows the
income of the corporation to be treated like the income of a partnership or sole proprietorship; the income is
"passed-through" to the shareholders. Thus, shareholder's individual tax returns report the income or loss generated
by an S corporation. By checking off this option on our incorporation order form 101incorporate can assist you in this
election.
Note: In order to qualify for S corporation status, the corporation must be a U.S. corporation with only one class of stock
and the shareholders must number fewer than 75. These shareholders must be individuals, estates or certain
qualified trusts, who consent in writing to the S corporation election. The shareholders can not be non-resident aliens.
General Partnership
A general partnership is a business that has not incorporated which is owned by two or more persons. The owners of
a general partnership are called general partners. If you start a law practice with any partners and do not incorporate,
then your law practice is considered a general partnership. A general partnership is subject to the occupational license
issue discussed above in the sole proprietorship section. General partnerships are governed by Part II of Chapter 620,
Florida Statutes.
In a general partnership, each partner is jointly and severally responsible for all liabilities of the law practice business,
and all personal assets of each partner are subject to seizure or lien by creditors. This is one of the major drawbacks
to operating your law practice as a general partnership. Why would you ever want to put yourself in a position where
your financial upside is limited to your percentage interest in the general partnership, but your financial risk is unlimited
and affected by liabilities that arise in the ordinary course of business and from the possible malpractice of one of your
partners? You should never be a partner in your individual name in any general partnership. The risks are too great.
A general partnership must apply for a Federal Employer Identification Number and file a federal tax return every year
on Form 1065. A general partnership is considered a pass-through entity under state and federal tax law. A general
partnership does not pay tax. The annual profit of a general partnership is reported to each partner on Schedule K-1,
and the partners pay income tax on their respective distributive share of the profits reported on that schedule.
Limited Liability Partnerships (LLP)
Limited Liability Partnerships or LLPs are a relatively new creation that operate much like a limited partnership, but
allows the members of the limited liability partnership to take an active role in the business of the partnership, without
exposing them to personal liability for others' acts except to the extent of their investment in the LLP. Many law and
accounting firms now operate as limited liability partnerships. A general partnership has the option of becoming a
registered LLP.
In a limited partnership, there must be at least one limited partner and at least one general partner. Each limited
partner has protection against personal liability for the liabilities of the limited partnership. If the Statement of
Qualification is not filed, each general partner has unlimited personal liability for the liabilities of the limited partnership.
A limited partnership that files the Statement of Qualification must use the LLP name ending. For example, a limited
partnership named "Smith Ltd." that files the Statement of Qualification will be renamed "Smith Ltd. LLP." The filing of
that statement protects each general partner against personal liability for the liabilities of the limited partnership, while
the LLP status is active.
Limited Liability Company (LLC)
The limited liability company or LLC is not a partnership or a corporation but a distinct type of business that offers an
alternative to partnerships and corporations, by combining the corporate advantages of limited liability with the
partnership advantage of pass-through taxation. The LLC can also elect under Ohio and Federal Law to be taxed as an
S-Corporation and avoid the self-employment taxes of a sole proprietorship and the disclosure and other regulations of
a corporation while maintaining limited liability for its shareholders.
An S corporation is a corporation that has elected a special tax status with the IRS. This tax treatment allows the
income of the corporation to be treated like the income of a partnership or sole proprietorship; the income is
"passed-through" to the shareholders. Thus, shareholder's individual tax returns report the income or loss generated
by an S corporation. By checking off this option on our incorporation order form 101incorporate can assist you in this
election.
Note: In order to qualify for S corporation status, the corporation must be a U.S. corporation with only one class of stock
and the shareholders must number fewer than 75. These shareholders must be individuals, estates or certain
qualified trusts, who consent in writing to the S corporation election. The shareholders can not be non-resident aliens.
General Partnership
A general partnership is a business that has not incorporated which is owned by two or more persons. The owners of
a general partnership are called general partners. If you start a law practice with any partners and do not incorporate,
then your law practice is considered a general partnership. A general partnership is subject to the occupational license
issue discussed above in the sole proprietorship section. General partnerships are governed by Part II of Chapter 620,
Florida Statutes.
In a general partnership, each partner is jointly and severally responsible for all liabilities of the law practice business,
and all personal assets of each partner are subject to seizure or lien by creditors. This is one of the major drawbacks
to operating your law practice as a general partnership. Why would you ever want to put yourself in a position where
your financial upside is limited to your percentage interest in the general partnership, but your financial risk is unlimited
and affected by liabilities that arise in the ordinary course of business and from the possible malpractice of one of your
partners? You should never be a partner in your individual name in any general partnership. The risks are too great.
A general partnership must apply for a Federal Employer Identification Number and file a federal tax return every year
on Form 1065. A general partnership is considered a pass-through entity under state and federal tax law. A general
partnership does not pay tax. The annual profit of a general partnership is reported to each partner on Schedule K-1,
and the partners pay income tax on their respective distributive share of the profits reported on that schedule.
Limited Liability Partnerships (LLP)
Limited Liability Partnerships or LLPs are a relatively new creation that operate much like a limited partnership, but
allows the members of the limited liability partnership to take an active role in the business of the partnership, without
exposing them to personal liability for others' acts except to the extent of their investment in the LLP. Many law and
accounting firms now operate as limited liability partnerships. A general partnership has the option of becoming a
registered LLP.
In a limited partnership, there must be at least one limited partner and at least one general partner. Each limited
partner has protection against personal liability for the liabilities of the limited partnership. If the Statement of
Qualification is not filed, each general partner has unlimited personal liability for the liabilities of the limited partnership.
A limited partnership that files the Statement of Qualification must use the LLP name ending. For example, a limited
partnership named "Smith Ltd." that files the Statement of Qualification will be renamed "Smith Ltd. LLP." The filing of
that statement protects each general partner against personal liability for the liabilities of the limited partnership, while
the LLP status is active.
Limited Liability Company (LLC)
The limited liability company or LLC is not a partnership or a corporation but a distinct type of business that offers an
alternative to partnerships and corporations, by combining the corporate advantages of limited liability with the
partnership advantage of pass-through taxation. The LLC can also elect under Ohio and Federal Law to be taxed as an
S-Corporation and avoid the self-employment taxes of a sole proprietorship and the disclosure and other regulations of
a corporation while maintaining limited liability for its shareholders.
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Law Offices of Christopher J. Shellito, Esq., LLC
5510 Pearl Road, Suite 300
Parma, Ohio 44129
(440) 885-LAWS (5297)
(440) 885-5318 Facsimile
E-Mail: chris@shellitolaw.com
5510 Pearl Road, Suite 300
Parma, Ohio 44129
(440) 885-LAWS (5297)
(440) 885-5318 Facsimile
E-Mail: chris@shellitolaw.com