Many businesses begin as an informal hobby or a small project. When the owners realize that their concept is profitable, steps are often taken to formalize the business in the eyes of the law –and to protect it– through various business registrations.
Business “registration” can mean many things. Generally, business registration refers to any act that requires a company to make a formal filing with a government entity. Registration includes taxpayer identification numbers, fictitious name registrations, and, if your business sells to consumers, a vendors license to pay sales tax. One of the most important kinds of registration for a new business, however, is entity formation.
1. Choose a business entity type
Most companies choose to operate as either a limited liability company (LLC) or a corporation. LLCs and corporations are desirable because they provide a layer of protection for the owners. In those entities, a lawsuit against the company usually cannot be used to attack the personal assets of the business owners.
Personal liability is of even greater concern when a business has partners because, without an LLC or corporation, all partners are personally liable for the acts of one another on behalf of the company. LLCs and corporations provide a wall of personal asset protection that makes it less risky to invest in a business because only the personal assets put into the business are at stake.
2. State your business purpose carefully
In Ohio, the document used to create an LLC or corporation is filed with the Secretary of State’s office. An LLC is created by filing Articles of Organization, while a corporation is formed by filing Articles of Incorporation. Both documents are straightforward and are easy to file. If you decide to file these yourself, the largest potential pitfall is the purpose clause of the form.
Many business owners fill in a narrow purpose. (e.g., “To operate a lemonade stand.”) However, your company will have only the power to act within the purpose that is stated in the articles. If the lemonade stand wants to start selling lemon squares, those sales may not be covered as a company activity if the purpose clause is too narrowly defined. The easiest solution is to write “any lawful purpose,” or to just leave the section blank, which has the same effect as writing “any lawful purpose.”
3. Consider hiring an attorney to help with more complex documents
While the Articles of Organization or Articles of Incorporation are easy to file, it is still best to consult an attorney to assist with drafting other entity documents that are not as easy to create. Corporate regulations and LLC operating agreements state the rules for how the company will be operated and govern important areas such as voting, termination of members, officers, and business succession planning.
Also, it is a common misconception that the Secretary of State articles filings list the names of the business owners. The business owners are actually listed in the LLC operating agreement or corporate regulations.