LLC vs. sole proprietorship in Ohio: which is right for you?

If you are starting a business in Ohio, one of the first choices you make is how to set it up. Most small business owners pick between two options: a sole proprietorship or a limited liability company (LLC). Here is what each one means, in plain language.

What is a sole proprietorship?

A sole proprietorship is the simplest way to run a business. If you start doing business under your own name and you don't file anything with the state, you are already a sole proprietor. There is no separate filing to become one - it's the default status.

The tradeoff is that a sole proprietorship gives you no separate legal protection. This means if your business is sued or owes money, your personal things - your car, your savings, your house - can be at risk too. Your business and you are treated as the same thing, both in law and on your tax return.

What is an Ohio LLC?

An LLC (limited liability company) is a separate legal entity from you. To create one, you file paperwork - called Articles of Organization - with the Ohio Secretary of State. Once it's approved, your LLC exists as its own legal "person" in the eyes of the state.

The biggest reason people choose an LLC is liability protection. In most cases, if your LLC is sued or runs into debt, your personal belongings stay separate and protected. Your risk is generally limited to what you put into the business.

The tradeoffs

A sole proprietorship costs nothing to start and has almost no paperwork. An LLC costs money to set up (check the Ohio Secretary of State site for current filing fees) and takes a bit more ongoing organization - separate bank accounts, separate records, and keeping business and personal money apart. In exchange, you get real legal protection that a sole proprietorship does not offer.

Ohio's reporting rules

Here's something that surprises people: unlike many other states, Ohio does not require regular for-profit LLCs to file a recurring annual or biennial report with the Secretary of State just to stay active. (Some other types of entities - like professional associations and limited liability partnerships - do have their own periodic filing rules, and those are different from a standard LLC.) That said, you still need to keep your business's information current with the state and stay on top of your tax filings every year, so it's worth checking your specific entity type with us or with the Secretary of State's office.

When each one makes sense

A sole proprietorship can make sense if you are just testing an idea, working alone, and not worried about lawsuits or big debts. An LLC tends to make more sense once you have customers, employees, contracts, equipment, or anything else that could create risk - or once you simply want the peace of mind of keeping your personal and business life separate.

This is general information, not personalized tax or legal advice. Talk to us about your specific situation.