So, you have a new business idea and you are excited to set up shop and make it big. Before you start selling your product and service, be sure to stop and think about the legal consequences of your business formation. This is a crucial step in creating a successful business in Ohio.

Q:        Should I incorporate?

A:        Absolutely. Forming either a corporation or an LLC allows you to protect your personal assets in case of a lawsuit or claims against your business. You will also be able to limit your liability for any outstanding business debts and obligations. When starting a business, be sure not to put your personal assets at risk. In the event you are ever sued and you have not incorporated, your home, bank account, and all other assets can potentially be exposed should you receive a court judgment against your business. By incorporating your business, you create a wall between the business assets and your own personal assets. Another benefit of incorporating is that it makes your business more credible to consumers. Just seeing “Inc.” or “LLC” behind your business name adds instant legitimacy. Further, incorporating protects your brand and business name. Finally, incorporation gives your business flexibility and tax benefits.

Q:        I’m thinking about going into business with a friend. What should I consider?

A:        Depending on the corporate formation you choose, you could very well be liable for your own debts and actions in addition to those of your business partner, over whom you have no control. Think long and hard before committing yourself to such a situation. To help alleviate personal risk in a partnership setting, consider speaking with an attorney or other professional with business start-up expertise who can walk you through this complicated situation and consider options such as placing assets in trust or in another’s name.

Q:        A friend told me I should set up an LLC. How do I know if that’s the best choice for me?

A:        A limited liability company is the most popular business entity. Like a corporation, an LLC limits your liability, but is treated, for tax purposes, like a partnership. Consult with an attorney, however, before deciding whether an LLC is the best option for you.

Q:        What are the differences between an S-Corporation and a C-Corporation?

A:        A C-Corporation is legal entity separate and distinct from its owners. The corporation issues ownership interests (“shares”) to “shareholders.” The shareholders elect the board of directors.  The directors, who are entrusted with managing the corporation, elect the officers. The officers operate the corporation under the board’s direction. The shareholders, the directors and the officers are generally not responsible for the debts and obligations of the corporation. The corporation’s profits are distributed to the shareholders in the form of dividends.

            A C-corporation is taxed twice: first, at the corporate level, when income is received, and second, when income is re-distributed to shareholders. Finally, a person who is merely a shareholder of the corporation will almost always be absolved of liability.

            An S-Corporation is similar to a C-Corporation, but it is taxed as a “pass-through entity” meaning that the owners pay taxes on all business profits on their individual tax returns (i.e., the business income “passes through” the business to the owners’ personal tax returns and business profits are not “double taxed”). To become an S-Corporation, a business must have fewer than 100 shareholders, all shareholders must be people (no estates, trusts, etc.) who are not nonresident aliens, and the corporation can have only one class of stock.

Q:        How do I create a legal business in Ohio?

A:        Surprisingly, it is very easy to set up a corporation, LLC, or other business formation. You simply have to complete a small amount of written paperwork and pay a filing fee. You can get the necessary papers through the Ohio Secretary of State website at www.sos.state.oh.us/sos/upload/business/filingformsfeeschedule.aspx?page=251. You may also draft an operating agreement or other document depending on the business form you choose. For instance, to create a legally binding LLC, you merely have to submit a two-page online Articles of Organization and send the Secretary of State a check for $99. This is a very small price to pay to avoid personal liability for your business’ debts and actions. You may wish to consult with an attorney to help you choose a business entity and draft an operating agreement.

This “Law You Can Use” column was provided by the Ohio State Bar Association. It was prepared by Andrew L. Smith, a senior associate attorney in the Cincinnati office of Smith, Rolfes & Skavdahl Company, LPA. Articles appearing in this column are intended to provide broad, general information about the law. Before applying this information to a specific legal problem, readers are urged to seek advice from an attorney.

Q:       What is an Ohio Legacy Trust (OLT)?

A:        The Ohio Legacy Trust (OLT), also known as a “domestic asset protection trust” (DAPT), is an estate-planning tool used to protect assets from future creditors. Ohio is one of 14 states in the United States that allow DAPT trusts. A person (the “trustmaker”) can create an OLT, fund the trust with his or her own assets, and be a beneficiary of the trust. Future creditors cannot access the trustmaker’s OLT assets if the trust was properly formed.

Q:       How do I create an Ohio Legacy Trust?

A:        To be valid, an Ohio Legacy Trust must: 1) be in writing; 2) appoint an Ohio trustee; 3) be irrevocable; 4) have a “spendthrift” clause (making the trustee responsible for distributions so that trust beneficiaries cannot assign trust assets and creditors cannot access trust assets); and 5) be subject to Ohio law. At the time your assets are contributed to the OLT, a “solvency affidavit” is also signed; it states that you are and will still be solvent after contributing your assets to the OLT.   

Q:        How might I use an Ohio Legacy Trust?

A:        An OLT is an estate planning and/or business planning tool. Normally an OLT includes estate planning distribution provisions for your heirs and beneficiaries similar to those of a will or revocable trust. An OLT does not replace a will, heath care power of attorney, living will, financial power of attorney or revocable trust, and you must coordinate the OLT’s terms and provisions with your other estate and business planning tools. Typically, OLT beneficiaries will include you (the trustmaker), your spouse and your children, but you can also name a charity, grandparent, parent or friends as beneficiaries. 

Q:       How does an Ohio Legacy Trust differ from a revocable trust?

A:        Unlike a revocable trust, the Ohio Legacy Trust is irrevocable (cannot be changed). Also, because you give up control of your OLT assets to an independent trustee, you should put only a small percentage of your assets or your excess assets, in the OLT.  The assets should not be encumbered by personal guarantees, liens, claims or lawsuits.

Q:       Who can form an Ohio Legacy Trust (OLT)?

A:         Any adult, business, corporation, out of state resident or out of state business can form an OLT.

Q:       What kinds of assets can I place in an OLT?

A:        Investment or financial accounts, mutual funds, investment real estate, shares of stock, LLC membership interests, artwork or personal property can be put into an OLT. IRAs and retirement accounts cannot be put into an OLT. Also, make sure the assets are titled in the name of the OLT.

Q:       How are OLT trust asset distributions made?

A:        You ask the independent trustee, in writing, for a distribution. Normally there is no limit to amount or the number of times you can request a distribution, but you can request a distribution only if: 1) proper steps were taken to form and fund the OLT; 2) the independent trustee has custody and control of the OLT assets; and 3) 18 months have passed without any threatened, existing or filed claims against you or the trustee.

Q:       Must the OLT’s independent trustee grant my distribution request?

A:        No. The trustee can refuse to distribute your OLT assets. This can be frustrating, but it helps to protect your  OLT assets from creditor claims.  

Q:       Can any creditors access OLT assets?

A:        If properly formed, and the required time period has passed (18 months) with no claims, future unknown creditors cannot access funds in the OLT. Ohio law does provide exceptions to this rule for child and spousal support (alimony). 

Q:       How much can I put into an OLT?

A:        Generally, you can fund your  OLT with assets not needed for monthly bills, loan payments, expenses or longer-term debts. Because OLT distributions are made by an independent trustee, you may not be able to get your money out, so don’t put in more than you can afford to lose.

Q:       Who can be an OLT trustee?

A:        An independent trustee should not be related to or under the control of the trustmaker or any of the beneficiaries. Independent trustees may include, for example, corporate bank trustees, institutional trustees, professional trustees, accountants, attorneys or financial planners.

Q:       Does a trustmaker need an attorney to form an OLT?

A:        Yes. Because the formation of  OLTs involve, giving up rights to assets, creditors’ rights, beneficiary rights and tax and estate planning issues, it is wise to engage an attorney experienced in OLT matters.  

This "Law You Can Use" consumer legal information column was provided by the Ohio State Bar Association. It was prepared by D. Bowen (“Bo”) Loeffler, Esq. of Port Clinton/Sandusky. Articles appearing in this column are intended to provide broad, general information about the law. Before applying this information to a specific legal problem, readers are urged to seek advice from an attorney.