THE THREE THINGS EVERY NEW BUSINESS NEEDS TO KNOW
In Ohio, business entities like limited liability companies and corporations provide business owners with protection from personal liability if operated correctly. This guide will help ensure that business owners do not jeopardize their interest in things like their personal home or car.
Proper FormationThe protection from liability afforded by limited liability companies and corporations stems from the fact the business entity is separate and distinct from its owner. The first step in formalizing that separation is to register the business with the Ohio Secretary of State. This formal filing notifies the public and any future creditors of the company’s separate legal status. And whether you are embarking on the new business venture alone or with others, it is also important to ensure that the filing with the Ohio Secretary of State coincides with the execution of formal corporate governing documents like an Operating Agreement or a Close Corporation Agreement. These documents provide additional proof that Joe Smith’s Flower Shop, LLC is separate and apart from Joe Smith.
Appropriate CapitalizationOnce you’ve formally registered your new business and executed the necessary corporate documents, it is important to open a separate bank account in the name of the business and to ensure that you maintain a certain level of funds in that account to pay potential creditors. Even if this amount is not significant – say $500 or $1000 – it again offers proof that the business and the business owner are separate. It is also highly advisable for the new business to purchase insurance which covers such risks as are normally insured in comparable businesses.
No ComminglingGiven that the new business is separate and apart from its owner, it is important to ensure that corporate funds are not comingled or intertwined with personal funds. For example, Joe Smith’s Flower Shop, LLC cannot write a corporate check to cover the Smith family’s vacation rental home in Destin, Florida. Instead, the business must make (and document) a payment – whether it be payroll or a distribution of profits - to Joe Smith. From his own personal account, Joe can then write a check for that beach front villa. Similarly, Winnie Cooper cannot purchase flowers from Joe Smith’s Flower Shop, LLC but write the check to Joe Smith personally. Instead, she should make the check payable to the business which can then deposit it in its corporate account and make appropriate payments or distributions. While this may seem onerous, experience shows that the commingling of funds is one of the most common (but preventable) errors a new business makes. Unfortunately, the consequences from making this type of error have huge ramifications. Namely, the elimination of the protections from personal liability afforded by the formalization of the new business.