Common Business Entities

Defining Common Business Entities

When you start your own business, it’s essential that you familiarize yourself with the different types of US business structures. The structure that you choose will have legal and tax implications for your business, and you need to be sure that you’re selecting the structure that will work best with your particular organization.

As an Ohio business attorney, I regularly provide counsel to entrepreneurs who are trying to decide how to structure their business, and I’d highly recommend that anyone starting a business for the first time seek professional legal advice. To give you a sense of your options before you talk to a lawyer, though, I’ve put together basic descriptions of six common types of business entities.

Sole proprietorship. If you are the one person running your small business, you should register as a sole proprietorship. This is a great choice for new entrepreneurs because it’s the most straightforward structure with the fewest barriers to entry. Under this structure, you are viewed as an unincorporated business with no legal distinction between you and the business. As a result, you’re entitled to all profits—but you’re also liable for any financial losses.

Partnership. As you can probably guess from the name, a partnership is a business owned by two or more people. There are several different arrangements under this structure. The most straightforward is a general partnership, where all partners evenly share profits and losses. You can also form a limited partnership, where liability and business input is divided unevenly based on each partner’s percentage of investment in the company. A third common type is a joint venture, where responsibilities and liability are divided evenly, but the partnership is only established for the duration of a single project.

Limited Liability Company (LLC). An LLC is similar to a partnership in that all owners (referred to as “members”) report profits and losses on their personal federal tax returns, and the business itself is not taxed. The business members are considered self-employed, and their personal assets are protected from any debt or lawsuits the LLC may incur.

Cooperative. If you’re creating a business in the restaurant, agriculture, art, healthcare, or retail industry, you may want to establish it as a cooperative. Cooperatives are considered corporations for tax purposes and receive a “pass-through” designation from the IRS, meaning they don’t pay federal income tax as a business entity. The cooperation is run by a group of “user-owners” who purchase shares in the business, make decisions by voting, and distribute profits amongst the group.

Corporation. If you’ve ever heard the dubious expression “corporations are people”, it’s because corporations are considered independent entities from a legal standpoint (just as an individual person is). However, they’re obviously not people; they’re organizations that are owned by shareholders. The business itself is legally liable for its actions and debts, rather than those shareholders. This type of business entity is particularly complex and comes with a lot of legal requirements and administrative fees, so it’s especially important to meet with an attorney if you’re thinking of forming one.

S Corporation. This structure type is for corporations that have been specifically designated as ‘S Corporations’ by the IRS in order to avoid double taxation for the corporation and its shareholders. Under this designation, shareholders are taxed but the business itself is not. If you run a corporation and want to qualify for this, you should first check the IRS stipulations.

Each of the above business structure types is much too complex to be fully explained in a paragraph, so treat these definitions as a basic starting point and make an appointment with an experienced business lawyer to learn more about your options.

Ohio Business Lawyer: Understand the Oil and Gas Boom Before Leasing

Ohio’s Utica Shale has sparked a recent oil boom in our state, and with over 600 new wells drilled last year alone, it’s a good time to be a landowner. If you own land that could potentially be the site of an oil well, you can make a healthy income from leasing it to a drilling company. However, there are a few things you should keep in mind before you sign a lease.

Leasing your land gives drilling company right to test property. Although you’ve hopefully already realized this, leasing your land to an oil and gas company gives them the right to test your property through drilling and other methods. If you’re not comfortable with this, you shouldn’t sign the lease.

qtq80-JD7cnUWork out a damage settlement. If you’re a farmer and you make a living off your land, you’ll want to make sure to include a damage settlement into your lease agreement in the event that drilling a well damages trees, crops, fences, or other valuable assets.

Look for a signing bonus. The oil company should give you an up-front lease payment (otherwise known as a signing bonus) in order to explore your land. Have your attorney look at the lease if the company is not offering you an up-front payment.

Work out a concrete time frame. Your lease needs to explicitly state how long your lessee has the right to explore your property, whether that’s a few months or a few years. If the lessee does not discover oil on your property within the time frame in the lease, then they will forfeit their rights and the lease will expire.

Decide whether or not to include “waiting on pipeline” clause. In some cases, the lessee may discover oil under your property but won’t have a way to transport it to market. If there is a “waiting on pipeline” clause in the lease they signed, then they can extend the lease.

Know that you’re entitled to royalties. If the lessee does find oil, then you should be entitled to royalties. It’s customary for the production company to pay at least 12.5%, but depending on the size of the well and the desirability of your property, you may be able to negotiate for a higher royalty payment. You can use this natural gas royalty calculator to come up with a fair estimate, but you should also talk with your lawyer.

Now that you know the basics of leasing your land to a drilling company, you may have a better sense of whether or not it’s a good choice for you. If you’ve already been approached by a drilling company, keep in mind that they’re the ones coming to you, and it’s fine to take your time negotiating for terms that work to your benefit. Carefully look over the lease with your Ohio business lawyer and make sure that you feel good about entering into this contract before you sign.