In Ohio, business entities like limited liability companies and corporations provide business owners with protection from personal liability. This protection ensures that a claim made against one’s business does not jeopardize their interest in their personal home or car. In order to maintain this personal protection, though, a new business must ensure they follow three basic principles:
- Formation. The 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.
- Capitalization. Once 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 Commingling. Given 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.
Starting a new business can be one of the most exciting things a person will do in their lifetime. It can also be one of the most challenging. At Rittgers & Rittgers, our attorneys will work closely with you as you begin your entrepreneurial journey in order to maximize your triumphs and minimize your risks and headaches. Call us today and let us help you start and grow your business.