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STARTING AND OPERATING A BUSINESS IN OHIO Copyright © 2008, Michael D. Jenkins CHAPTER 18
CONTENTS OF THIS CHAPTER:
I. INTRODUCTION I. INTRODUCTION Ohio has a fairly typical tax and legal structure under which businesses must operate, not markedly dissimilar to that of most other states. Like most states, Ohio imposes an income tax, a franchise tax on corporations, a sales and use tax, various excise taxes, with property taxes imposed at the local level. The state has also adopted a limited liability company (LLC) law, and a limited liability partnership (LLP) law, so that businesses operating in Ohio in LLC or LLP form may thus obtain the advantages of limited liability, without incorporating or becoming subject to corporate taxation, generally. However, since 1998, an withholding tax has been imposed on the Ohio-apportioned income of all "qualifying pass-through entities," such as S corporations, partnerships, and LLC's that are taxable as partnerships, if the recipient shareholder, partner, or LLC member is not an individual and is not a corporation filing Ohio franchise tax returns. A withholding tax, at the highest individual income tax rate, is also imposed on the profits allocable to nonresident individual investors in a qualifying pass-through entity. Effective July 1, 2005, the Legislature enacted a new Commercial Activities Tax (CAT) that applies to all but very small businesses operating in Ohio. However, as part of a major overhaul of Ohio's tax laws, the corporate franchise (income) tax is being phased out over 5 years, as the CAT is phased in, and individual tax rates are gradually being reduced by 21% over 5 years, beginning in 2005, from the previous maximum rate of 7.5% to 5.925% by 2009. In addition, the personal property tax on tangible personal property is being phased out over 4 years for existing property, and was immediately eliminated for new manufacturing machinery and equipment purchased in 2005 or later and for all personal property in 2009 and later. See Section IV(a) for details. At present, the state's economy has been somewhat sluggish, in terms of the level of unemployment and other economic measures, and unemployment has soared recently in 2008. For example, in July, 2008, the Ohio rate of unemployment was 7.2%, up sharply from a rate of 5.6% a year earlier, and higher than the national unemployment rate of 5.7% in July, 2008. To view the latest federal Bureau of Labor Statistics unemployment rate data for Ohio or any other state, visit the BLS website. II. LEGAL ENTITIES -- FILING FEES AND REPORTING REQUIREMENTS. (a) In General. A business that operates in Ohio can operate as a sole proprietorship, a general or limited partnership, a corporation, or a limited liability company. In addition, like the federal tax law, the state income (franchise) tax law also recognizes S corporations, for tax purposes, and generally allows the income or losses of an S corporation to "flow through" and be taxed or deducted at the shareholder level, rather than taxing the corporation itself as an entity. Ohio also provides for limited liability partnerships, in which no partner is liable for debts of the partnership, in general, as in the case of a corporation or LLC, but with fewer legal formalities than are required for either a corporation or an LLC. Each of the above entities is discussed below, along with the basic requirements for forming such an entity and any general ongoing (non-tax) reporting requirements that are applicable to it. The tax treatment of each form of legal entity is discussed in Section IV below. (b) Sole Proprietorships. In general, sole proprietorships in Ohio can be established with no formalities. However, as discussed in Section IV(b), it will generally be necessary to obtain one or more local business licenses from cities or counties in which you operate and, in some cases, state licenses, as well. In addition, if you make any sales of tangible personal property at retail or provide certain types of services, you may be required to obtain a sales tax license and collect sales tax, as discussed in Section IV(d). No separate tax form filing is required, generally, for a sole proprietorship, under the Ohio income tax law. Instead, as with the Schedule C on your federal Form 1040, you simply report the net income or loss from your sole proprietorship on your state personal income tax return. As a sole proprietor, your income may also be subject to city or school district income taxes, or both. See Section IV(c) for information on the Ohio income tax and filing requirements for individuals. In addition to paying Ohio income taxes, sole proprietors are also required to register for and pay the Ohio Commercial Activity Tax (CAT) on gross receipts, except for small businesses with less than $150,000 a year in gross receipts. Doing business as a sole proprietor in Ohio is generally much simpler than operating as any other kind of business legal entity. As a sole proprietor, if you have no employees, you are not required to pay any unemployment taxes, withhold any federal or state income tax from wages, nor obtain workers' compensation coverage for yourself. However, if you do business under a trade name or fictitious business name, you may need to register it, as discussed in Section IV(g). (c) Partnerships. Ohio's partnership laws allow creation of either a general partnership, in which all partners are liable for the debts of the business, or a limited partnership, in which only the general partners are liable for debts, while the liability of limited partners is limited to the amount they have invested, usually. State law also allows for the creation of a limited liability partnership, in which no partner has personal liability (subject to certain exceptions). As discussed in Section IV(b), it will generally be necessary to obtain one or more local business licenses from cities or counties in which you operate and, in some cases, state licenses, for any type of partnership, including general or limited partnerships, or limited liability partnerships. Partnerships, as entities, are not subject to state income tax in Ohio. Instead, the income or losses of the partnership, as allocated among the partners, must be reported on the personal income tax returns of the individual partners (or on the corporate tax returns of any corporate partners). While the state does not require filing of a state partnership information return, a partnership with Ohio-source income and with two or more nonresident partners may elect to file a single nonresident tax return on behalf of all the nonresident partners. Partnerships and other pass-through entities (limited liability companies and S corporations) are required to withhold Ohio income tax with respect to the share of Ohio-source income allocable to nonresident individuals or foreign business entities, other than corporations that file Ohio corporate franchise tax returns. Partnerships are also required to register for and pay the Ohio Commercial Activity Tax (CAT) on gross receipts, except for small businesses with less than $150,000 a year in gross receipts. UPDATE NOTE: For more on the Ohio tax treatment of partnerships, see Section IV(c). A partnership agreement, for any type of partnership, should spell out in considerable detail such matters as the following:
As a rule, general partnerships in Ohio can be formed with no formalities, although it is highly advisable to have a written partnership agreement. However, as discussed in Section IV(b), it will generally be necessary to obtain one or more local business licenses from cities or counties in which you operate and, in some cases, state licenses, as well. If engaged in selling tangible personal property or rendering certain types of taxable services, it will be necessary to also register with the Department of Taxation for a sales tax vendor's permit, as discussed in Section IV(d). In addition, any partnership or other business that has employees will generally have to register for, and pay, state unemployment tax on wages paid, as discussed in Section V(b), and as an employer for state income tax withholding purposes, as discussed in Section V(a). A limited partnership, in which there is at least one general partner (who is liable for partnership debts) and at least one limited partner (who is not liable for partnership debts), may also be formed under Ohio law. Unlike a general partnership, a limited partnership must generally have a written partnership agreement, and must file a certificate of limited partnership with the Ohio Secretary of State, together with a filing fee of $125. Foreign limited partnerships must also register before they are allowed to do business in Ohio, and must pay a registration fee of $125. For information on limited partnership filing requirements, see the contact information for the offices of the Ohio Secretary of State, listed in Section VI(a). LIMITED LIABILITY PARTNERSHIPS Limited liability partnerships (LLP's) are a relatively new form of partnership permitted under the laws of Ohio. Like an LLC, an LLP provides limited liability for its owners, while retaining the tax advantages of a partnership for federal and Ohio state income tax purposes. However, unlike an LLC, an LLP typically operates like a regular partnership, and is not required to file articles of organization. The partners in a general partnership can obtain a degree of limited liability by simply registering the partnership with the state as an LLP. Until recently, an the degree of liability protection provided by an LLP in Ohio was not comparable to that of a corporation or LLC since, under Ohio law, an LLP only protected a partner from liabilities arising from the misconduct or negligence of another partner. However, as several other states have recently done, in 2007 Ohio amended its LLP law to provide broader protection for LLP's, which are now roughly the equivalent of a corporation or LLC in terms of the liability protection they offer. A partner in a registered limited liability partnership remains specifically liable for that partner's own negligence, wrongful acts, errors, omissions, or misconduct, including that partner's own negligence, wrongful acts, errors, omissions, or misconduct in directly supervising any other partner or any employee, agent, or representative of the partnership. To obtain LLP status in Ohio, a partnership must register with, and pay a filing fee of $125 to the secretary of state. Foreign LLP's, those created under the laws of another state, must register with the secretary of state and pay a fee of $125. Every LLP doing business in Ohio, including both domestic and foreign LLP's, must file a biennial report with the Ohio Secretary of State in July of each odd-numbered year and pay a filing fee of $25. For more information on LLP registration and reporting requirements, see the contact information for the offices of the secretary of state, listed in Section VI(a). Note that one potential drawback of LLP's, if you will do business in other states besides Ohio, is that some states, like California and New York, only recognize certain types of professional partnerships as LLP's. If yours is not a professional partnership, such other states may simply treat your LLP like an ordinary general partnership, with no limitation of liability. (d) Corporations.
To form a corporation in Ohio, you must file articles of
incorporation with the Ohio Secretary of State and pay a
fee of at least $125, or a larger fee (maximum $100,000),
based on the number of authorized shares of stock, if
issuing or authorizing over 1,500 shares:
A foreign corporation (one that is formed under the laws of another state or a foreign country), must obtain a certificate of authority before it may legally conduct business in Ohio, by filing an application for a certificate of authority and paying a license application fee of $125. For more information on filing articles of incorporation or applying for a certificate of authority to do business in Ohio, see the contact information for the offices of the secretary of state, listed in Section VI(a). In addition to paying federal income taxes on its income, a corporation that does business in Ohio must also file corporate franchise (income) tax and, except for certain small businesses, file Commercial Activity Tax (CAT) returns with the state. See Section IV(c) for a discussion of state corporate tax rates and tax return filing requirements. For tax forms and more information on corporate franchise taxes in Ohio, see the contact information for the offices of the Ohio Department of Taxation listed in Section VI(a). (e) S Corporations. An S corporation is simply a regular corporation that has elected, for federal or state income tax purposes, or for both, to be taxed somewhat like a partnership, with its income, losses and tax credits flowing through to its owners, who report such income, losses, or credits on their individual tax returns. Ohio recognizes S corporations for income tax purposes, and treats them in a manner similar to the federal tax treatment, with regard to their income or losses, exempting S corporations from the franchise tax on income. An S corporation is also exempt from the franchise tax based on capital. To maintain its S corporation status, it is necessary for a corporation to file a report between the first day of January and March 31 each year to report that such an election is still in effect for federal income tax purposes. S corporations are not exempted, however, from the new Commercial Activities Tax (CAT) on gross receipts, except for small businesses with under $150,000 in gross receipts. Also, like other pass-through entities (partnerships or LLC's taxable as partnerships), an S corporation with nonresident shareholders must withhold Ohio income tax on the Ohio-source income allocable to such shareholders. (f) Limited Liability Companies. Ohio, like every other state in the U.S., has adopted a limited liability company (LLC) law. Thus, in addition to the traditional choices of a sole proprietorship, partnership, or corporation, a business that operates in Ohio may also choose to operate in the form of an LLC. In most states, LLC's are very attractive entities for many small businesses, in that they offer the same protection as a corporation from creditors for debts of the business, while offering much of the flexibility plus the flow-through tax treatment of a partnership for federal tax purposes. This is true in Ohio, which does not impose income tax on an LLC, as an entity. However, the new Commercial Activity Tax (CAT), which will soon replace the corporate franchise tax, applies to all types of business entities, including LLC's. See Section IV(c) for a discussion of the income and CAT tax treatment of LLC's under Ohio tax laws. To form an LLC under the laws of Ohio, it is necessary to file articles of organization with the secretary of state, which must be accompanied by a filing fee of $125. Foreign LLC's, those formed under the laws of another state, must obtain a certificate of authority to do business in Ohio, by filing an application for a certificate of authority with the secretary of state and paying a filing fee of $125. Ohio state law now recognizes the validity of one-member LLC's. While state law formerly required an LLC to have two or more members, this was changed after the federal income tax regulations were modified to allow one-member LLC's to be treated as sole proprietorships for federal tax purposes. Ohio, unlike some other states, also allows professional service firms to operate as professional LLC's. For more information on filing articles of organization for an LLC, see the contact information for the offices of the secretary of state, listed in Section VI(a). III. BUSINESS ACQUISITIONS (a) In General. When acquiring an existing business, there are a number of state legal and tax issues you or, preferably, your business attorney, should attend to before closing the purchase. These include matters such as doing a title search for any real property that is being acquired, checking for any recorded security interests on personal property items, and thoroughly researching county, state, and federal records for any judgment liens, tax liens, or other liens, before property is acquired. You will also benefit from consulting a tax advisor before the agreement of sale is negotiated, in order to seek a structuring of the agreement so that the purchase price is allocated among the assets in a way that favors you. You may be able to obtain considerable tax savings if the purchase price is allocated in a way that gives you the best possible tax results under federal and state income tax laws, and other state tax laws, such as sales/use tax or property tax laws. Depending upon the state (or states) in which the seller's assets are located, you may also have to comply with state bulk sale or bulk transfer laws. You should also obtain tax releases from various state taxing agencies, as is discussed below. (b) Bulk Sale Laws. Typical bulk sale laws require either publication of legal notices to all creditors in advance of the sale and recording of such notices in some cases, or maintenance of detailed lists of the property to be transferred, for inspection by the public. Ohio is one of the business-friendly states that has repealed its bulk sale laws, so you no longer have to be concerned with this requirement when buying a business in Ohio. However, see Section III(c), regarding the Ohio law requirement that an escrow be established when a business is purchased, to assure that all liabilities of the seller are properly paid off. (c) Tax Releases. When you acquire an existing business, you will want to make sure that you do not unwittingly become liable for any unpaid taxes owed by the seller. Typically, to protect yourself, you will need to receive a tax release or releases from various state taxing agencies, for such taxes as sales and use tax, income tax withholding, and state unemployment taxes, in each state in which the seller does business. If you fail to obtain such a release or written statement from the tax agency that the seller is not delinquent on any tax payments, you will be held responsible for such tax if it is not withheld from the purchase price proceeds and paid to the state at the time the sale of the business transpires. In Ohio, you should obtain tax releases for unemployment taxes from the Ohio Bureau of Job and Family Services and a sales tax release, which the seller can obtain by submitting a Sales Tax Release issued by the Department of Taxation. Ohio law requires that an escrow account be set up when you buy a business, and that sufficient funds be withheld in escrow for liabilities of the seller, including any sales tax. The escrowed funds must not be released to the seller until the seller provides you with the Sales Tax Release, or you will be liable, as successor to the seller's business, for any unpaid sales and use taxes of the seller. (d) Unemployment Tax Rating of Seller. In addition to obtaining tax releases, you may find it advantageous to succeed to the seller's unemployment tax experience rating, if the seller has a tax rate lower than you would otherwise obtain as a new business. However, in Ohio, unlike many other states, if you acquire all of the assets of a business you will automatically inherit the tax experience rate of the seller, whether you wish to or not. Thus, when you are investigating the purchase of an existing business, you need to find out what unemployment tax rate you will be acquiring. PLANNING POINT: EXAMPLE: IV. OHIO TAXES AND OTHER GENERAL REQUIREMENTS. (a) In General.
Businesses in Ohio are subject to a wide range of taxes,
most of which are comparable to those in most other states,
in reach and in tax rate. Ohio income tax rates on individuals
and the franchise tax on business corporations (and on LLC's
that are taxable as corporations) are neither particularly high
nor low. However, unlike most other states, many cities and
villages in Ohio impose income taxes ranging between 0.3% and
2.85% on all compensation of residents (or compensation earned
in such a city by nonresidents), and on all the income derived
from any form of unincorporated business in which a resident
has ownership (or income of an unincorporated business earned
within such city, in the case of nonresidents). An Ohio
appellate court has held that it is not unconstitutional for
two cities to tax an individual's income, where the taxpayer
lives in one city and works in another.
A number of school districts in the state also impose
income taxes on district residents.
In 2005, the Ohio Legislature enacted a major restructuring
of the state tax system in Ohio, including the following major
changes:
COMMERCIAL ACTIVITIES TAX
The Commercial Activities Tax (CAT), which became effective
July 1, 2005, is a broad-based gross receipts tax that applies
to all businesses with over $150,000 of gross receipts in Ohio
except banks and financial institutions. The tax rate will be
0.26% when it is fully phased in, beginning in April, 2009.
Initially, the tax was 0.06% for the last two quarters of 2005
and the first quarter of 2006; then phases in at 40%, 60% and
80% of the 0.26% rate during each one-year period (from April
1 to March 31) from April 1, 2006 through March 31, 2009. The
tax rate increased to 0.208% from April 1, 2008 through March
31, 2009, after which it will be fully phased in, at 2.6%.
The CAT only applies to gross receipts in excess of
$1 million, but businesses with over $150,000 of annual
gross receipts also pay an annual CAT minimum tax of
$150, which is due by February 9 of each year for that
year. All businesses with over $150,000 of gross receipts
are required to register for the tax and pay a small
one-time registration fee of $20 ($15, if registering
electronically). Certain types of gross receipts, such as
receipts from sales of capital assets or assets used in a
trade or business, are exempted from the tax. Also exempted
(generally) are interest and dividends received, as well as
tax collections such as sales or excise taxes that a business
collects from its customers and must remit to a local,
state, or federal tax authority.
In addition, the state has ruled that payments from
subcontractors to a general contractor are not "gross
receipts" of the general contractor if the latter is
acting as an agent of the property owner.
RESULT: None of the above asset sales would be taxable
under the Ohio Commercial Activities Tax. (However, the
Ohio INCOME tax would apply to any assets sold at
a gain and assets sold at a loss might help to reduce
the amount of income tax you owe. Similarly, for an
incorporated business, the gain or loss might increase
or decrease the corporate FRANCHISE tax owed by
the corporation.)
For state tax forms and tax information, see the contact
information for the Ohio Department of Taxation
in Section VI(a).
(b) State and Local Licensing.
Nearly any business, operated anywhere in the United States,
will have to have at least one government license of some
kind. In most cases, this will be a local license, issued
by your city or county. Before you open your business,
contact your local city or county hall and find out if
your particular business needs one or more local licenses.
Most kinds of local business licenses are granted upon
payment of a fee, with no further requirements, except
possibly for annual or other periodic renewal fees.
However, if you are engaging in any kind of food business,
you will usually need to also obtain a health department
permit and show that you are in compliance with health
department food-handling requirements. In addition, be
sure to check with an attorney or local government zoning
or planning department officials to determine if your
business will be in compliance with all local zoning
and planning restrictions. If you own or rent any type
of facility, you will generally need fire department
permits, showing that you meet fire safety codes and any
construction or improvements to an existing structure
will usually require a building permit. If you intend to
simply operate your business from your home, you may be
in violation of local zoning requirements, but this is
less likely to be a concern if you don't have clients,
customers, suppliers, or employees coming to your house
on business, on a regular basis.
State governments have traditionally required special
licenses for many kinds of professionals, such as physicians,
dentists, lawyers, and accountants. To further protect
consumers, Ohio has expanded the list of occupations that
must be licensed by the state to include many other
occupations. Most state licenses not only require payment
of fees, but are only issued for a given profession or
occupation upon showing that you have completed certain
educational or experience requirements, or passed certain
tests, or some combination of the foregoing.
For help with state licensing and business registration
requirements in Ohio, see the contact information for the
offices of 1st Stop Business Connection, which is part of the
Ohio Department of Development, listed in Section VI(a).
(c) Income and Franchise Taxes.
Ohio has both an individual income tax and an income tax (the
franchise tax) on corporations. Cities and school districts
may also impose local income taxes. Ohio has recently adopted
a new Commercial Activities Tax, based on gross receipts,
that is described in Section IV(a)
and is gradually phasing out both the corporate franchise
tax and the business personal property tax by 2009, as well
as gradually reducing the state individual income tax each
year from 2005 to 2009.
TAXATION OF SOLE PROPRIETORS AND PARTNERSHIPS
The Ohio individual income tax has been imposed at
a maximum tax rate of 7.5%, ordinarily, applicable to
taxable income in excess of $200,000, through 2004.
However, the tax rates are being reduced by 4.2% each
year for 5 years, beginning in 2005, so that the total
tax reduction in rates will be 21% by 2009, lowering the
top tax bracket rate to 5.925% by 2009. Thus, the top
rate in 2005 was 7.185%, 6.87% in 2006, 6.555% in
2007, is 6.24% in 2008, and will be 5.925% in 2009.
Individual taxpayers generally pay state income tax on
their business earnings from a sole proprietorship, or
on their share of the earnings of a pass-through entity,
such as a partnership or S corporation or LLC. The Ohio
personal income tax return is Form IT-1040,
which must be filed with the state Department of Taxation
by April 15th each year.
Individual wage earners or persons with income from a
business are also subject to city income taxes in many Ohio
cities, with rates that can range from 0.3% to 2.85% of
taxable income. Over 500 cities and villages currently levy
such taxes, all of which must be imposed at a flat rate.
In addition, Ohio school districts are also allowed to
impose income taxes on residents, at rates of 0.5% to
2.0% on taxable income. In fiscal 2006, some 153 Ohio
school districts (of 614 in the state) levied school
district income taxes.
Partnerships, or entities taxable as partnerships, such as
LLC's, are not subject to state income taxation in Ohio, and
unlike most other states, Ohio does not require partnerships
to file a state information return. However, nonresident
partners are required to pay Ohio income tax on their shares
of Ohio-source income of a partnership. A partnership with
two or more nonresident partners can file a composite tax
return, Form IT-4708, for all the nonresident
partners, which must be filed, with full payment of the tax,
by April 15th, for a calendar year partnership.
Form IT-4708ES may be used to make
estimated tax payments on behalf of the nonresident partners
during the year. Tax must be paid at the highest individual
tax bracket rate for the current year.
In addition, since 1998 an entity-level income tax has been
imposed on the Ohio-apportioned income of all "qualifying
pass-through entities," such as S corporations, partnerships,
and LLC's that are taxable as partnerships, if the recipient
shareholder, partner, or LLC member is not an individual and
is not a corporation that files Ohio franchise tax returns.
A withholding tax is imposed on the Ohio-sourced profits that
are allocable to nonresident individual investors in such
a qualifying pass-through entity, or the entity may file a
composite tax return on behalf of its nonresident owners. The
rules for paying the pass-through entity taxes and filing
of the appropriate forms (Form IT-1140 or
Form IT-4708) are quite complex, so you may
need to consult a knowledgeable Ohio income tax advisor to
comply with the pass-through entity tax requirements.
Individual taxpayers doing business as sole proprietors
(or who are partners in partnerships, members of LLC's, or
shareholders in S corporations), who have taxable income
from the business, will generally be required to make
advance payments of estimated Ohio individual income
taxes, on Form IT-1040ES, if their net
tax liability (not covered by withholding) exceeds $500.
Estimated tax payments are due in four installments, on the
15th day of the 4th, 6th, and 9th months of the taxable year,
and the 15th day of the first month of the following year.
To avoid penalties for underpayment of estimated tax,
you must generally pay in 90% of the current year's tax.
However, no penalty for underpayment will be imposed if
you pay in an amount at least equal to 100% of your tax
for the prior year, if the prior year was a full taxable
year of 12 months.
As noted in Section IV(a), all
businesses of all types, including sole proprietorships and
partnerships (except for certain very small businesses),
are subject to the new Commercial Activities Tax, which
is based on gross receipts, rather than on net income.
The Ohio corporate franchise (income) tax, on corporations
other than S corporations, until 2004 (before its phase-out
began), was the higher of:
However, under 2005 tax legislation, the corporation franchise
tax is being phased out (except on certain financial institutions
and insurance companies), by being reduced 20% each year, beginning
in calendar year 2005 (franchise tax year 2006), until it is entirely
eliminated by 2009 (franchise tax year 2010). For calendar year 2008,
the tax is 1/5 of the tax as it would otherwise be computed.
Thus the effective maximum tax rate on corporate income was 6.8% in
calendar year 2005, 5.1% for 2006, 3.4% in 2007, is 1.7%
in 2008, and will be zero thereafter.
The franchise tax is being replaced by the Commercial Activities
Tax (CAT) on gross receipts, which is described above in
Section IV(a).
Also, it would be especially advantageous for a corporation
to sell capital assets or assets used in the business on an
installment sale basis, with payments deferred until the tax
year ending in 2009, so that when the taxable gain is finally
realized, the Ohio corporation franchise (income) tax rate will
be zero. In addition, while the CAT tax rate will increase each
year until 2009, such capital gains or gains from sales of assets
used in the business are exempt from the CAT.
Ohio also imposes a first tier litter tax (on corporations
other than certain family farms) at the rate of 0.11% on
the first $50,000 or income and 0.22% on the excess income;
or, under the net worth computation, 0.00014 times net worth,
with a maximum first tier litter tax of $5,000 a year. A
second tier litter tax also applies to certain sellers and
large manufacturers that contribute to the litter stream.
This tax is 0.22% on the excess income over $50,000, or
0.00014 times net worth, but is also limited to a maximum
of $5,000.
The state corporation income (franchise) tax return is
Form FT-1120, Corporation Franchise Tax Report.
A corporation may file its return by January 31 of
each year and pay all of its tax. If it does not, it must
instead pay 1/3 of the tax by January 31 and the balance
with its return by March 31. However, it may request an
extension until May 31, in which case it would pay a
second third of the tax by March 31, and the balance with
the return by May 31.
TAXATION OF LIMITED LIABILITY COMPANIES
In Ohio, a limited liability company (LLC) is taxed
in the same manner as a partnership, thus avoiding the
possible double taxation of income that can occur with
a corporation. A single-member LLC will generally be
treated, as under federal law, as a "disregarded entity."
Thus, the income of an LLC, like a sole proprietorship
or partnership, will generally be taxed to its owner or
owners, rather than at the entity level, for both federal
and Ohio income tax purposes.
However, as noted in Section IV(a),
all businesses of all types, including LLC's, are now subject
to the new Commercial Activities Tax (CAT), which is a gross
receipts tax rather than an income tax. However, certain
small businesses are exempted from the CAT.
Under IRS regulations, effective since 1997, an LLC is now
able to elect to be treated as a partnership if it has more
than one owner, or as a sole proprietorship (disregarded entity)
if it does not, for federal tax purposes. Ohio law has been
amended so that it now permits the formation of a one-owner
LLC, following the adoption of 1997 IRS regulations that first
allowed for noncorporate treatment of such one-owner LLC's.
Note that it is not always entirely clear whether an LLC
is a "single-member LLC" or not, where the "single owner" is
a married couple who hold the entire ownership of the LLC in
some form of co-tenancy, such as joint tenants with right of
survivorship, tenants by the entirety, or as tenants in common.
The federal Internal Revenue Service (IRS) has taken a very
lenient position in Rev. Proc. 2002-69, where a couple
hold the LLC interest as community property, ruling that the
IRS will accept whatever choice the couple make, either to
disregard the LLC as an entity (treating it as a "single-member
LLC") or to treat it as a partnership between the husband and
wife.
However, Ohio is not a community property state, so where the
LLC is owned by a husband and wife in some form of co-tenancy,
it is unclear whether the IRS treatment would be as lenient as
for community property owners, since the IRS has not issued any
published rulings on whether an LLC can be a disregarded entity
if held in one of the various forms of co-tenancy by a married
couple, rather than being held as community property. Thus, it
is also unclear, where an LLC is owned by a husband and wife as
co-tenants, whether Ohio would treat the LLC as a single-member
LLC or as a partnership.
As described above with regard to partnerships, an
LLC that is taxable as a partnership may be subject to
the "qualified pass-through entity" tax and reporting
requirements for state income tax purposes, if it has
any members that are not Ohio residents or corporations
that file Ohio franchise tax returns.
(d) Sales and Use Tax.
Ohio imposes a general sales tax on retail sales of tangible
personal property and certain types of services, including
lodging, at the statewide rate of 5.5%. Also, local governments
levy local sales taxes, at varying tax rates. Sellers are required
to obtain a vendor's permit for each place of business where
taxable sales are to be made and to collect and pay over the
state and local sales and use taxes to the Department of Taxation.
Combined state and local tax rates range from 6% in some
areas to as high as 7.75% (in Cuyahoga County).
Businesses that collect sales and use taxes are allowed to
keep 0.75% (0.9% before July 1, 2007) of the amount collected,
in order to defray their administrative costs of collecting
and reporting the taxes, if the taxes are reported and paid
on a timely basis.
As of June 30, 2007, no such discount is allowed to a vendor
that uses a "Certified Service Provider" (an intermediary,
under the Streamlined Sales and Use Tax Agreement, or SSUTA)
that receives an allowance for performing the vendor's
function. See Chapter 5
of this publication for a description of the SSUTA and of
the functions of Certified Service Providers under the SSUTA.
Recent Ohio legislation has extended the scope of the sales
tax to include the following services:
Effective as of December 9, 2004, delivery charges on items
subject to sales or use tax are also subject to tax. Delivery
charges, including postage, are taxable whether or not such
charges are separately stated.
In a further development in the summer of 2007, the Ohio
legislature enacted a small business provision that may
permanently exempt businesses with annual delivery sales in Ohio
of less than $500,000 from destination-based sourcing, but this may
jeopardize Ohio's attempt to harmonize its sales tax laws with the
Streamlined Sales and Use Tax Agreement (SSUTA), which was to go
into effect in Ohio in 2008. These new sourcing rules were effective
June 30, 2007. It remains to be seen whether the small business
exception will be acceptable under SSUTA and whether Ohio will
be able to become a fully participating member of SSUTA. The state
is petitioning the national SSUTA organization to make changes to
accommodate Ohio's departures from the current SSUTA rules.
There are numerous exemptions from the sales tax, the most
important of which is the resale exemption. If you are a
wholesaler or retailer who purchases goods that you will
resell, your purchase of such goods may qualify as an exempt
sale for resale. Similarly, if you sell goods to wholesalers
or retailers for resale by them, your sale may also qualify
as an exempt sale for resale. In any such transaction, the
exemption is ordinarily available only if the purchaser gives
the seller a valid resale certificate, certifying that the
items are being purchased for resale, and not for use or
consumption by the buyer.
Other major exemptions include:
Ohio has announced it will continue to impose sales and
use taxes on sales of Internet access services to businesses,
as it had been doing so before the enactment of the federal
Internet Tax Freedom Act in October, 1998. It is one of the
few states that does so. However, it is imposed only where
the service is sold for business use.
A shadow tax, the use tax, is also imposed at the same
rate as the sales tax. It is primarily intended to tax
property that is acquired from sources outside of the state,
in transactions not subject to sales tax, when such property
is used or consumed within Ohio. Use tax may also apply
to items purchased on an exempt basis, such as for resale,
if such items end up being used or consumed, instead of
being resold.
Before making any taxable sales, you will need to register
with the Department of Taxation on Form ST-1, Application
for Vendor's License to Make Taxable Sales. There is
an initial fee of $25 for each required license and an annual
renewal fee of $10 for each license, due by February 1. There
are four types of vendor's licenses, and a business may be
required to obtain one or more of such licenses:
New legislation in 2007 greatly simplified the rules for
Electronic Funds Transfer (EFT) payments of sales and use
taxes, effective January 1, 2008. Under the new law, a single
payment schedule applies to all vendors making EFT payments
of sales tax, under which an estimated payment of 75% of the
tax liability for each month is to be paid by the 23rd of the
month and the balance for that month is to be paid on the
23rd of the next month, along with the estimate payment for
that month. A 5% charge will be imposed for underpayment of
the 75% estimated payment for any month, if the amount paid
is less than 75% of the actual tax for the month in question,
unless the payment is at least equal to the vendor's entire
liability for the same month of the preceding year.
For more information on Ohio sales and use tax registration
and compliance, see contact information for the offices of
the Ohio Department of Taxation in Section VI(a).
(e) Real and Personal Property Taxes.
In Ohio, as in every other state, any business real estate
you own will be subject to real property taxes. In general,
there is little that you must do, unless you wish to
challenge your assessed valuation, since the assessor
will bill you for each year's real property taxes as they
come due.
Ohio also imposes personal property taxes on tangible
personal property, for which the filing requirements can be
quite complex. ("Personal property" is any kind of property
that is not real estate.) Unlike most states, Ohio's personal
property tax laws do not exempt business inventories, which
are taxed based on their average monthly values. However,
inventories are only taxed at 25% of their true value, and
this tax is being phased out since 2002 (the assessment rate
was reduced to 23% in 2003-2005). Other personal property
has continued to be assessed at 25% of actual value, until
recently.
While Ohio generally taxes tangible personal property,
the major tax overhaul that was signed into law by Governor
Taft in 2005 provides for a complete phase-out of the property
tax on tangible personal property in 4 years. Instead of
being assessed at 25% of true value, as in the past, the
assessment ratio is reduced for tax return years as follows:
Most new manufacturing machinery and equipment purchased
in 2005 or later was immediately fully exempted from property
tax, for returns to be filed in 2006 or later. Other tangible
personal property and any manufacturing equipment and machinery
acquired before 2005 will continue to be taxable before 2009
according to the above table.
Ohio does not impose a property tax on intangible personal
property, such as stocks, bonds, promissory notes, and
other such paper assets, except in the case of certain
dealers in intangible property, who pay a property tax
on intangibles in lieu of any other property taxes. Note,
however, that the Ohio Supreme Court ruled in a 2006
decision that "canned" computer software is a form of
tangible property, since the encoded instructions are
eventually stored in some manner on a computer storage
medium. Thus, the court held that such software is
subject to property tax as tangible personal property.
(f) Other Business Taxes.
Ohio levies a number of excise and other taxes on businesses, the
most important of which is the (since 2005) Commercial Activities
Tax, a gross receipts tax on all but very small businesses, which
is discussed in Section IV(a).
Other excise and miscellaneous taxes imposed by the state
of Ohio include the following:
(g) Trade Names. A trade name, also known as a fictitious or assumed name, is any name used in the course of business that does not include the actual legal names of all the owners of the business. Thus, if your business goes by any name other than your own real name, it is operating under a trade name. The same is true of a corporation, if it operates under a name other than its legal name. A trade name might also be one that suggests the existence of additional owners, by using such words as "company," "associates," or "group." In most states where you do business, it will be necessary to register a trade, fictitious, or assumed name, so that people who do business with you can find out who the actual owners of your business are. You may also want to register any such trade name, as a means of protecting against other companies usurping that particular trade name. Ohio law permits registration, with the secretary of state, of a trade name used in a business or trade and to which the user asserts a right to exclusive use. A business using a fictitious name that does not wish to register it as a trade name, or that cannot do so because the name is not available for registration, must register the fictitious business name with the secretary of state on Form 534, Name Registration. There is a $50 fee for trade name registration or for registering a fictitious name. V. EMPLOYER REQUIREMENTS IF YOU HAVE EMPLOYEES (a) Employer Registration and Withholding. If you have any employees, you will already be withholding federal income tax and FICA taxes from their wages. Since Ohio imposes a state income tax on the income of individuals, you will need to also withhold Ohio income tax from the wages of your employees, as well as city income taxes in most cities, and school district taxes on wages as well, in some districts. As soon as you begin to pay wages, you must register as an employer with the Department of Taxation by filing Form IT-1, Combined Application for Registration as an Ohio Withholding/School District Withholding Agent, and should also check with your local municipal tax office as to whether withholding of city income taxes is required where your business is located. For more information on Ohio income tax withholding and registration requirements for employers, see the contact information for the offices of the Department of Taxation, listed in Section VI(a). (b) Unemployment and Other State Payroll Taxes. If your business employs one or more individuals in each of 20 weeks during the current or preceding calendar year or if your payroll amounts to $1,500 in any calendar quarter in either such year, you, as an employer, will be required to pay state unemployment tax based on the amount of such wages paid. Employers subject to the Ohio unemployment tax are required to register with the Unemployment Compensation Division of the Ohio Bureau of Job and Family Services on Form JFS-66300, Report to Determine Liability. New employers are required to pay tax at rates that vary by industry, on the first $9,000 (in 2008) of wages paid to each employee. Generally, the new employer rate is 2.7% and is set by statute, but is higher (5.8% in 2008) for construction industry employers and varies from year to year for that industry, based on the average tax rate for experience-rated construction industry employers. After you have had employees for at least four consecutive calendar quarters ending on June 30, you will develop an unemployment tax experience rating. This rating is based on the number of employees you terminate who then claim unemployment benefits and the amount of such benefits paid to those former employees, under complex formulas. The state will inform you when they have assigned you an individual tax rate based on your firm's experience rating. That rate may be higher or, if you have had relatively few benefit claims charged to your account, lower than the standard new employer tax rate for your industry that you were initially paying. In 2008, the tax rate can be as low as 0.5% or as high as 9.2%, depending upon on the employer's experience rating. All state unemployment taxes are imposed upon you as the employer, and, under Ohio law, cannot be charged to your employees or withheld from their wages. Employers are required to submit a complete Contribution and Wage Report each quarter. The due dates for filing quarterly reports are as follows:
For more information on your Ohio unemployment tax obligations as an employer, see the contact information for the offices of the Ohio Bureau of Job and Family Services, Office of Unemployment Compensation, listed in Section VI(a). (c) Workers' Compensation. In Ohio, virtually all businesses with one or more employees are required by law to have workers' compensation insurance, except those able to self-insure. However, a sole proprietor, a partner in a partnership, or an officer in a family farm corporation is generally not considered an employee, but coverage may be elected for such individuals. Workers' compensation provides wage loss and medical benefits to employees injured on the job and it protects you, as an employer, from legal action for damages for injuries or job-related illnesses suffered by your employees. In effect, it is a "no-fault" insurance system for work-related injuries or illnesses. CAUTION: As an employer, you must notify injured employees of their benefits and post a notice in the workplace informing your employees of your most recent payment of premiums for their workers' compensation coverage. For more detailed information regarding your obligations as an employer under the Ohio workers' compensation laws, contact your insurance carrier or see the contact information for the offices of the Ohio Bureau of Workers' Compensation, listed in Section VI(a). (d) State Wage and Hour Laws. Some employees of certain small firms not engaged in interstate commerce are not covered by the federal minimum wage and overtime laws. However, Ohio law requires most employers in the state to pay a state minimum hourly wage that is currently higher than the federal minimum wage. In the November, 2006 election, Ohio voters passed an initiative (Ohio Issue 2) that amended the state constitution, increasing the state minimum wage to $6.85 an hour, beginning January 1, 2007, and indexed for inflation in each subsequent year ($7.00 as of January 1, 2008). Employers whose gross revenues are under $250,000 are not subject to the new state minimum wage, but must pay employees a wage that is at least equal to the current federal minimum wage. Note that, as under federal wage-hour laws, certain classes of executive, administrative, and professional employees are exempted from the Ohio wage-hour rules, as are commission-paid outside salespersons. Ohio law generally follows the federal minimum wage definitions of who is and is not an "employer" and an "employee." Businesses with at least $150,000 a year in gross sales are required to pay time-and-a-half for overtime hours worked in excess of 40 hours a week, as under federal law, but those with less than $150,000 in gross sales are exempted from the Ohio overtime pay requirements (but will still be subject to the federal overtime law, usually). Besides the federal wage-hour posters that you must display in the workplace, you must also display a state wage-hour poster, which you can obtain from the Wage and Hour Bureau of the Ohio Department of Commerce. In addition to wage-hour laws, most businesses are subject to federal child labor laws, which put numerous restrictions on the working hours and kinds of work in which minors under the age of 18 may engage. Your business must also be cognizant of similar state child labor laws, in Ohio. Ohio law generally requires that any minor you wish to hire, who is of compulsory school age, must first provide you with an age and schooling certificate (work permit) from the superintendent of education. An exception is made for 16- and 17-year olds during summer vacation, who may instead provide you with proof of age and written consent of a parent to work for you. Additional exceptions are made for made for minors who work in movies or theatrical productions, deliver newspapers, or who engage in work such as shoveling snow or mowing lawns. The Ohio child labor laws do not apply to a minor who has received a high school diploma or certificate of high school equivalence. No minor under the age of 18 may work more than 5 consecutive hours without a rest period of at least 30 minutes. Working hours are limited for 16- and 17-year-olds as follows:
Working hours are restricted for children under the age of 16 as follows:
An employer who employs minors must post a notice in the workplace at all times, listing all minors who are employed at the site. For more on your obligations as an employer under the Ohio wage/hour and child labor laws, see the contact information for the Ohio Department of Commerce, Division of Labor & Worker Safety, Wage and Hour Bureau, listed in Section VI(a). (e) State Occupational Safety and Health Laws. Employers in Ohio must comply with state and federal job safety laws designed to prevent injuries resulting from unsafe or unhealthy conditions in the workplace. While nearly half of the states have their own agencies which enforce health and safety laws for private employment in their state, Ohio is one of the states that does not, instead relying on the federal Occupational Safety and Health Administration (OSHA) to enforce such requirements in Ohio. However, the Ohio Bureau of Workers' Compensation, Division of Safety and Hygiene, can assist you with information and free on-site safety consultations, to help you comply with the federal OSHA requirements at your workplace. Note that while you may obtain a free safety consultation from federal OSHA experts, they must and will cite you for any violations they discover at your workplace. This is not the case with state safety inspections. If you request a safety consultation from the Bureau of Occupational Safety and Health, and they detect violations, they will not cite you if you promptly correct the unsafe conditions. For information on your job safety and health obligations as an employer, required posters, and possible on-site safety consultations, see the contact information for the offices of the Bureau of Workers' Compensation, Division of Safety and Hygiene, listed in Section VI(a). (f) Other Miscellaneous State Labor Laws. Other Ohio labor laws you need to be aware of, as an employer, include the following: (1) Wage payments to employees. Employers in Ohio are generally required to pay wages at least twice a month. Where wages remain unpaid more than 30 days after a regular payday, and are not in dispute, an employer is liable to the employee for 6% of the unpaid wages or $200, as liquidated damages, in addition to the amount of wages owed. (2) Right-to-work laws. About half the states have enacted "right-to-work" laws, which guarantee that no person may be denied employment for refusing to join a union or for not paying union dues, thus banning either "union shop" or "agency shop" agreements, or both. In a union shop, an employee not belonging to a union may be hired but then must join the union, usually within 30 days. In an agency shop, an employee need not join the union but, to remain employed, must pay union dues. Ohio does not have such a right-to-work law and allows union shop or agency shop contracts between an employer and a union. In fact, Ohio law makes any contract or agreement by an employee not to join or belong to a union void, as against public policy. (3) State anti-discrimination laws. In addition to complying with federal anti-discrimination laws, employers with 4 or more employees with the state must also be aware of and comply with state civil rights laws in Ohio. The state law prohibits discrimination in employment on the basis of race, color, religion, sex, military status, national origin, disability, age, or ancestry. Any employment policy or practice that discriminates against employees or applicants on account of pregnancy is a form of sex discrimination, under administrative regulations. Sexual harassment is also defined as a form of sexual discrimination. Employers subject to the Ohio anti-discrimination laws must display a poster informing employees of their rights. You can obtain this poster from the Columbus office of the Ohio Civil Rights Commission, at the address listed in Section VI(a). (4) Reporting new hires. Under federal welfare reform laws, employers in all states are now required to report newly-hired (or rehired) employees to a designated state agency within 20 days after the date of hire. Ohio employers must report new hires to the Ohio New Hire Reporting Center, administered by the Ohio Department of Job and Family Services. See contact information for new hire reporting in Section VI(a) and a link to the Ohio New Hire Reporting Program web site in Section VI(c). Employers who file electronically must file reports twice a month (if needed), on dates not less than 12 days or more than 16 days apart. Ohio law now requires businesses that pay certain independent contractors for services rendered to also file new hire reports with regard to such contractors, even though they are not employees. Under the new law, a "contractor" includes an individual, the sole shareholder of a corporation or sole owner of an LLC. However, reporting is not required if such a person is either:
If a contractor must be reported as a "new hire," a report must be filed each time a new contract is entered into with the contractor. If there is no contract, report the contractor once each year. If a social security number has not been obtained from the contractor, the report may instead list the contracting person's or entity's Federal Employer Identification Number (F.E.I.N.). (5) Workforce Reductions. Ohio has a mass layoffs law, somewhat similar to the federal "W.A.R.N." Act, that requires an employer to notify the Ohio Department of Job and Family Services (ODJFS) at least three days prior to a mass layoff. To be considered a "mass layoff," an employer must have a separation of 50 or more employees within a seven-day period. In addition to giving the required notice, at the time of the layoff or separation the employer must furnish to each individual and to ODJFS the information necessary to determine the laid-off individual's eligibility for unemployment compensation. VI. STATE SOURCES OF HELP AND INFORMATION (a) Key State Agencies Contact Information. Ohio, as many states have done in recent years, has set up a "one-stop" center to help your new or existing businesses to obtain all necessary state licenses and permits from a single office, without your having to go from agency to agency to meet all the legal and regulatory licensing requirements. Also, you can register your business with the state for Ohio state and school district employer tax withholding, on a single state application form, Form IT-1, Combined Application for Registration as an Ohio Withholding/School District Withholding Agent, with the Ohio Department of Taxation, whose address is listed below, in this section. To obtain business registration forms, one-stop permit assistance, and information on starting or relocating your business in Ohio, contact one of the Ohio Small Business Development Centers (see the address of the lead center listed in Section VI(b)), or contact: Ohio Department of Development Addresses and other contact information for other key state and federal government agencies in Ohio, mentioned in preceding sections of this book, are listed below for your convenience. SECRETARY OF STATE. Contact the office of the secretary of state for information on:
Ohio Secretary of State TAXES. Obtain state income, sales and use tax, and other miscellaneous business tax forms, instructions and information from the Ohio Department of Taxation, which is the main tax collection agency in Ohio. Also register with this agency as an employer, for state and school district income tax withholding purposes, on Form IT-1, Combined Application for Registration as an Ohio Withholding/School District Withholding Agent. Department of Taxation STATE LABOR LAWS. Contact the following agency about your obligations as an employer under various state labor laws, including:
Ohio Department of Commerce STATE OSHA PROGRAM. For information on both federal and state occupational safety and health laws that affect you as an employer in Ohio, contact the Bureau of Occupational Safety and Health, of the Ohio Department of Commerce, at: Ohio Bureau of Workers' Compensation STATE LICENSES. The Office of Small Business of the Ohio Department of Development, 1st Stop Business Connection, is the main state agency that can help you get started with licensing and permit requirements. See the contact information for this agency listed above. STATE SALES TAX. Obtain your sales and use tax license or permit and information on the Ohio sales and use tax law, from the following agency Department of Taxation. See the address information listed above for that agency. EMPLOYER WITHHOLDING. Contact the Department of Taxation, at the address listed above for that agency, to register as an employer, for purposes of Ohio income tax withholding. OHIO NEW HIRE REPORTING PROGRAM. Report newly hired or rehired employees and in some cases, newly retained independent contractors, to the Department of Job and Family Services' Ohio New Hire Reporting Program, generally within 20 days after hiring, at the Web address listed in Section VI(c), or mail to: Ohio New Hire Reporting Center STATE UNEMPLOYMENT TAX. Contact the following state agency to determine whether you are an employer subject to payment of state unemployment taxes, and for registration as an employer on Form JFS-66300 if you are subject to such taxes. Ohio Bureau of Job and Family Services WORKERS' COMPENSATION INSURANCE. If you employ workers for whom you must supply workers' compensation coverage, contact the following agency for further information: Ohio Bureau of Workers' Compensation STATE ANTI-DISCRIMINATION LAWS. Contact the following state agency for more detailed information on Ohio civil rights laws that may apply to your business, and to obtain anti-discrimination notices you are required to post in the workplace: Ohio Civil Rights Commission (b) Small Business Development Centers. A number of Small Business Development Centers (SBDCs) are located throughout Ohio to assist you. These centers, usually located on college campuses, provide a wealth of start-up information and sponsor frequent business-oriented seminars. Contact one of the SBDC offices such as the one listed below for information, or for the location of other SBDCs nearer to you. Ohio Small Business Development Center (c) Internet Sites. For anyone with access to the Internet, there is a wealth of state and even local business information provided by state and local governments. All states now have a state government Web page, and most major Ohio state agencies also have sites on the Internet where you can obtain useful small business information on matters such as Ohio taxes, financing sources, or the addresses and phone numbers (or e-mail addresses) of various state and federal agencies' offices in Ohio. To start your Internet search for Ohio state government information, you may want to begin with the following Internet sites: State of Ohio home page (general information on Ohio): Ohio state agencies (links to state agency web sites): Ohio Department of Taxation (tax forms and information): Secretary of State Business (organization filing fees): Ohio New Hire Reporting Center (on-line reporting of new hires): Ohio Laws (text of Ohio Statutes and Administrative Code): (d) Financing Sources. For information and help on locating financing for your small business, contact the nearest U.S. Small Business Administration office in Ohio. For state government sources of financing, under the Chapter 166 Direct Loan Program and other state financing programs, contact the following state agency: Ohio Department of Development The address of the SBA District Office in Cleveland is: U.S. Small Business Administration |
Copyright © 2008 Michael D. Jenkins
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