In Ohio, you're generally free to choose to operate your business as a C corporation, S corporation, partnership, limited liability company (LLC), or sole proprietorship. However, the entity type you select for your business may, in some cases, decide whether you or your business pays income taxes on the business income.
Corporations. Domestic corporations (corporations organized in Ohio) and foreign corporations (corporations organized in a state other than Ohio) are subject to an Ohio income tax. The corporate income tax (also referred to as the Ohio franchise tax) is computed as follows:
The tax rate is the greater of $50, or:
- 5.1 percent of the first $50,000 of the value of a taxpayer's outstanding shares of stock determined according to net income plus 8.5 percent of the value over $50,000; or
- .004 times the value of the taxpayer's total value of capital, surplus, undivided profits, and reserves, up to $150,000.
The minimum Ohio corporate income tax increases from $50 to $1,000 for some larger corporations. The increased minimum tax applies to corporations having either (1) $5 million or more in worldwide gross receipts for its taxable year, or (2) 300 or more employees worldwide at any time during its taxable year. The minimum tax remains at $50 for other corporations.
Beginning in the 2006 tax year, the corporation franchise (income) tax is being phased out over five years at a rate of 20% per year. For the 2006 tax year, tax liability is multiplied by 80%. For the 2007 tax year, tax liability is multiplied by 60%. For the 2008 tax year, tax liability is multiplied by 40%. For the 2009 tax year, tax liability is multiplied by 20%. No tax is imposed for the 2010 tax year.
An additional corporate franchise tax (known as the "tier I litter tax") is charged by the state of Ohio. This tax is an additional 0.11 percent to 0.22 percent of the computation above. The additional tax for any tax year may not exceed $5,000.
If your corporation manufactures or sells "litter stream" products (beverage and fast food containers, cigarettes, candy, etc.), you are also subject to a "tier II litter tax" in addition to the franchise tax and tier I litter tax. This tax is an additional 0.11 percent to 0.22 percent of the franchise tax computation above. The additional tier II litter tax for any tax year may not exceed $5,000.
In addition, qualified areas in Ohio are authorized to levy a local income tax, so be sure to check with your local government.
S corporations. If you meet the federal tax law requirements to operate as an S corporation, the IRS allows your business to "pass through" its income to the shareholders. This means that your business will not pay any IRS corporate level income tax. However, you'll have to claim your entire share of the business income on your personal federal income tax return even if you did not take any money out of the business.
In Ohio, the law extends this favorable tax treatment to state corporate income tax liability and S corporations will not be subject to the corporate income tax.
Partnerships. If you operate your business as a partnership, your partnership will not be taxed on its net income. Instead, partners must include in their Ohio taxable adjusted gross income their distributive share of partnership income.
Limited liability companies (LLCs). Ohio law recognizes businesses operating as limited liability companies (LLCs). Domestic and foreign LLCs in Ohio are classified as either partnerships or corporations for Ohio tax purposes. LLCs follow the federal rules on how they will be taxed. Accordingly, if your LLC is treated as a partnership, it will not be taxed on its net income. Instead, members must include in their Ohio taxable adjusted gross income their distributive share of LLC income.
If a business is classified as an association taxable as a corporation for federal income tax purposes, it will also be taxable as a corporation for Ohio tax purposes.