setting up LLC in Ohio

[Chris S.]

I have currently set up an LLC for my rental properties that my wife and I own in Ohio. I am setting up the business bank accounts and need the EIN. When I apply for this online with the IRS is it possible in Ohio to set it up as a disregarded entity so I don't have to file a separate return for the rental biz? I am a realtor so would like to run my entire rental business through my real estate business since I am involved with managing them so not sure what the best approach may be? any advice/experience with best way to structure the LLC legally and with IRS?

[Timothy Murphy III]

@Matthew Kreitzer

I had to dig around to find it, but I've made a more detailed post on this subject in the past. Last year I defended a suit at trial where the plaintiff unsuccessfully attempted to piece my client's corporate veil under Ohio law. The law of our particular jurisdiction is very favorable to business owners and plaintiffs have a very tough burden to meet. This is the text of the post I made earlier on the subject with relevant case law citations and explanations:

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You specifically asked if anyone had any real life experience in using an LLC to protect assets. I have. Please excuse the following wall of text, but this can be a rather complex subject. Also, every situation is unique and has its own set of factors that should be considered. The following should not be construed as actionable legal advice by anyone and you should not make decisions based on this information. Instead, consider the following a starting point for your research and retain an attorney to consult you on your specific situation.

Earlier this year, I defended a lawsuit that was filed against a client of mine that went to trial and final verdict. In this case, the plaintiff had attempted to pierce my client's corporate veil and hold the company's owner personally responsible. While the plaintiff did prevail in winning a judgment for breach of contract against my client, we were able to successfully thwart the attempt at piercing the corporate veil and holding the company's owner personally liable for that judgment. With respect to the limited liability protection offered by LLCs or other corporate entities, the controlling law varies from state to state. I am neither licensed nor educated in the controlling case law for most states, I can tell you that Ohio law requires a very high burden for a plaintiff to successfully pierce the corporate veil.

When determining whether an LLCs corporate form may be disregarded and its owners may be held personally liable, Ohio courts apply the Belvedere test. It states that:

[T]he corporate form may be disregarded and individual shareholders held liable for corporate misdeeds when (1) control over the corporation by those to be held liable was so complete that the corporation has no separate mind, will, or existence of its own, (2) control over the corporation by those to be held liable was exercised in such a manner as to commit fraud or an illegal act against the person seeking to disregard the corporate entity, and (3) injury or unjust loss resulted to the plaintiff from such control and wrong.

The test is conjunctive and requires that the plaintiff can satisfy all three prongs of the test. The first prong is essentially the traditional "alter ego" test, requiring that the plaintiff show that the individual and the company are fundamentally indistinguishable. In determining whether the company is the alter ego of the individual, Ohio courts consider the following factors:

(1) grossly inadequate capitalization, (2) failure to observe corporate formalities, (3) insolvency of the debtor corporation at the time the debt is incurred, (4) shareholders holding themselves out as personally liable for certain corporate obligations, (5) diversion of funds or other property of the company property for personal use, (6) absence of corporate records, and (7) the fact that the corporation was a mere facade for the operations of the dominant shareholder(s).

The Ohio Supreme Court has recently revisited the Belvedere test in Dombroski v. WellPoint, Inc., 119 Ohio St. 3d 506 (2008) to determine how broadly the second prong should be construed and to reconcile various interpretations from several Ohio appellate districts. The Dombroski Court stated “we continue to adhere to the principle that limited shareholder liability is the rule and piercing the corporate veil is the 'rare exception' that should only be 'applied in the case of fraud or certain other exceptional circumstances.'” In reconciling competing views from the Ohio Appellate Courts, the Dombroski Court found it “necessary to modify the second prong of the Belvedere test to allow for piercing in the event that egregious wrongs are committed by shareholders” and held that in order to “fulfill the second prong of the Belvedere test for piercing the corporate veil a plaintiff must demonstrate that the defendant shareholder exercised control over the corporation in such a manner as to commit fraud, an illegal act, or a similarly unlawful act.”

Whether an Ohio court will pierce an LLCs corporate veil is a fact specific inquiry that will vary from case to case. That said, absent fraud or similar illegal acts, the limited liability protection is rather reliable under current law and a plaintiff will have a difficult time piercing the corporate veil.

I could get into even more detail on this but this should be more than sufficient for most readers of this forum. The point is that piercing the corporate veil under Ohio law requires a very high burden. An LLC, if properly structured and operated, provides liability protection for its owners that is not easily defeated even if challenged in court. That said, the limited liability protections of an LLC should be used in conjunction with other tools and techniques to provide yourself with a comprehensive asset protection plan. Appropriate insurance coverage, including an umbrella policy should be considered. Debt can also help you protect your assets by discouraging a suit. For example, a $250k property owned free and clear may be an enticing asset for a potential plaintiff. That same property, with a $200k mortgage and lien against it may discourage a plaintiff from pursuing a claim against you because the asset has insufficient equity to justify the time, hassle, and expense of litigation and collection efforts.

If you're not operating in Ohio then this won't apply to you. Instead, you should talk to an attorney in the state(s) you do operate and make sure that he or she can provide you with this level of detail on the protections provided by an LLC so you can determine exactly where the thresholds of limited liability protection fall, and you can make sure you stay within those parameters.

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