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Editorial 9 MIN READ

Ohio in November 2017: a $99 filing, no annual report, and a tax bill that starts at the city line

The cheapest state paperwork in the Midwest, a gross-receipts tax most LLCs never owe, and three municipal layers the state does not collect

The Editors
Staff, Incorporator.org
9 min read Updated
Contents 6 sections
  1. The filing, at $99
  2. No annual report, because Ohio does not have one
  3. The Commercial Activity Tax, which most LLCs never owe
  4. Municipal income tax: where Ohio actually gets expensive
  5. Who Ohio actually makes sense for
  6. Sources

n Ohio LLC costs $99 to form and nothing to maintain at the state level. There is no annual report, no franchise tax, no minimum fee waiting on June 1. The state's business-entity paperwork is the cheapest in the Midwest.

What the state does not take, the cities do. A founder budgeting for Ohio LLC formation in 2017 who stops at the Secretary of State's line item will underpay the total by an order of magnitude.

The filing, at $99

You form an Ohio LLC by filing Form 533A, Articles of Organization for a Domestic Limited Liability Company, with the Ohio Secretary of State. The form runs four pages and asks for the company name, an effective date (on filing or up to 90 days forward), the purpose (a single line is fine, "any purpose permitted by law"), the period of existence (perpetual unless you say otherwise), and the statutory agent's name, address, and signed acceptance. The statutory agent must be a natural person resident in Ohio or a business entity authorized to act in that role in the state.

The filing fee is $99. You can pay $100 more to get 2-business-day expedited processing, $200 more for same-day expedited if the filing is submitted before 1:00 p.m. Eastern, and $300 more for a 4-hour turn. Regular processing in late 2017 runs three to seven business days, faster if you file online through the Ohio Business Central portal.

The authorizing statute is R.C. 1705.04, which spells out exactly what the articles must contain. The broader LLC act lives at Ohio Revised Code Chapter 1705, a 1994-vintage statute that has aged less aggressively than Delaware's but more aggressively than, say, California's. Ohio still uses the word "member" to mean owner and "manager" to mean, when elected, the person running the company. The articles themselves do not have to disclose either; members and managers are internal to the operating agreement, which Ohio does not require you to file and expects you to have.

Once the articles are filed and approved, you apply for an EIN from the IRS (Form SS-4, same-day online), adopt an operating agreement, and open the bank account. If you have employees you also register with the Ohio Department of Taxation for employer withholding and with the Ohio Bureau of Workers' Compensation, which runs a state monopoly rather than allowing private workers'-comp carriers. Neither of those is formation work; both are first-30-days work.

No annual report, because Ohio does not have one

Ohio is one of a very small number of states that does not require an annual report or a periodic biennial filing from a standard for-profit LLC. There is no box to check with the state each year. There is no $50 or $200 maintenance fee. The only event that prompts a filing is an actual change: a new statutory agent (Form 521), an address change, an amendment to the articles (Form 543A), a merger or conversion, or dissolution. Professional associations and limited liability partnerships file biennially, and nonprofit corporations file every five years, but an ordinary domestic LLC files once, on Day One, and then does not hear from the Secretary of State again unless it chooses to.

This matters for the math. A Delaware LLC costs $90 at formation and $300 every June 1 thereafter; a California LLC costs $70 to form and then pays an $800 franchise tax floor annually under R&TC § 17941; a Texas LLC costs $300 at formation plus a franchise-tax filing most small LLCs do not owe. An Ohio LLC is done at $99. If the only question is state-level entity maintenance, Ohio wins the Midwest outright and most of the country on simple cost.

The corporate franchise tax that used to sit alongside the filing fee is gone. Ohio phased it out under H.B. 66 of the 126th General Assembly starting in 2006, and the last corporate franchise-tax returns, for financial institutions under the transitional rules, closed out the 2014 tax year. The replacement is the Commercial Activity Tax, discussed below. For operating LLCs that never elect corporate tax treatment, neither tax lands on the entity directly, but the CAT reaches through on gross receipts regardless of federal tax election.

The Commercial Activity Tax, which most LLCs never owe

The CAT, codified at R.C. Chapter 5751, is a broad, low-rate gross-receipts tax on the privilege of doing business in Ohio. It does not care whether the filer is a C-corp, an S-corp, a partnership, or an LLC taxed as any of those. It cares about taxable gross receipts sitused to Ohio.

The 2017 rate structure is straightforward. Entities with taxable gross receipts under $150,000 a year owe no CAT and do not need to register. Entities between $150,000 and $1 million pay a flat $150 a year (the minimum tax) and register but owe nothing above it. Entities with more than $1 million in gross receipts pay a tiered minimum tax ranging from $800 to $2,600 depending on the bracket, plus 0.26 percent (2.6 mills) on every dollar of taxable gross receipts above the first $1 million. A business doing $2 million in Ohio-sourced gross receipts pays, roughly, an $800 tiered minimum plus 0.26 percent of $1 million, which is another $2,600: about $3,400 total, or under two-tenths of a percent of top line.

Two features of the CAT deserve attention from someone forming an LLC this month. First, it applies to gross receipts, not profit: a thin-margin reseller and a high-margin software company pay the same rate on the same revenue number, which is why retailers and distributors complain about the CAT more than consulting firms do. Second, it applies to anyone with "bright-line" nexus in Ohio, which R.C. 5751.01(I) defines to include $500,000 in annual Ohio gross receipts regardless of physical presence. A remote seller with Ohio customers can cross the CAT threshold without ever setting foot in the state. The Ohio Supreme Court upheld this economic-nexus standard in Crutchfield Corp. v. Testa, 151 Ohio St. 3d 278 (2016), which predates and anticipates the national argument about remote-seller nexus that is now making its way through the federal courts.

For anyone forming in Ohio and expecting first-year gross receipts below $150,000, the CAT is a line item to remember, not to budget. For anyone projecting $1 million or more, the CAT plus the minimum tier is where the real entity-level state tax obligation begins.

Municipal income tax: where Ohio actually gets expensive

Ohio does not have a general state-level business income tax for LLCs that pass through to individual owners. Member-level income flows to the Ohio IT 1040, which in 2017 tops out at 4.997 percent on income above $213,350, with a small-business deduction (the "business income deduction") that exempts the first $250,000 of apportioned business income for most owners and taxes the rest at a flat 3 percent. That combination is competitive with most of the Midwest.

The layer the headline rates miss is the municipal one. More than 600 Ohio municipalities levy their own income tax, collected either directly by the city, through the Regional Income Tax Agency (RITA), or through the Central Collection Agency (CCA) in Cleveland. These are not small. In 2017 Columbus charged 2.5 percent, Cleveland charged 2.5 percent, Cincinnati charged 2.1 percent, Toledo charged 2.25 percent, and Akron charged 2.5 percent. Rates apply to earned income sourced to the municipality and, for net profits, to business income apportioned to the municipality using a three-factor formula of property, payroll, and sales.

For a pass-through LLC, the mechanics run two ways. If the entity has a physical location, payroll, or customers in a taxing municipality, the LLC itself files a net-profits return in that municipality and remits tax at the local rate. The individual member then also owes municipal income tax where the member lives, with a partial or full credit for taxes paid to the work-city, depending on the resident city's ordinance. The effective combined municipal rate for an Ohio-resident LLC owner working and living in two different taxing cities lands somewhere between 1.8 and 3.0 percent of the relevant income, on top of state income tax, on top of federal.

Ohio has been slowly standardizing this patchwork. House Bill 5 of the 130th General Assembly, signed by Governor Kasich on December 19, 2014 and effective January 1, 2016, rewrote R.C. Chapter 718 to impose uniform definitions, a mandatory five-year net operating loss carryforward, a three-year statute of limitations, and uniform filing and appeal procedures across all Ohio municipalities. The 2017 state budget bill, H.B. 49, went further and gave business taxpayers a one-stop net-profits filing option through the Ohio Department of Taxation beginning with tax year 2018, a change a coalition of municipalities is currently litigating to block. A founder forming in November 2017 will still file net-profits returns under the old city-by-city regime for the current tax year and watch the litigation decide what tax year 2018 looks like.

Who Ohio actually makes sense for

Ohio is a clean state of formation for a business that operates in Ohio, employs Ohio residents, or sells into Ohio at volume. Three profiles fit.

The first is a local-services LLC: a contractor, a consultancy, a small agency, a restaurant group. The filing cost is the lowest in the region, there is no annual maintenance fee, and the relevant tax exposure, CAT plus municipal, scales with actual revenue rather than sitting as a fixed floor. You pay for what you make.

The second is a holding entity for Ohio real estate. The formation and maintenance numbers are negligible, R.C. Chapter 1705 carries a workable member-liability shield, and the CAT carves out certain real estate rental receipts from taxable gross receipts under R.C. 5751.01(F)(2), which reduces the gross-receipts drag for pure landlord LLCs. You will still owe municipal net-profits tax where applicable and state individual income tax on the pass-through.

The third is any business that is already operating in Ohio and has been forming out-of-state "for privacy" or "for Delaware case law" without a specific reason. Foreign qualification in Ohio costs another $99 and requires the same statutory agent, and the out-of-state entity's own home-state maintenance fees continue to accrue. If there is no transactional reason for the foreign state, forming in Ohio and skipping both the qualification filing and the other state's annual tax is usually the right call. The broader argument for forming at home rather than shopping jurisdictions applies here the way it applies most places: see our guide to choosing a state when you do not live there and the real-math comparison for the cases where a shell elsewhere genuinely earns its keep.

Ohio is a poor state of formation for anyone planning to raise institutional venture capital. The case law is thinner than Delaware's, the investor base will ask for conversion before a priced round, and the conversion itself costs more than the savings from forming in Ohio ever recouped. Form in Delaware, foreign-qualify in Ohio when the operations start, and budget the Delaware $300 and the Ohio $99 as two separate line items.

The November 2017 number to remember is $99 at formation, $0 at the mailbox for the rest of the entity's life, and whatever the cities and the CAT bring, at their own cadence, against real revenue. If the business will live or die on state-level entity overhead, Ohio has already answered the question.

Sources

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