If you own a business in Oklahoma — whether it’s a side hustle or your full-time career — you may wonder if structuring your business as a limited liability company (LLC) is right for you. Unlike a sole proprietorship, an LLC is a business entity that protects owners, referred to as members, from being personally liable for the debts of the company.
This, however, is not what makes the LLC special as several other types of entities offer the same protection. The LLC is unique because it combines characteristics of other business structures, such as corporations and partnerships.
What is a limited liability company?
A limited liability company (LLC) is a hybrid business structure that provides the liability protection of a while allowing profits and losses to be passed through to members’ personal incomes. Typically, LLC members are not personally liable for debts and obligations. Another benefit of an LLC is that if an individual member has problems with creditors, it’s more difficult for a creditor to access the membership interest in the LLC than the stock a shareholder would own in a corporation.
Advantages of an LLC
Compared to a sole proprietorship, an LLC is not as simple to start or operate. However, there are numerous benefits to an LLC that makes it one of the most preferred legal structures for companies in Oklahoma today.
- Limited liability protection
The most recognized characteristic of an LLC is limited liability protection. This benefit allows LLC members to separate personal assets from those of the business entity. As a result, the LLC can pursue its business purposes with reduced risk to the members’ assets.
- Pass-through taxation
Another benefit of an LLC is the opportunity to avoid double taxation. Unlike some other limited liability legal entities, such as some corporations, the LLC generally is not taxed at both the entity and ownership levels. An LLC is generally taxed only at the ownership level. In other words, the business’s taxes pass through to its owners.
While an LLC’s taxation can be of a pass-through nature, LLCs can also elect to be recognized as a corporation for tax purposes. It is important to understand that if an LLC elects to be recognized by the IRS as a C corporation, it will be subject to double taxation (once at the entity level, and a second time when the business income is distributed to its owners). Nevertheless, the ability to decide how to be taxed by the IRS is a benefit of an LLC.
- Customizable management structure
Unlike other business entities, an LLC does not mandate any particular management structure. Members can decide whether they will manage the company or hand over management responsibilities to one or more managers (who may or may not be members). There is also no mandate regarding the number of people who can own or manage an LLC.
An LLC operating agreement (or in its absence, state law) determines the specific details regarding management of the business. This allows LLC members to choose the management structure that works best for their LLC.
- Relaxed compliance requirements
An additional benefit of the LLC is less stringent compliance and governance requirements. Unlike corporations, unless required by the operating agreement, LLCs do not have required annual meetings or boards of directors.
The documentation and reporting requirements are also more lenient. As a result, smaller businesses that do not run complex operations can enjoy a legal structure that meets their unique needs without the cost and burden of some of the other available business structures. However, if LLC members want to add mandates, such as a requirement for an annual meeting, they can do so in the operating agreement.
Disadvantages of an LLC
The benefits and risks of an LLC are opposite sides of the same coin. Essentially, there is a cost for flexibility. As a business owner, you must analyze your circumstances to determine whether the benefits outweigh the risks. The following are some of the key risks to consider.
Loss of limited liability
Although an LLC generally enjoys limited liability protections, poor operational and governance practices could result in an LLC losing this liability shield. If a member fails to properly maintain a separation between the company’s business assets and the members’ assets by failing to keep separate bank accounts, complying with state regulations, or maintaining proper records, a court may find grounds to “pierce the veil” and attack personal assets of the members during litigation.
In other words, a court may determine the LLC was a sham and allow litigants to pursue the members’ personal assets to satisfy the debts and obligations of the LLC.
Difficulty obtaining investors
Although an LLC’s less stringent compliance and governance requirements reduce the cost and administrative burden of operating the company, this makes the business structure less appealing to investors for two key reasons:
- It can be more challenging to ensure returns on investment absent structural elements like mandatory meetings and reports that provide accountability.
- Interests are less liquid because there are often limits on transferability of LLC membership interests and an absence of interested buyers.
If members decide that a new entity type better suits investors, they may find the process of converting an LLC in Oklahoma to be expensive and challenging.
Members can be taxed on income they didn't receive
Pass-through taxation can have drawbacks for LLC members because the tax on the members occurs whether dividends are paid to the members or not. That is, LLC owners must report the LLC’s profits and losses on their individual tax returns and must pay in proportion to the profits the company makes even if those profits are not distributed to the members. As a result, members may elect to classify the LLC as an S corporation for tax purposes.
Gungoll Jackson helps LLCs do business in Oklahoma
Whether you have questions about structuring your business as an LLC in Oklahoma or need help choosing the right legal entity structure for your business, Gungoll Jackson is here for you. Our corporate and business attorneys can assist you in filing the proper documents with your secretary of state and remaining compliant with applicable requirements. Contact us to schedule a meeting.
