When you’re ready to start a business in Oklahoma, being resourceful and hardworking provides a solid foundation. While every business begins with a dream of being your own boss and achieving success, you must also be pragmatic. As Henry David Thoreau said, “If you have built castles in the air, your work need not be lost; that is where they should be. Now put the foundations under them.”
Types of business structures
One of the first practical concerns you’ll face as an entrepreneur is how to legally structure your business. Factors to consider include the complexity of the business, the potential risks it faces, protecting your personal assets from claims against the business, and the amount you’ll pay in taxes.
The business structure affects issues such as taxation, fundraising ability, filing requirements, and personal liability.
As an entrepreneur in Oklahoma, you’ll most likely choose one of the following structures for your small business:
- Sole proprietorship
- Partnership
- Corporation
- Limited liability company (LLC)
For business owners, each structure provides a different mix of benefits, potential drawbacks, and legal protections.
What is a sole proprietorship?
A is a business founded and owned by a single individual. It is the least complicated type of business to set up. It is the default structure for a business owned by one person that is not registered as another entity type. With this structure, there is no difference between the business and its owner.
Let’s add a link to the internal blog post about sole proprietorships after it goes live later this month.
Forming a sole proprietorship in Oklahoma
Sole proprietors generally use a trade name—e.g., Edmond Engine Repair—that should be registered with the business filing department of the Oklahoma Secretary of State and any other state where you may do business.
The Internal Revenue Service (IRS) does not require a sole proprietor to obtain a separate employer identification number (EIN) or taxpayer identification number (TIN). Business profits and losses are reported on the owner’s personal income tax returns under the owner’s Social Security number.
As a sole proprietor, you have complete control over how to run your business and are responsible for its day-to-day management. You own all assets and keep all profits of the business. However, there is no limitation on personal liability and protections from the same because there is no legal distinction between the owner of the business and the business itself. That means all assets of the owner could be vulnerable to lawsuits against the business or claims made by creditors.
What is a partnership?
A general partnership is simple and inexpensive to organize and can be established without a formal state filing or entity registration. It’s the default entity that exists when two or more persons go into business together but do not form any other type of legal entity.
Other forms of partnerships that require formal filings in Oklahoma include:
The type of partnership you choose affects a partner’s liability for the actions and debts of the business. In addition, different business structures determine how much control each partner has over day-to-day management decisions.
Like a sole proprietorship, general partnerships typically use a trade name that should be registered with the Oklahoma Secretary of State and any other state where the general partnership does business.
How to report partnership income
Income from a partnership is ultimately reported on each partner’s personal income tax return. However, partnerships must file a separate return to report the partnership’s income, gains, losses, deductions, and credits from its operations.
Because partnerships involve two or more people, there are some complexities not encountered with sole proprietorships. Owners should work with an attorney to develop a partnership agreement that covers business operations and dispute resolution, while addressing numerous other issues that may arise.
Corporation: What it is and how to form one
A corporation is a formal legal entity that can earn a profit, pay taxes, buy and sell assets, and sue and be sued. Filing articles of incorporation with the appropriate state agency creates a corporation that is entirely separate from the individual owners of the corporation (i.e., the corporation’s shareholders).
Legally, corporations have many of the same rights and responsibilities as individuals. An important benefit of forming a corporation is that shareholders typically cannot be held personally liable for corporate debts and obligations. Owners must adopt corporate bylaws that set out how the business will be operated. Corporations must also follow other legal requirements to maintain the liability protection benefits for shareholders.
Compared to other forms of businesses, corporations involve more complexities and costs including:
- Higher formation costs
- More extensive record-keeping and reporting requirements
- Potential double taxation (depending on the specific tax election made with the IRS)
S corporation vs. C corporation
The main differences between an S corp and a C corp involve taxation, ownership restrictions, stock options, and employee benefits.
A corporation that meets certain requirements may elect to be taxed as an S corporation, which allows profits and losses to pass through to the individual shareholders. An S corporation election avoids the double taxation that C corporations endure where the corporation itself is taxed on profits and then the individual shareholders are individually taxed when they receive their share of those profits in the form of dividend payments.
What is a limited liability company?
A limited liability company (LLC) is a hybrid business structure that provides the liability protection of a corporation while allowing profits and losses to be passed through to the individual owners’ personal income. Typically, LLC owners (also called 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 an individual owns than the stock a shareholder would own in a corporation.
In order to be legally created, an LLC requires formal filing with the state of Oklahoma and must also file annual reports with the state. LLCs do not have to have an operating agreement that governs the rights and duties of each member. If no operating agreement exists, state statutes control. However, those statutes do not cover many important issues that may arise. As a result, Gungoll Jackson highly encourages owners to work with an attorney to draft an LLC operating agreement.
IRS tax treatment of an LLC varies depending on what tax election the LLC makes with the IRS at the time of its creation. Members should consult an attorney and an accountant to determine what election to make.
Gungoll Jackson provides legal support for new businesses
A sound strategy is key to building a solid foundation for your new business and positioning it for success from the very beginning. The first step is to create the proper legal entity structure for your business in order to try to maximize profits and minimize potential liabilities.
Gungoll Jackson provides comprehensive legal services for businesses of all sizes. Contact us today to speak with an attorney who is committed to providing strategic, sensible advice about choosing an entity structure and other legal considerations involved in starting a business.
