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10 Steps to Starting a Small Business in 2022 - Step 3: Choose Your Entity

Posted by Jonathan Krems | Jan 03, 2022 | 0 Comments

Last week in the Freedom Friday blog and email newsletter we continued the series, “10 Steps to Starting a Small Business in 2022,” and we covered the second step, which is to gather your team.  In today's Freedom Friday blog and email newsletter, we're going to talk about the third step, once you have developed a business plan and gathered your team, and that is to choose your entity.  One of the most important decisions a small business owner can make when starting a new small business is the business entity which will be the legal structure for that new small business.  This one decision is critical to starting your new small business the right way.  I highly recommend you talk with an attorney to help you choose your business entity. 

The Oklahoma Secretary of State requires you to perform a name search because you cannot name your business with a name that has already been taken.  Also, if you're interested in trademarking the name of your small business, you or your attorney might also want to conduct a trademark search.  After you choose your business name, you and/or your attorney need to choose your business entity.  Here are four basic choices you can make as a small business owner in regards to choosing your business entity:

1.  Sole Proprietorship

The first type of entity a small business owner can choose is a sole proprietorship.  This is the default option, which means if it is just you, and you don't make a different choice, this is what you have.  Its very easy to start a sole proprietorship.  There is no form or paperwork required to be filed with the Oklahoma Secretary of State.  You can optionally file for a trade name or a DBA.  However, there are several disadvantages to choosing a sole proprietorship.  The biggest disadvantage is that your personal assets are vulnerable to liability because there is no liability protection.  There are also no opportunities for investment or venture capital if that's something you're looking for.  Lastly, if you pass away, the sole proprietorship will die with you, because the business entity cannot be transferred to another individual or person when you die.

2.  Partnership

The second type of entity a small business owner (or owners) can choose is a partnership.  This is the default option if it is you and at least one partner, and between the two or more of you, you don't make a different choice.  In Oklahoma, there are two different types of partnerships which you can choose: either a general partnership, or a limited partnership.  A general partnership is truly the default option.  There are no forms or paperwork required to form a general partnership, but the partners can optionally file for a trade name or DBA.  Ideally the partners should create and sign a partnership agreement.  There are also disadvantages to a general partnership.  Again, the biggest disadvantage is that neither partner has any liability protection and so their personal assets are vulnerable.  There is also no opportunity for investment or venture capital.  There is also an additional disadvantage in that each partner owes a fiduciary duty to the business as a whole, and to each other, creating additional liability.

The other type of partnership that can be formed is a limited partnership.  A limited partnership usually consists of a general partner and one or more limited partners.  The limited partner(s) have some liability protection because the only asset they can lose is their investment in the business.  However, limited partners can't participate in the daily management of the business.  Again, the partners will need to have a partnership agreement for a limited partnership.

3.  Corporation

The third type of entity a small business owner or owners can choose is a corporation.  This is the most formal type of entity you can choose, but it is the only option available if you wish to have any opportunity for investment or venture capital.  In Oklahoma, a corporation is formed by filing the certificate of incorporation with the Secretary of State.  Also, the corporation's owners (which are called shareholders), should create and sign corporate bylaws and a shareholders' agreement.  In a corporation, the personal assets of the shareholders are completely protected from liability, but there can be double taxation if the small business owner chooses to form a C-corporation and does not request S-corporation status with the IRS.

4.  Limited Liability Company (LLC)

The fourth type of entity a small business owner or owners can choose is a limited liability company (LLC), and this is the most common choice.  In Oklahoma, an LLC is formed by filing the articles of organization with the Oklahoma Secretary of State.  In addition, the LLC's owners (which are called members), should create and sign an operating agreement.  A major advantage to forming an LLC is that the members have liability protection, but there is often no flexibility for investment or venture capital.  However, creating an LLC is very easy, and you can create a single-member LLC if it is just you, or a multi-member LLC if other people are involved besides yourself.

If you are interested in starting a small business in 2022, or you have any business law or business litigation need anywhere in the State of Oklahoma, please contact me at [email protected] to schedule a FREE strategy session.

For more information about Liberty Legal Solutions, LLC, please visit our website at http://www.libertylegalok.com/

About the Author

Jonathan Krems

Jonathan is the Founder and Managing Attorney of Liberty Legal Solutions, LLC, a law firm dedicated to building, protecting, and defending the business and personal interests of our clients in Oklahoma.  Jonathan's primary practice areas are business law, contracts and agreements, business liti...

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