This week in the Freedom Friday blog, we are continuing the series, the 10 Steps to Starting a Small Business in Oklahoma. If you missed the blogs for the first or second step, you can find links to those blog posts here:
Step 1: Develop a Business Plan
Step 2: Gather Your Team
In today's Freedom Friday blog, we're going to cover the third step in starting a small business in Oklahoma, which is to choose your business entity. One of the most important decisions a small business owner makes when he or she is starting a business is which business entity that the business will be. This one decision is critical to starting your business on the right foot. I highly recommend you consult with an attorney in choosing your business entity. I also highly recommend that you or your attorney conduct a name search before 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 your business name, you or your attorney might also want to conduct a trademark search as well.
After you have chosen your name, you and/or your attorney need to consider which business entity you will choose. There are four basic categories of business entities which a small business owner can choose in starting their business.
1. Sole Proprietorship
The first type of business entity a small business owner can choose is a sole proprietorship. This is a default option, meaning that if you do not choose any of the other options, this is what you will get. It's easy to start a sole proprietorship. There is no paperwork or forms required to be filed with the Oklahoma Secretary of State in order to form a sole proprietorship. You can optionally file for a trade name (aka DBA). However, there are several disadvantages for a small business owner who chooses a sole proprietorship in starting a business. The biggest disadvantage is that your personal assets are vulnerable as there is no liability protection. There are also no opportunities for investment or venture capital, if that is of interest to you. Lastly, if you die, the sole proprietorship will die with you, as a sole proprietorship cannot be transferred to another individual upon the owner's death.
The second type of business entity a small business owner can choose is a partnership, if the small business owner is going into business with at least one partner. There are two different types of partnership which can be formed: a general partnership and a limited partnership. In regard to a general partnership, this is the default option when two or more people go into business together, but do not choose any of the other options. It's easy to start a general partnership, as no paperwork or forms are required, but the partners can optionally file for a trade name (aka DBA). The partners should also 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 their personal assets are vulnerable. There is also no opportunity for investment or venture capital. There is also another disadvantage in that each partner has fiduciary duties to the business and to one another, presenting an additional liability for them.
The other type of partnership which can be formed is a limited partnership. A limited partnership usually consists of a general partner, and then at least one limited partner. The limited partner has some liability protection, as the only asset he or she can lose is their investment in the partnership. However, limited partners do not participate in the daily management of the partnership. Once again, the partners need to create and sign a partnership agreement.
The third type of business entity that a small business owner or owners can form is a corporation. Perhaps this is the most formal entity a small business owner can choose, but it is the only option if the small business owner wishes to have any opportunity for venture capital or investment. In Oklahoma, a corporation is formed by filing the articles of incorporation with the Oklahoma Secretary of State. In addition, the owners of a corporation (which are called shareholders) should create and sign corporate bylaws and a shareholders' agreement. In a corporation, the owner's personal assets are completely protected from liability, but there can be double taxation if the small business owner choose to form a C-corporation, rather than a S-corporation.
4. Limited Liability Company (LLC)
The fourth type of business entity that a small business owner or owners can form is a limited liability company (LLC). In Oklahoma, an LLC is formed by filing the articles of organization with the Oklahoma Secretary of State. In addition, the owners of an LLC (which are called members) should create and sign an operating agreement. A major advantage of an LLC is that the members have liability protection, but there is no flexibility for investment or venture capital. Creating an LLC is easy to do, and you can create a single-member LLC, or a multi-member LLC.
If you are interested in starting a small business anywhere in Oklahoma, or if you have a small business and you are looking to grow, please feel free to contact me at [email protected]. For more information about Liberty Legal Solutions, LLC, please visit our website http://www.libertylegalok.com.