This week in the Freedom Friday blog and email newsletter, we're continuing the series 10 Steps to Take Your Small Business to the Next Level in 2023. Today's we're covering the second step in taking your small business to the next level, and that's choosing your business entity. Maybe you've already done this, but many small business owners, especially if they're just doing business by themselves, operate as a DBA. They might call their business “John's Window Cleaning,” or something like that. If you need window cleaning for your home, you might call John up and hire him and his business to clean the windows of your house. However, John is operating as a DBA, which stands for Doing Business As, and “John's Window Cleaning” is nothing more than a trade name which doesn't give John any liability protection.
Its critical if you're starting a small business, if you're wanting to take your small business to the next level, that you as a small business owner choose a business entity for your small business, and its important you choose a business entity which is a good fit for your small business. I highly recommend you discuss with a lawyer about choosing your business entity. There are four basic categories of business entities which a small business owner can choose from for their small business:
The first type of business entity a small business owner can choose is a sole proprietorship. This is a default option, and “John's Window Cleaning” is a good example. If you don't choose any of the other options, you have a sole proprietorship, and many of them operate as a DBA. There are many disadvantages to choosing a sole proprietorship, the biggest of which is your personal assets are vulnerable as there is no liability protection. There are also no opportunities for investment or venture capital, if that's something that is of interest to you. Lastly, if you pass away, the sole proprietorship dies with you, because a sole proprietorship cannot be transferred to someone else when the owner dies.
The second type of business entity a small business owner can choose is a partnership. This is similar to “John's Window Cleaning,” but John needs a business partner, so this business might be named “John and David's Window Cleaning.” There are two different types of partnerships which can be formed: a general partnership and a limited partnership. A general partnership is the default option when two or more people go into a 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 easily file for a trade name or DBA. The partners should also create and sign a partnership agreement. There are also disadvantages to a general partnership, the biggest of which is that neither partner has any liability protection, and their personal assets are vulnerable. In addition, both partners owe fiduciary duties to each other and the partnership business. There is also no opportunity for investment or venture capital if the partners desire that for their business.
The other type of partnership is a limited partnership. In a limited partnership there is a general partner, and the remaining partner(s) are limited partners. A limited partner will have some liability protection, as the only asset that he or she can lose is his or her investment in the partnership. However, limited partners are not allowed to participate in the daily affairs or management of the partnership business. Of course, in order to have a limited partnership, you need to have a partnership agreement which identifies who the general partner is, and who the limited partner(s) are.
The third type of business entity that a small business owner can choose is a corporation. This is the most formal entity a small business owner can choose, but it's also the only option available if the small business owner wants to have any opportunity for venture capital or investment. In Oklahoma, a corporation is formed by filing the certificate of incorporation with the Oklahoma Secretary of State. In addition, the owners of a corporation, which are called shareholders, should create and sign bylaws, and possibly a shareholders' agreement. In a corporation, the personal assets of the owner(s) are completely protected from liability, but there can be double taxation if the small business owner(s) choose to operate as a C corporation instead of an S corporation so far as the IRS is concerned.
Limited Liability Company
The fourth type of business entity that a small business owner can choose 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, which is similar to bylaws for a corporation. 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 either a single-member LLC, or a multi-member LLC.
Thinking about starting a small business? Or maybe your small business is having issues with contracts, leases, business partners, collection issues, or experiencing other barriers to growth? 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/