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10 Steps to Take Your Small Business to the Next Level - Step 2: Choose Your Business Entity

Posted by Jonathan Krems | Nov 09, 2021 | 0 Comments

This week in the Freedom Friday and email newsletter, we're continuing the series 10 Steps to Take Your Small Business to the Next Level.  Today we're going to cover the second step in taking your small business to the next level, and that is to choose your business entity.  Many small business owners, especially those who are just doing business by themselves, operate as a DBA.  They may have a business like, “Joe's Window Cleaning,” or something similar.  If your house needs window cleaning, you call Joe Smith up and hire his business to clean your house's windows.  However, Joe is operating as a DBA, which stands for Doing Business As, and “Joe's Window Cleaning” is simply a trade name which gives Joe no liability protection at all.

It is critical if you're starting a small business, or if you are 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, too.  I highly recommend you talk with a lawyer about choosing 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 is already taken.  Also, if you're interested in trademarking your business name, you or your attorney might want to consider doing a trademark search, as well.

After you choose your name, you and/or your lawyer need to decide which business entity is a good fit for your small business.  There are four basic categories of business entities which a small business owner can choose for a small 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, and “Joe'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 for a small business owner who chooses a sole proprietorship for their small 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's something that's of interest to you.  Lastly, if you pass away, the sole proprietorship dies with you, as a sole proprietorship cannot be transferred to someone else when the owner dies.

2.  Partnership

The second type of business entity a small business owner can choose is a partnership.  This is similar to “Joe's Window Cleaning,” but Joe needs a business partner for this business entity, so the business might be named “Joe and Charlie'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 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 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 if that's of interest to the partners.  There's also another disadvantage, and that's each partner has fiduciary duties to the business and to one another, which presents an additional liability to the partners themselves.

The other type of partnership which can be formed 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 he or she can lose is their investment in the partnership.  However, limited partners do not participate in the daily management of the partnership business.  Of course, in order to have a limited partnership, you also need to have a partnership agreement which identifies who the general partner is, and who the limited partners are.

3.  Corporation

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 its 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 owner(s) of a corporation (which are called shareholders) should create and sign corporate bylaws, and maybe 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 form a C corporation instead of an S corporation.

4.  Limited Liability Company (LLC)

The fourth type of business entity that a small business owner or owners 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.  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.

If you are interested in starting a small business anywhere in Oklahoma, or you are interested in taking your small business to the next level, 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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