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Choosing a Business Entity

Posted by Jonathan Krems | Oct 30, 2021 | 0 Comments

Before I get into this week's Freedom Friday blog and email newsletter, I want to share a short story about last week, and why there was no Freedom Friday blog and email newsletter.  Last week, my wife and I took a much-needed vacation.  We hadn't had a vacation in 3 years, and so we took a few days off and drove down to Beavers Bend State Park in Broken Bow, Oklahoma.  Originally, I was going to do the Freedom Friday blog and email newsletter on Wednesday, but I felt it would be rushed and not the quality that I would want to send you.   And why would I want to send that kind of content to you during my vacation?  So, I decided to just skip the week, and bring you fresh new content today, just like usual.  Before I get to that content, I do want to say, that as a business owner, you need to schedule vacations.  Everyone needs a vacation, and you are doing your business a disservice if you don't take one.

In today's Freedom Friday blog and email newsletter, I want to get back to the basics of one of the most important topics I discuss with many of my clients, and that is choosing a business entity.  For most small business owners, there are four different types of business entities to choose from when starting a new business:

1.  Sole Proprietorship

The first type of business entity a small business owner can choose is a sole proprietorship, and this is a default option.  If its just you, and you don't choose any other option, you've chosen by default a sole proprietorship.  No paperwork is required to form a sole proprietorship, but you can optionally file for a trade name or DBA.  The biggest disadvantage to a sole proprietorship is that your personal assets are vulnerable since there is no liability protection.  Also, if you pass away, the business will die with you.  Sole proprietorships 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, and this is when there are at least two small business owners, working together.  But just like the sole proprietorship, it's a default option.  If its just you and a friend, or you and your spouse, and you don't choose one of the other options, you've chosen by default a partnership.  Again, no paperwork is required to form a partnership, but you can optionally file for a trade name or DBA.  Also, just like a sole proprietorship, none of the partners will have liability protection for their personal assets, which is a big disadvantage.  It is also an issue what happens to the business if one of the partners dies.  Does the business end or stay with the remaining partners?  Its important to have a document which describes that process, but if you don't that's a major liability.

3.  Corporation

The third type of business entity a small business owner can choose is a corporation.  This is the most formal option, but its also the only option available if the small business owner wishes to have any opportunity for venture capital or investment.  In Oklahoma, a corporation is formed by filing the certificate of incorporation with the Secretary of State.  Also, the owners of a corporation (which are called shareholders) should create and sign bylaws and possibly 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 forms a C-corporation instead of an S-corporation.

4.  Limited Liability Company (LLC)

The fourth type of business entity 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 Secretary of State.  Also, the owners of the LLC (which are called members), should create and sign an operating agreement, which is similar to the bylaws of a corporation.  A major advantage of an LLC is that the members of the LLC have liability protection for their personal assets.  However, there is no opportunity for venture capital or third-party investment as you would find with a corporation.  Creating an LLC is an easy and simple thing to do, and you can have either a single-member LLC if its just you as the sole owner, or a multi-member LLC if its more than one person owning the business. 

As always, its best to consult with a business attorney before choosing which business entity is right for you in starting a new business.

If you are interested in starting a small business anywhere in Oklahoma, or you are interested in restructuring your small business, please contact me at [email protected] to schedule a FREE consultation.

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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