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Choosing Your Business Entity

Posted by Jonathan Krems | Aug 23, 2021 | 0 Comments

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. 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 of business entities, this is what the small business owner has. It is easy to start a sole proprietorship. There is no paperwork or forms required to be filed with the Oklahoma Secretary of State. The small business owner 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 the small business owner's personal assets are vulnerable as there is no liability protection. There are also no opportunities for investment or venture capital. Lastly, if the small business owner dies, the sole proprietorship ends, as a sole proprietorship cannot be transferred to another individual upon the owner's death.

  1. Partnership

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 is 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 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 they can lose is their investment in the partnership. However, limited partners do not participate in the daily management of the partnership. Once again, the partner need to create and sign a partnership agreement.

  1. Corporation

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.

  1. 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.

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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