Types of Business Structures
Picking the right business structure is the first step to opening a successful business. It's a crucial decision because your business structure determines how the business is managed, the rights and duties of the owners, procedures for voting and decision-making, taxes, liability, along with many other aspects. Therefore, prospective owners should familiarize themselves on the different business structures.
The Oklahoma Uniform Revised Partnership Act (Okla. Stat. tit. 54, § 1-100 et seq.) (“OUFPA”), defines a partnership as an "association of two or more persons to carry on as co-owners of a business for profit . . . ." § 1-202(a). Partners typically have equal power and decision-making authority, have joint property ownership, and split business profits and losses. Unlike other business structures (except sole proprietorships), general partnerships need not register with the Oklahoma Secretary of State ("OSOS").
Partnerships do not need a formal written agreement (partnership agreement), or intend to form a partnership. The OUFPA states that a person who receives business profits is "presumed to be a partner" unless the profits were received as payment for some form of benefit (e.g., goods, services, etc). § 1-202(c)(3). However, contract laws, like the statute of frauds requires partners to have a written partnership agreement to enforce the terms past one year. See Okla. Stat. tit. 15, § 136. The OUFPA's default provisions apply to partnerships that don't have a partnership agreement and are treated as "partnerships at-will." Partnerships at-will can be dissolved at any time and for any reason.
Partners are jointly and severally liable for the business and misconduct by other partners. Partners' personal assets may be seized to satisfy a judgment against the partnership when the partnership cannot fulfill a judgment. Partnerships may limit the partners' personal liability through forming either a (i) limited partnership or (ii) limited liability partnership. Both limited partnerships and limited liability partnerships must register with the OSOS under the Oklahoma Uniform Limited Partnership Act (Okla. Stat. tit. 54, § 501-101A et seq.).
To form a limited partnership, a “Certificate of Limited Partnership” must be filed with the OSOS. Limited partnerships must have at least one "general" partner and one "limited" partner. A partnership agreement may designate a partner as either or both. General partner(s) are responsible for managing the business and may be personally liable for all business obligations. General partners share in profits and losses and subject to self-employment taxes. Limited partners have no authority to act for or bind a limited partnership unless the partner is both a general and limited partner. Limited partners share in the business profits but are not personally liable for the partnership's obligations even when the limited partner also helps manage the business. However, a limited partners may be personally liable up to their investment amount when the partnership cannot satisfy a judgment. Limited partners are taxed according to their personal income.
Limited Liability Partnerships
To form a limited liability partnership, a “Statement of Qualification” must be submitted to the OSOS. Limited liability partnerships are similar to limited partnerships, except limited liability partnerships shield general partners from liability. In Oklahoma, limited liability partnerships must also carry liability insurance of at least $500,000.00. Partners are not individually liable, either directly or indirectly, for the partnerships obligations or another partner's misconduct. Limited partnerships are common among professionals like lawyers and accountants.
Limited Liability Companies
Limited Liability Companies ("LLC") are a hybrid between partnerships and corporations. Under the Oklahoma Limited Liability Company Act (Okla. Stat. tit. 18, § 2000 et seq.), LLCs must register with the OSOS by filing "Articles of Organization." LLCs are owned by “members" and usually have a formal written contract called an "operating agreement." Operating agreements specify how an LLC is managed, voting rights, ownership interests, liability, among other things.
LLCs are either “member-managed” or “manager-managed,” as designated by the operating agreement. Members of a member-managed LLC handle the day-to-day business activities. The members of a manager-managed LLC have little to no involvement with the LLC's regular business operation unless designated as both a member and manager in the operating agreement.
Members and managers are not are personally liable for LLC obligations or judgments. LLCs with at least two members are automatically taxed as a partnership. LLCs may change its tax status to a corporation by filing a form with the IRS.
Business with Ease
Starting a business doesn't have to be hard or time-consuming. Consult with an attorney at Martuch Law to determine what structure will best fit your business needs. We'll handle filing the necessary paperwork, get you an Employer Identification Number (EIN), and take care of getting you a trade name for your business.
Do you need more help than just the basics or have an existing business that need internal policies? With years of experience, we draft and review business organization agreements whether it's two (2) or twelve (12) owners, we're prepared for almost any size business. We can also help you with employment manuals and agreements, compliance issues, work place behavior training for employees, among other services.
Schedule an appointment for a free, no obligation consultation online or contact us to make an appointment.
A "Certificate of Incorporation" must be filed with the OSOS to form a corporation under the Oklahoma General Corporations Act (Okla. Stat. tit. 18, § 1001 et seq.). Corporations are owned by shareholders. Shareholders own a specific number of shares in a company, which are purchased at a set price. A shareholder's ownership interest in the company is determined by how many shares the shareholder owns. Further, business profits get paid to shareholder as dividends in proportion to their share ownership. Corporations may designate different classes of shares a "share class" in the certificate of incorporation. A corporation with multiple share classes must indicate whether each share class is either common or preferred. Common stock gives shareholders voting rights while preferred does not.
Shareholders appoint or elect a board of directors to determine and execute the corporate structure and policy. The board of directors then report to the shareholders on the business' status and progress . The bylaws establish the number of directors, the director selection process, and their removal. The bylaws also detail the board's duties and responsibilities to the company.
The board of directors may form committees and appoint officers when permitted by the bylaws to manage the everyday business operations. The bylaws provide how many and which officers the board of directors may choose. Common officers include the chief executive officer, president, vice-president, treasurer, secretary, etc. A shareholder may be appointed to the board of directors and serve as an officer or do any combination of roles allowed under the bylaws.
Private v. Public Corporations
Corporations are either privately or publicly held. Typically, a private corporation is a smaller corporation with a limited number of shareholders. Usually, the shareholders know each other and have a personal relationship (e.g., family members). However, larger corporations with many shareholders may choose to remain private. Private corporations don't issue shares/stock to the public. In contrast, public corporations sell their stocks to the public on open market exchanges. Public corporations need authorization to sell their stock to the public and are subject to securities laws and regulations.
For-Profit v. Not-for-Profit Corporations
A corporation may be either for-profit or not-for-profit. For-profit corporations generate revenue to benefit the shareholders. Not-for-profit corporations reinvest their revenue to maintain the business in order to continue pursuing an objective. Not-for-profit corporations may be charitable organizations or social clubs and qualify for federal tax exemption. Not-for-profit corporations must apply to the IRS to receive a tax exempt status.
C Corporations v. S Corporations
C corporations pay a "corporate double tax," which means the profits are subject to taxes twice. The business pays taxes on its profits as an entity. The profits get taxed again after shareholders get paid their dividends through their income personal taxes. Some corporations have the option to change their tax status to an S corporation. In doing so, the profits "pass through" the corporate tax and get paid only through as shareholders' personal income taxes. Not all corporations are eligible for S corp. status and must file status change form with the IRS.
**Prospective owners should note that there are other types of corporations not discussed in this article.
Here are some questions that might help prospective owners decide which business structure is right:
What is the purpose of the business?
How many owners will the business have?
Will there be more owners throughout the business's existence?
How much power and involvement will the owners have in regular business activities?
Will the owners have equal or different levels of voting power, authority, management duties?
How will profits get divided among the owners?
Will the business regularly engage in complex financial transactions?
How much risk will the business have?
Who is liable for other owner's actions or the business's obligations?
Note that the list of factors to decide which business structure to choose is non-exhaustive.
Prospective business owners who are still unsure about which business structure is best for their needs should consider consulting with an attorney experienced in business organization.
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