Starting Your Own Business in Oklahoma Building a Solid Legal Foundation Presented by: Patrick R. Carlson and Josh Copeland of Carlson & Copeland, PLLC, a Norman, Oklahoma law firm that provides business formation planning, personal and business tax planning, estate planning, probate, bankruptcy, and other legal services. When you are starting your own business or thinking about starting your own business, it’s important to fully investigate your legal options and become aware of the choices you will be faced with. Selecting the right entity and building a system to implement and maintain it will help you protect your personal assets, help you save taxes legally, and help your business survive and prosper. A team of trusted advisors, including an attorney, accountant, banker, insurance agent, and others depending on your specific business, is an essential component for success of your business. Your team of trusted advisors can help guide you through the needs of your business as it grows and develops.

Entity Selection The important first step is deciding whether your business needs an entity and then selecting the appropriate type. There are a many choices of entities available under Oklahoma law. Each has advantages and disadvantages. Generally, you want to make a choice that will protect your business assets as well as your personal assets.

Sole Proprietorship A sole proprietorship isn’t really a business entity as such. It’s the default form of business for a business with a single owner that hasn’t filed anything with the Secretary of State. In fact, no filing with the Secretary of State is necessary to operate in this form, although a trade name filing may be necessary if the business operates under a name other than the name of the legal owner.

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A sole proprietorship is sometimes called “dba” or “doing business as”. The owner of a sole proprietorship is referred to as a proprietor or sometimes owner. Sole proprietorships are fairly easy to set up. Essentially, any individual who begins operating a business without any type of business entity filing has set up a sole proprietorship. However the lack of a business structure to provide limited liability exposes the owner of the business to potentially unlimited tort and contract liability – the owner is fully liable for the debts of the business. This form of business ownership is generally not advisable for businesses of any significant size or businesses that have potential liability exposure.

General Partnership (GP) A general partnership is the default form of business for a business with two or more owners. No filing with the Secretary of State is necessary to operate in this form, although a trade name filing may be necessary if the business operates under a name other than the names of its legal owners. The owners of a general partnership are referred to as partners or general partners. Like sole proprietorships, general partnerships are easy to set up. Unfortunately, like a sole proprietorship, each general partner is exposed to potentially unlimited tort and contractual liability – in fact, each partner is fully liable for the debts of the business. This form of business is generally not advisable for most situations. If you currently have a general partnership, it is likely that a limited partnership (LP), limited liability partnership (LLP), or a limited liability company (LLC) might be a more advantageous business form. Documents That a General Partnership Should Have  Partnership Agreement  Trade Name Reports (if the partnership does business other than in its legal name)  Buy-Sell Agreement (perhaps as a part of the partnership agreement, or perhaps as a freestanding document)

Limited Partnership (LP) & Limited Liability Partnership (LLP) Both limited partnerships and limited liability partnerships are formed by filing a Certificate of Limited Partnership or a Limited Liability Partnership Statement of Qualification, as the case may be. Both types of entity require at least two owners to exist, which limits flexibility for situations when you may want an entity with a single owner. These types of entities are sometimes seen nested inside of other business ownership structures. Another common use of these types of entities is for certain real estate and estate planning strategies. For most operating businesses, LLCs or Corporations are a better fit.

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Documents That a Limited Partnership or a Limited Liability Partnership Should Have  Certificate of Limited Partnership or Limited Liability Partnership Statement of Qualification  Trade Name Report (if the LP or LLP does business other than in its legal name)  Partnership Agreement  Buy-Sell Agreement (perhaps part of the partnership agreement, or perhaps a freestanding document)

Limited Liability Company (LLC) Limited liability companies (LLCs) are formed by filing Articles of Organization with the Secretary of State. LLCs can provide their owner or owners with limited liability, although there are numerous conditions to obtaining and maintaining limited liability. The owners of LLCs are called Members. An LLC in Oklahoma can have one or more members. The LLC is very flexible in the management structure it can adopt. It can be “member managed”, which means that the owner or owners of the business directly operate the LLC. It this way, an LLC can be operated in a relatively informal way, similar to a general partnership. On the other end of the spectrum, an LLC operating agreement can have a corporate like management structure, with a Board of Directors, an executive team, and committees. And virtually any spot between these two points on the spectrum is also possible. The structure of your operating agreement should be negotiated between the owners of the new business. Documents That an LLC Should Have  Articles of Organization  Trade Name Reports (if the LLC does business other than in its legal name)  Operating Agreement  Buy-Sell Agreement (perhaps part of the operating agreement, or perhaps a freestanding document)

Corporation (usually Inc. or Corp.) Corporations are formed by filing Articles of Incorporation with the Secretary of State. Corporations are the most formal of all business entities. A corporation in Oklahoma can have a single shareholder. Corporations, unlike LLCs, are required to have a Board of Directors which adopts rules for the corporation and hires an executive team (usually a President, Vice-President, Treasurer, and Secretary) to manage the business of the corporation. Note that in small businesses with few

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employees and owners, a single person may serve multiple roles. For example, in a single shareholder corporation, the shareholder may serve as the member of the Board of Directors, the President, Secretary, and Treasurer of the corporation. Documents That a Corporation Should Have  Articles of Incorporation  Trade Name Reports (if the corporation does business other than in its legal name)  Corporate Minute Book, which includes, at a minimum: o Bylaws and amendments o Board of Directors Meeting Minutes o Board of Directors Resolutions o Shareholder Meeting Minutes o Shareholder Resolutions o Consents to Action o Share or Stock Ledger  Buy-Sell Agreement between the corporation and shareholders and between the shareholders

Benefits of an LLC over a Corporation for Small Businesses 1. LLCs can be operated in a less formal manner, similar to a sole proprietorship or a general partnership, whereas corporations require yearly shareholder meetings, a board of directors, and an executive team. 2. LLC owners may have their business protected from personal liabilities to some extent because creditors of the LLC member are limited to a charging order (provided certain requirements are met), whereas shareholders of corporations do not enjoy the same charging order protection. 3. LLCs can be converted to corporations if the need arises in the future. Therefore, you can have the ease and flexibility of an LLC today without the corporate form’s formality during the initial growth phase of your business.

Implementing and Maintaining Your Business Entity Implementing Your Entity 1. The first step to implementing your entity is selecting which entity is appropriate for your personal needs, for your business needs, and for your tax strategy. 2. Next, select a name that is not the same or indistinguishable from an existing name. Additionally, depending on your long-term business plan, a search of other states’ records

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3.

4. 5. 6. 7.

and the United States Trademark and Patent Office database may be necessary to ensure that the name is available for the taking. Next (and probably during the entire process), finalize the negotiations with the other coowners, banks, lessors, and other parties relevant to the formation of your particular business. Next, all co-owners should sign the appropriate business formation legal documents. Next, file the appropriate documents with the Secretary of State. Next, as a business, sign the loan paperwork, leases, purchase agreements, and other contracts depending on the type of business you have. Then finally, begin operating and (hopefully) making money.

Maintaining Your Entity Maintaining your business entity helps to maintain your limited liability (protects your personal assets against debts arising from the business) and helps you make sure that you are carefully documenting business activities for tax purposes and financial purposes. Copies of all contracts, tax forms/elections/returns, leases, financing agreements, and other business records should be kept in an organized manner. All business records should be kept separate from your personal records and activities – a critical first step is to have separate bank accounts for personal and business purposes. Additionally, establishing and keeping financial books helps you monitor the financial health and status of your business and can assist you with substantiating records in the event you are audited by the IRS, the Oklahoma Tax Commission, or other tax authority.

Limited Liability and Piercing the Veil Assuming all the formalities governing each business type are followed, no owner has guaranteed an obligation of the business, and the veil isn’t pierced, this chart shows which owners have limited liability for business contract liability and business tort liability:

Ownership Structure Sole Proprietorship General Partnership (GP) Limited Partnership (LP) Limited Liability Partnerships (LLP) Limited Liability Company (LLC) Corporations (Inc. or Corp.)

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Does an owner have limited liability for business debts and torts? No. The proprietor or owner is fully liable. No. Each partner is fully liable. No, a general partner is fully liable. Yes, the limited partners have limited liability. Yes, both managing and non-managing partners have limited liability. Yes, the members have limited liability. Yes, the shareholders have limited liability.

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A couple of important notes on limited liability and piercing the veil  If you guarantee an obligation of the business (for example guarantee or cosign on a credit card, mortgage, line of credit, lease, etc.), then you are fully liable for the debt and the creditor or lessor would not need to pierce the veil to reach your personal assets because the guarantee is evidence that you’ve agreed to pay if your business doesn’t.  If you are personally at fault (for example getting into a car accident while delivering products for your business or otherwise acting on behalf of your business), then a potential plaintiff doesn’t need to pierce the veil to reach your personal assets because you are personally at fault. As you can see, the limited liability that a business entity provides is a good start, but is an incomplete solution for many small businesses. To fully protect your business assets and your personal assets, you should use general liability commercial insurance and other types of insurance to provide the fullest possible protection.

Glossary  Contract – a contract is an agreement between two or more parties with the intention of creating legal obligations between them. Contract liability can occur when a party breaches an obligation under the contract. A common type of breach of contract (and therefore contract liability) is a party refusing to pay.  Guarantee – a guarantee when used in this informational brochure refers to a promise to pay another person’s debt if that person fails to pay. This is sometimes also referred to as cosigning.  Limited Liability – limited liability when used in this informational brochure refers to the ability of a business entity under state law to shield or protect the owners from the contract and tort liability of the business entity. For example, limited liability companies (LLCs), when properly formed and implemented can help protect the owners of the LLC from tort and contract claims against the LLC.  Piercing the Veil – piercing the veil when used in this informational brochure refers to the ability of a plaintiff in a lawsuit to break through the limited liability of a business entity and obtain a judgment against the personally owned assets of the owner or owners of the business.  Tort – a civil action other than for a breach of contract. Torts often involve personal injury, but some types of tort do not. Car accidents, slip and falls, medical malpractice, and dangerous defective product claims are a few examples of torts. Tort liability is

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essentially the damages that may need to be paid as part of the litigation or settlement of a tort based lawsuit.  Trade Name – a trade name is a name an individual or business entity assumes or uses to transact business and which is different than the individual’s or business entity’s legal name. This is sometimes called “dba” or “doing business as”. An example would be Sally Smith who operates a business called Sally’s Diner. In this case, Sally Smith is an individual’s legal name and “Sally’s Diner” is a trade name.

To Learn More

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We also offer a free consultation to entrepreneurs and others interested in learning more about business planning or any of our other legal services, such as estate planning, personal or business tax planning, probate, or bankruptcy. Call today to schedule your free consultation. Carlson & Copeland, PLLC (405) 701-1994 (855) 538-2521 (toll free) 103 N. University Blvd. Norman, OK 73069-7137

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Legal Disclaimer Every effort has been made to provide accurate and authoritative information in this informational brochure. However, every situation is unique, and the law’s application to specific facts and situations can vary. Additionally, no specific business legal structure or tax strategy is appropriate for all businesses or all situations. Your receipt and review of these materials does not create an attorney-client relationship with Carlson & Copeland, PLLC or any of its attorneys. Accordingly, when making choices that have legal ramifications, such as creating a business entity like a corporation or an LLC, you should always seek the advice of a competent attorney prior to signing any agreements or contracts, filing any documents, making any tax elections, or entering into any transaction.

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