The Bill Kumpe Law Firm

There are hundreds of facts to be considered when starting a new small business.   Details such as choosing a name, choosing a location, choosing a bank, acquiring start-up capital and writing a good business plan are just a few.  Very few individuals are competent to do this by themselves and almost everyone, including “old-pro” entrepreneurs, choose to retain an attorney and a CPA to help them through the maze. 

An attorney is needed to help with the organizational documents.  The first issue often addressed is choice of a business name.  This is not as simple as it sounds.  Many people think that calling the Oklahoma Secretary of State’s office and finding out if the name they have chosen is available in Oklahoma is sufficient.  And, it may be.  But, it may not.  Every once in a while, an Oklahoma business gets a letter or a telephone call from a law firm in another state or country advising them to cease and desist from using their client’s trade-mark.  When that does happen, embarrassment, damages and lawsuits aside, it is an incredibly expensive undertaking to change everything in the small business from signage to letterhead to business cards.  So, from the attorney’s standpoint, the organizational process usually begins with a very thorough professional name search.

The next step is usually a choice of entity.  The choice of entity is a mixed accounting and legal function.  The prospective business owner needs to have a very good handle on his current financial situation and the projected financial situation of the new company.  It usually requires a CPA to determine what business entity offers the best tax structure under the client’s particular circumstances.  But, this decision cannot be made in a vacuum.  Taxes are not the only consideration.  Hundreds of other issues such as the type of business, the client’s business experience, education, the proposed ownership structure of the company and even things such as the proposed owner’s age, health and family situation must all be taken into consideration.  These issues require an attorney’s advice.

The IRS describes the available business entities as follows:

Sole Proprietorships:

 

A sole proprietorship is an unincorporated business that is owned by one individual. It is the simplest form of business organization to start and maintain. The business has no existence apart from you, the owner. Its liabilities are your personal liabilities. You undertake the risks of the business for all assets owned, whether used in the business or personally owned. You include the income and expenses of the business on your own tax return.

 

Partnerships:

 

A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor, or skill, and expects to share in the profits and losses of the business.

 

 

Corporations:

 

In forming a corporation, prospective shareholders exchange money, property, or both, for the corporation's capital stock. A corporation generally takes the same deductions as a sole proprietorship to figure its taxable income. A corporation can also take special deductions.  The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. However, shareholders cannot deduct any loss of the corporation.

 

S Corporations:

 

An eligible domestic corporation can avoid double taxation (once to the shareholders and again to the corporation) by electing to be treated as an S corporation. Generally, an S corporation is exempt from federal income tax other than tax on certain capital gains and passive income. On their tax returns, the S corporation's shareholders include their share of the corporation's separately stated items of income, deduction, loss, and credit, and their share of non-separately stated income or loss.

 

Limited Liability Company (LLC):

 

A Limited Liability Company (LLC) is a relatively new business structure allowed by state statute.  LLCs are popular because, similar to a corporation, owners have limited personal liability for the debts and actions of the LLC. Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation.  Owners of an LLC are called members.  Since most states do not restrict ownership, members may include individuals, corporations, other LLCs and foreign entities.  There is no maximum number of members. Most states also permit “single member” LLCs, those having only one owner. A few types of businesses generally cannot be LLCs, such as banks, insurance companies and nonprofit organizations.  (Note: Individual state statutes may allow other forms as well such as the Professional Limited Liability Company.)

After the type of entity is chosen, the organizational documents must be drafted and filed with the appropriate state agencies.  This is usually done by the attorney.  Some federal filings are also required such as a request for an Employer Identification Number and if a SubChapter “S” corporation is chosen a “Subchaper S” election form.  These may be filed by either the attorney or the CPA.  If a “C” corporation is chosen, SEC filings may be required.  These must be handled by an attorney with experience in SEC filings.  State tax filings may be required as well.  Depending upon the size of the business and the owner's available funds, this may be done by the CPA or by the business owner themselves.  The State of Oklahoma regularly conducts free tax seminars for new business owners which not only teaches them how to handle their state tax obligations but also assists them in preparing their initial state tax filings.

A number of internal organizational documents must be prepared as well, again depending upon the type of entity chosen such as corporate bylaws or LLC operating agreements, stock certificates, stock ledgers, and a host of internal resolutions covering everything from adoption of the bylaws or operating agreement to the choice of a bank.  These are done by the attorney.

The good news is that this all can happen pretty quickly.  Oklahoma now has expedited online filing for start-ups and the whole process frequently takes less than thirty days from initial appointment to final organizational meeting.  The bad news is that it all has to be done right.  Mistakes can be expensive and embarrassing and decisions made during this phase of business’s life will cast a long shadow over its future.