The pros and cons of forming an Oklahoma limited liability company
There are pros and cons to forming LLCs in Oklahoma, which may help business owners decide whether this is the right option for their needs.
When entrepreneurs and others in Oklahoma set out to start up a business, one of the most important decisions they make is how to structure their companies. A hybrid-type formation, many people choose to form limited liability companies, or LLCs. Understanding some of the pros and cons associated with this business formation type may help people determine if this structure is right for their needs.
Pro: More flexibility
As the owners, or members, of LLCs set up their companies, this organization structure may offer more flexibility than other options. They must file articles of organization when forming an LLC, but they are able to create structures that are tailored to suit their unique necessities and preferences. Additionally, members may decide for themselves how they wish to split the companies’ profits and share the ownership and operational responsibilities.
Con: Less structure
The flexibility that LLCs offer compared to other business structure types means companies structured in this way may lack strict requirements for their governance. Consequently, disputes between members could result in significant issues. Unless they have an operating agreement in place that specifies how such conflict should be handled, member disagreements could halt operations, affect a company’s bottom line and, in extreme cases, result in the dissolution of the business altogether.
Pro: Eliminates double taxation
In some circumstances, corporations and other business types may experience double taxation. This means that companies pay tax on their incomes and their owners must also pay taxes on their earnings. Unless the members have chosen to tax their LLC as a corporation, the company itself will not pay taxes. Thus, double taxation generally does not occur when people structure their businesses as limited liability companies.
Con: Pass-through taxes
For federal tax purposes, LLCs are not considered separate tax entities. Therefore, rather than LLCs paying corporate taxes, their taxations pass through to their members. Each of an LLCs’ owners must report the business’ profits and losses on their personal tax returns. Furthermore, managing members may be required to pay a self-employment tax on any guaranteed earned income payments they receive for their role in operating the business.
Pro: Limits personal liability
When people form their businesses as sole proprietorships or partnerships, they may be held responsible for their companies’ debts. Consequently, they could be required to forfeit personal assets, such as homes or bank accounts, if their companies default on loans, become bankrupt or are sued. Limited liability companies, on the other hand, may offer some liability protection for members. Thus, they may not be held personally responsible for such obligations unless they engaged in fraudulent or illegal acts.
Working with a legal representative
Deciding how to structure their companies is only one of many important decisions facing Oklahoma business owners as they are getting up and running. Therefore, those who are starting up new businesses may find it helpful to seek legal counsel. An attorney may help them understand their options and responsibilities, as well as guide them through any associated legal processes.