When you start a business one of the first things you’ve got to decide is which business structure your business will take. Each structure offers different combinations of tax advantages, liability protection, and other unique advantages. This article will help you understand how partnerships differ in Oklahoma so you can choose the one that may be best for you.
Types of Partnerships: Liability & Tax Considerations
Two important topics to consider when you are forming a business are taxation and personal liability. In Oklahoma partnerships are generally taxed as pass-through entities, meaning the profit and losses from the businesses pass directly into the partners’ personal incomes. The partnership doesn’t file a tax return because the money it made, or lost, is reported as personal income. The IRS has useful tips on some of the federal requirements for partnerships.
Personal liability is the other important topic to consider when forming a business. Liability refers to how personally responsible you are for your business’ debts and obligations. If you are fully liable for your business’s debts then your personal assets such as property or savings, can be used to settle outstanding business debts. Some partnerships offer limited liability, protecting your assets from some types of debts.
The types of partnerships offered in Oklahoma are compared below, with information highlighting the differences in liability and tax considerations.
General Partnership (GP)
General partnerships are business entities that allow two or more partners to share revenue and responsibilities. GPs do not offer any protection to the partners from the GP’s debts. Thus, the partners are jointly and severally liable for the entirety of the businesses liabilities.
Partners in GPs are responsible for reporting the partnership’s losses and profits on their Oklahoma state income tax returns, according to their ownership share of the partnership. A yearly informational return may also be required.
Limited Partnership (LP)
Limited partnerships allow limited partners in addition to general partners. Limited partners are not liable for the business’s debts beyond their total investment. General partners still bear full liability, even in LPs. LPs and GPs share the same tax structure.
A common choice for professionals practicing in high-liability fields, limited liability partnerships shield partners from liability that they aren’t responsible for creating themselves. While the exposure to liability may be different and there may be slightly more regulation of LLPs, the tax structure remains similar to that of GPs and LPs.
LLPs may have additional reporting requirements and may have further tax requirements, depending on their structure, business type, and other details. Check with the Secretary of State for the most current information.
Limited Liability Limited Partnership (LLLP)
Limited liability limited partnerships combine the LLP and LP into one partnership type. An LLLP offer two layers of liability shielding like an LP, one for general partners who are not liable for partnership debts not of their own creation and one for limited partners whose liability is limited to the amount of their investment. LLLPs are exactly like LLPs for tax purposes but may also have further tax requirements, depending on their structure.
How to Form a Partnership in Oklahoma
Once business owners have decided to start a partnership in Oklahoma there are a few mandatory steps to go through before the doors can open for business.
Step 1: Select a business name
When deciding on a name, try to create one that reflects your business ideals, but that (more importantly) also appeals to the type of customers you want to attract. Take note that you should include the entity type in the business’s name (i.e. a limited liability partnership named “XYZ Pet Shop” would be “XYZ Pet Shop, LLP”).
Step 2: Register the business name
Check to make sure the name you want is not already registered by accessing the Secretary of State’s Business Database. If not, register it yourself with the Oklahoma Secretary of State so another business can’t use the name.
Step 3: Complete required paperwork
In Oklahoma, businesses are required to pay current filing fees along with filing the appropriate paperwork with the Oklahoma Secretary of State and/or Oklahoma Tax Commission. The forms are often different for out-of-state businesses.
General Partnerships (GP) – GPs register with the Secretary of State and the Oklahoma Tax Commission. They are the least regulated type of partnership in Oklahoma.
Limited Partnerships (LP) – LPs must file a Certificate of Limited Partnership with the Oklahoma Secretary of State. LPs are also required to file a yearly Certificate.
Limited Liability Partnerships (LLP) – LLPs must file a Statement of Qualification as an LLP with the Oklahoma Secretary of State.
Limited Liability Limited Partnerships (LLLP) – LLLPs file a Certificate of Limited Partnership that specifies their status as an LLLP with the Oklahoma Secretary of State. LPs are also required to file a yearly Certificate.
Step 4: Determine if you need an EIN, additional licenses or tax IDs
If you plan on hiring employees, you’ll need to get an Employer Identification Number (EIN) from the IRS. Even if you aren’t hiring employees, an EIN is helpful for opening business bank accounts, credit cards, and more. It’s highly recommended you get one from the IRS.
Some partnerships need additional licenses from the state in order to do business. For example, plumbers, electricians, and other types of contractors usually need to be licensed to do business. Additional taxes may also be needed, check with the Secretary of State for more details.
Step 5: Get your day to day business affairs in order
Once the Secretary of State has approved your paperwork and sent you a certified, stamped copy of the paperwork back, you’re able to do business. Here are a few things to consider as you get started with your business:
- You’ll need to open a bank account in your business’s name to keep your liability protection in tact (if your partnership type offers liability protection).
- You’ll need a physical address where the business can receive mail and legal notices.
- Make sure you have a partnership agreement on hand. This is a document that outlines how the partnership will be ran and includes details such as how to deal with partners that leave, adding new partners, changing the business, or shutting the business down.
LegalZoom will help you choose which partnership may be right for you. We can also file the paperwork to form your business, help you find a registered agent, and get you in touch with an attorney or tax professional.