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STARTING AND OPERATING A BUSINESS IN OKLAHOMA Copyright © 2007, Michael D. Jenkins
CONTENTS OF THIS CHAPTER:
I. INTRODUCTION Oklahoma has a fairly typical tax and legal structure under which businesses must operate, not unlike that of most other states. Like most states, Oklahoma imposes an income tax, a franchise tax on corporations, a sales and use tax, various excise taxes, with property taxes imposed at the local level. The state has also adopted a limited liability company (LLC) law and a limited liability partnership (LLP) law, so that businesses operating in Oklahoma in LLC or LLP form may obtain the advantages of limited liability, without the necessity of incorporating or becoming subject to corporate income and franchise taxes. Oklahoma is an extremely friendly environment for small and startup businesses. For example, small firms that operate out of "small business incubator" facilities can obtain state tax exemption of their profits for up to 10 years, a strong incentive to "hatch" your new business in Oklahoma. In addition, the Oklahoma Department of Commerce maintains an excellent Business Licensing System (BLS) website, which allows you to scan through a list of many types of business activity and answer a series of questions for an activity you select from the list, to determine whether that particular business or activity requires a state license or permit. The Oklahoma BLS, which is offered free to businesses, is quite possibly the best, most useful state guide to licensing and permit requirements offered by any of the 50 states. At present, the state's economy is fairly healthy, but has weakened in the last year, in terms of the level of unemployment and other economic measures. For example, in July, 2007, the Oklahoma unemployment rate was up to 5%, from only 4% a year earlier. This now compares unfavorably to a national unemployment rate of 4.6% for the same month. Oklahoma continues to be an economically attractive state for employers because of its relatively low cost of living, compared to national averages, and the state's right-to-work law. To view the latest federal Bureau of Labor Statistics unemployment rate data for Oklahoma or any other state, visit the BLS website. II. LEGAL ENTITIES -- FILING FEES AND REPORTING REQUIREMENTS. (a) In General. A business that operates in Oklahoma can do so as a sole proprietorship, a general or limited partnership, a corporation, or a limited liability company. In addition, like the federal tax law, the state income tax law also recognizes S corporations, for income tax purposes, and allows the income or losses of an S corporation to "flow through" and be taxed or deducted at the shareholder level, rather than taxing the corporation itself as an entity. Oklahoma also provides for limited liability partnerships, in which no partner is liable for certain debts of the partnership, somewhat like a corporation or LLC, but with fewer legal formalities than are required for either a corporation or an LLC. Each of the above entities is discussed below, along with the basic requirements for forming such an entity and any general ongoing (non-tax) reporting requirements that are applicable to it. The tax treatment of each form of legal entity is discussed in Section IV below. (b) Sole Proprietorships. In general, sole proprietorships in Oklahoma can be formed with no formalities. However, as discussed in Section IV(b), it will generally be necessary to obtain one or more local business licenses from cities or counties in which you operate and, in some cases, state licenses, as well. In addition, if you make any sales of tangible personal property at retail or provide certain types of services, you may be required to obtain a sales tax license and collect sales tax, as discussed in Section IV(d). No separate tax form filing is required, generally, for a sole proprietorship, under the Oklahoma income tax law. Instead, as with the Schedule C on your federal Form 1040, you simply report the net income or loss from your sole proprietorship on your state personal income tax return. See Section IV(c) for information on the Oklahoma income tax and filing requirements for individuals. Individuals (sole proprietors) are not subject to the Oklahoma franchise tax, which applies only to corporations. Doing business as a sole proprietor in Oklahoma is generally much simpler than operating as any other kind of business legal entity.As a sole proprietor, if you have no employees, you are not required to pay any unemployment taxes, withhold any federal or state income tax from wages, nor obtain workers' compensation coverage for yourself. However, if your sole proprietorship operates under an assumed or fictitious business name (trade name), it will be required to register the name with the state and file a copy of the registration in the county where you do business, as discussed in Section IV(g). (c) Partnerships. Oklahoma's partnership laws allow creation of either a general partnership, in which all partners are liable for the debts of the business, or a limited partnership, in which only the general partners are liable for debts, while the liability of limited partners is limited to the amount they have invested, usually. State law also allows for the creation of a limited liability partnership, in which no partner has personal liability (subject to certain exceptions). As is discussed in Section IV(b), it will generally be necessary to obtain one or more local business licenses from cities or counties in which you operate and, in some cases, state licenses, for any type of partnership, including general or limited partnerships, or limited liability partnerships. Partnerships, as entities, are not subject to state income tax in Oklahoma. Instead, the income or losses of the partnership, as allocated among the partners, must be reported on the personal income tax returns of the individual partners (or on the corporate tax returns of any corporate partners). Partnerships are required to file an annual tax information return with the state. For details on Oklahoma partnership income tax return filing requirements, see Section IV(c). Partnerships are not subject to the Oklahoma franchise tax. A partnership agreement, for any type of partnership, should spell out in considerable detail such matters as the following:
As a rule, general partnerships in Oklahoma can be formed with no formalities, although it is highly advisable to have a written partnership agreement. However, as discussed in Section IV(b), it will generally be necessary to obtain one or more local business licenses from cities or counties in which you operate and, in some cases, state licenses, as well, and partnerships that operate under a fictitious or assumed name must register the name with the Oklahoma Secretary of State, as discussed in Section IV(g). A general partnership may, though it is not required to do so, file a Statement of Partnership Authority with the secretary of state, stating which partners in the partnership have the authority to execute instruments that transfer ownership of real estate held in the name of the partnership and specifying any authority or limitations on partners authorized to execute such instruments or perform various other acts on behalf of the partnership. There is a $100 fee for filing a Statement of Partnership Authority. In addition, any partnership or other business that has employees will generally have to register for, and pay, state unemployment tax on wages paid, as discussed in Section V(b). A limited partnership, in which there is at least one general partner (who is liable for partnership debts) and at least one limited partner (who is not liable for partnership debts), may also be formed under Oklahoma law. Unlike a general partnership, a limited partnership must generally have a written partnership agreement and must file a certificate of limited partnership with the secretary of state, together with a filing fee of $100. Foreign limited partnerships must also register before being allowed to do business in Oklahoma, and must pay a registration fee of $300. For information on limited partnership filing requirements, see the contact information for the offices of the Oklahoma Secretary of State, listed in Section VI(a). LIMITED LIABILITY PARTNERSHIPS Limited liability partnerships (LLPs) are a new form of partnership permitted under the laws of Oklahoma. Like an LLC, an LLP provides limited liability for its owners, while retaining the tax advantages of a partnership for federal and Oklahoma state income tax purposes. However, unlike an LLC, an LLP typically operates like a regular partnership, and is not required to file articles of organization. Partners in a general partnership can obtain a significant degree of limited liability by simply registering the partnership with the state as an LLP. To form an LLP in Oklahoma, you must file an Oklahoma Limited Liability Partnership Statement of Qualification, and pay a filing fee of $100 to the secretary of state. Foreign LLPs, those created under the laws of another state, must register with the secretary of state and pay a fee of $100. For more information on LLP registration requirements, see the contact information for the offices of the secretary of state, listed in Section VI(a). Note that one potential drawback of LLPs, if you will do business in other states besides Oklahoma, is that you may not enjoy limited liability with regard to creditors of the LLP if you do business in some such states. Some states, like California, Nevada, and New York, only recognize certain types of professional partnerships as LLPs. Such other states may simply treat your LLP like an ordinary general partnership, with no limitation of liability. Some states will also deny your LLP limited liability status if you do business there without first registering as a foreign LLP in such state, although most states will simply deny an LLP the right to maintain a lawsuit in the state's courts until the LLP has registered for authority to do business in that state. LLPs doing business in Oklahoma are required to meet specified financial security requirements, equal to at least $500,000 of malpractice or general liability insurance, or by setting aside at least that amount of funds segregated to pay potential claims against the partnership, or some combination of the two. (d) Corporations. To form a corporation in Oklahoma, you must file articles of incorporation with the Oklahoma Secretary of State and pay a fee of $1 per $1,000 par value of authorized capital stock. No-par stock is deemed to have a par value of $50 per share. There is a minimum fee of $50. A foreign corporation (one formed under the laws of another state or a foreign country), must obtain a certificate of authority before it may legally conduct business in Oklahoma, by filing an application for a certificate of authority and paying a filing fee of $1 per $1,000 of capital invested in the state. There is a minimum fee of $300. However, no foreign corporation is required to pay a fee on an amount in excess of its authorized capital. For more information on filing articles of incorporation or applying for a certificate of authority to do business in Oklahoma, see the contact information for the offices of the secretary of state, listed in Section VI(a). If a domestic corporation increases its capital stock by more than $50,000, it must pay a fee of 0.1% on the amount of the increase, otherwise $50. Similarly, a foreign corporation must file an Annual Certificate of Capital Invested in the state, and pay a tax of 0.1% on any increase. However, the total invested amount taxable cannot exceed the foreign corporation's total authorized capital stock. In addition to paying federal income taxes on its income, a corporation that does business in Oklahoma must also file corporate income tax returns with the state. See Section IV(c) for a discussion of state corporate income tax rates and tax return filing requirements. Corporations that do business in Oklahoma are also subject to a corporate franchise tax. For tax rates and details on the franchise tax, see Section IV(c). For tax forms and more information on corporate income and franchise taxes in Oklahoma, see the contact information for the offices of the Oklahoma Tax Commission, listed in Section VI(a). (e) S Corporations. An S corporation is simply a regular corporation that has elected, for federal or state income tax purposes, or for both, to be taxed somewhat like a partnership, with its income, losses and tax credits flowing through to its owners, who report such income, losses, or credits on their individual tax returns. Oklahoma recognizes S corporations for income tax purposes, and treats them in a manner similar to the federal tax treatment. However, if an S corporation has non-resident shareholders, the portion of the S corporation's taxable income attributable to those shareholders is taxable, unless all of the nonresident shareholders file with the corporate tax return an agreement to pay Oklahoma personal income tax on their allocable shares of the income. Like other for-profit corporations, S corporations that do business in Oklahoma are subject to the state's franchise tax on their capital that is employed in the state. For more on the Oklahoma income and franchise tax treatment of S corporations, see Section IV(c). (f) Limited Liability Companies. Oklahoma, like every other state in the U.S., has adopted a limited liability company (LLC) law. Thus, in addition to the traditional choices of a sole proprietorship, partnership, or corporation, a business that operates in Oklahoma may also choose to operate in the form of an LLC. In most states, including Oklahoma, LLCs are very attractive entities for many small businesses, in that they offer the same protection as a corporation from creditors for debts of the business, while offering much of the flexibility plus the flow-through tax treatment of a partnership for federal tax purposes. LLCs, as entities, are not subject to Oklahoma income tax, although they must generally file partnership income tax information returns. LLCs are not subject to the Oklahoma franchise tax. See Section IV(c) for a discussion of the income tax treatment of LLCs under Oklahoma's tax laws. To form an LLC under the laws of Oklahoma, one or more persons must file articles of organization with the secretary of state, which must be accompanied by a filing fee of $100. Oklahoma state law allows formation of one-owner LLCs, which now qualify for treatment as sole proprietorships for federal income tax purposes. Foreign LLCs, those formed under the laws of another state, must obtain a certificate of authority to do business in Oklahoma, by filing a Registration of Foreign Limited Liability Company application form with the secretary of state and paying a filing fee of $300. Oklahoma's LLC law provides that a limited liability company agreement may establish or provide for the establishment of one or more designated series of members, managers or limited liability company interests having separate rights, powers or duties with respect to specified property or obligations of the limited liability company or profits and losses associated with specified property or obligations. Any such series may have a separate business purpose or investment objective. This provision, in effect, allows a single "series LLC" to be set up with multiple divisions or "series," each of which can function like a separate legal entity, as long as separate accounting is done for each. Thus, each such "series" may contain a separate business venture, whose losses or bankruptcy will be walled off, in terms of liability, from the other such divisions of the "series LLC." In addition, some tax advisors believe such a single LLC can be set up in place of multiple LLCs and thereby save significant amounts of state taxes in many states where each LLC is subject to special taxes or fees. (However, California's Franchise Tax Board has already announced that in California each such foreign "series LLC" will be taxable as a separate LLC entity in that state, so Oklahoma "series LLCs" that do business in California will not save on California LLC taxes or fees.) For more information on filing articles of organization for an LLC, see the contact information for the offices of the secretary of state, listed in Section VI(a). (a) In General. When acquiring an existing business, there are a number of state legal and tax issues you or, preferably, your business attorney, should attend to before closing the purchase. These include matters such as doing a title search for any real property that is being acquired, checking for any recorded security interests on personal property items, and thoroughly researching county, state, and federal records for any judgment liens, tax liens, or other liens, before property is acquired. You will also benefit from consulting a tax advisor before the agreement of sale is negotiated, in order to seek a structuring of the agreement so that the purchase price is allocated among the assets in a way that favors you. You may be able to achieve considerable tax savings if the purchase price is allocated in a way that gives you the best possible tax results under federal and state income tax laws, and other state tax laws, such as sales/use tax or property tax laws. Depending upon the state (or states) in which the seller's assets are located, you may also have to comply with state bulk sale or bulk transfer laws. You should also obtain tax releases from various state taxing agencies, as discussed below. (b) Bulk Sale Laws. Typical bulk sale laws require either publication of legal notices to all creditors in advance of the sale and recording of such notices in some cases, or maintenance of detailed lists of the property to be transferred, for inspection by the public. Oklahoma is one of the business-friendly states that has repealed its bulk sale laws, so you no longer have to be concerned with this costly requirement when buying a business in Oklahoma. (c) Tax Releases. When you acquire an existing business, you will want to make sure that you do not unwittingly become liable for any unpaid taxes owed by the seller. Typically, to protect yourself, you will need to receive a tax release or releases from various state taxing agencies, for such taxes as sales and use tax, income tax withholding, and state unemployment taxes, in each state in which the seller does business. If you fail to obtain such a release or written statement from the tax agency that the seller is not delinquent on any tax payments, you will be held responsible for such tax if it is not withheld from the purchase price proceeds and paid to the state at the time the sale of the business transpires. In Oklahoma, you should contact the Oklahoma Tax Commission in advance of closing the business purchase, to determine how much, if any, sales and use taxes are owed by the seller and should be withheld from the purchase price. You may do so by filing a written request to the Tax Commission, asking for a disclosure of the amounts, if any, of sales and use taxes that are delinquent or due from the seller. In most states, it is also necessary to obtain an unemployment tax release. However, this is not generally the case in Oklahoma, unless you are acquiring an ongoing business and the seller signs over his or her unemployment tax rating to you. (d) Unemployment Tax Rating of Seller. Besides obtaining tax releases, you may find it advantageous to succeed to the seller's unemployment tax experience rating, if the seller has a tax rate lower than you would otherwise obtain as a new business. To obtain the seller's favorable experience rating as a successor employer, the business you acquire will have to continue to be ongoing, and you will need to apply on a timely basis to the Oklahoma Employment Security Commission (OESC), requesting that you be treated as a successor employer. Notify the OESC by filing their simple Employer's Notice of Acquisition of a Business form. Oklahoma state law provides that whenever substantially all of an existing employer is acquired, the acquiring business will qualify as a successor employer, for unemployment tax purposes. Written notice of all current or delinquent contributions, interest, penalties and fees owed to the OESC by the predecessor (selling) employer must be provided to you, as the successor employer, by the predecessor employer prior to the sale of the business, or the predecessor (seller) may be subject to penalties. Where a buyer and a seller are under substantially common ownership or control, transfer of the seller's experience rating is mandatory; or, where the acquisition of the business is done for the principal purpose of obtaining the seller's low tax rate, the buyer will not be allowed to succeed to that rate, but will be given a minimum rate assigned by the OESC, not below 1% or the average experience rate, if higher. Civil money penalties may also be imposed in either such type of attempt to obtain a seller's low tax rate. PLANNING POINT: EXAMPLE: IV. OKLAHOMA TAXES AND OTHER GENERAL REQUIREMENTS. (a) In General.
Oklahoma is a relatively attractive place in which to do business,
with a very pro-business attitude on the part of state government,
and relatively low state individual and corporate income tax rates.
In addition, it has some of the lowest property tax rates in the U.S.
and is one of the minority of states that has a right-to-work law.
The state provides excellent small business incentives,
including a 100% net income exemption for up to 10 years for certain
small businesses that are tenants in a "small business incubator."
The income of such incubator businesses can be exempt even after
the business ceases to be a tenant in the small business incubator.
The income exemption only applies in any given year if at least 75%
of the taxpayer's gross sales from its principal business activity
are made to:
In years 6 to 10 for such an incubator business, failure to meet
the 75% gross sales test will not result in disqualification for
the following years.
In addition, the rent paid to the sponsor of a business incubator is exempt
from tax for up to ten years from the date of the tenant's occupancy in the
incubator, which allows the sponsors of business incubators to charge you a
lower rent, if your business is a tenant in an incubator.
In recent years, Oklahoma's Tax Commission has been moving towards
online filing of more and more tax returns of all types. Currently, all
businesses that remitted an average of $5,000 or more per month in taxes
in the previous fiscal year are required to file returns online through
the State Tax Commission's Quick Tax program.
The QuickTax System accepts the following reports and remittances:
(b) State and Local Licensing. Nearly any business, operated anywhere in the United States, will have to have at least one government license of some kind. In most cases, this will be a local license, issued by your city or county. Before you open your business, contact your local city or county hall and find out if your particular business needs one or more local licenses. Most kinds of local business licenses are granted upon payment of a fee, with no further requirements, except possibly for annual or other periodic renewal fees. If you are engaging in any kind of food business, you will usually need to also obtain a health department permit and show that you are in compliance with health department food-handling requirements. In addition, be sure to check with an attorney or local government zoning or planning department officials to determine if your business will be in compliance with all local zoning and planning restrictions. If you own or rent any type of facility, you will generally need fire department permits, showing that you meet fire safety codes and any construction or improvements to an existing structure will usually require a building permit. If you intend to simply operate your business from your home, you may be in violation of local zoning requirements, but this is less likely to be a concern if you don't have clients, customers, suppliers, or employees coming to your house on business, on a regular basis. State governments have traditionally required special licenses for many kinds of professionals, such as physicians, dentists, lawyers, and accountants. To further protect consumers, Oklahoma has expanded the list of occupations that must be licensed by the state to include many other occupations. Most state licenses not only require payment of fees, but are only issued for a given profession or occupation upon showing that you have completed certain educational or experience requirements, or passed certain tests, or some combination of the foregoing. Unlike a number of states, Oklahoma does not require all businesses to obtain a state license, though professions and certain occupations or businesses such as beauty salons or restaurants will require special state licenses or permits. For information on state licensing and business registration requirements in Oklahoma, see the contact information for the offices of the State Tax Commission, listed in Section VI(a). For professional licensing in the many fields such as law, medicine, dentistry and the like, you will need to contact the specific board or agency, of which there are dozens, that regulates your particular profession. If you are unsure what licenses you may need, and from which agencies, contact the Business Development Division of the Oklahoma Department of Commerce at the address listed for that agency in Section VI(a). The Oklahoma Department of Commerce also maintains an excellent Business Licensing System (BLS) website, which allows you to scan through a list of many types of business activity and answer a series of questions for an activity you select from the list, to determine whether that particular business or activity requires a state license or permit. The Oklahoma BLS is quite possibly the best, most useful state guide to licensing and permit requirements offered by any of the 50 states, and may save you a great deal of time, headaches, and legal fees, in many cases. (c) Income and Franchise Taxes. Oklahoma has both an individual income tax and a corporate income tax, as well as a franchise tax on corporations. As under federal tax law, partnerships, LLCs, and S corporations are generally not subject to state income tax, at the entity level. However, all such pass-through entities are required to withhold state income tax with respect to any distributions made to nonresident partners, members, or shareholders, although there are exceptions where the nonresidents voluntarily agree to submit to the tax jurisdiction of the Oklahoma State Tax Commission or where the annual amount to be withheld is not expected to exceed $500. Withholding of state income tax is also required on payments of royalties to nonresidents of the state. Effective July 1, 2006, Oklahoma reduced the rate of income tax withholding on royalty payments made to nonresidents to 5% of such payments, down from the 6.75% rate that previously applied to such payments. Starting November 1, 2007, Oklahoma will also require state withholding of income tax on some payments to independent contractors (immigrants who are not authorized to work in the U.S.), as discussed in Section V(a). The Oklahoma income and franchise tax treatment of the various forms of business legal entities is discussed in more detail in the remainder of this Section. TAXATION OF SOLE PROPRIETORS AND PARTNERSHIPS The Oklahoma individual income tax was imposed at a maximum tax rate of 6.65% in 2004 and 2005 for taxpayers who do not deduct federal income tax, or up to 10% for those who do elect to deduct their federal income tax on their state tax returns. The 6.65% rate was a reduction from the 7% rate that applied before 2004, and while this reduction was previously dependent on the state not incurring budget shortfalls, the passage of an initiative by voters in November, 2004 fixed the maximum rate at 6.65% for those taxpayers who do not elect to deduct their federal income tax on their Oklahoma tax returns. UPDATE NOTE: Individual taxpayers pay Oklahoma state income tax on their income, including their business earnings from a sole proprietorship or on their share of the earnings of a pass-through entity, such as a partnership, S corporation or LLC. The Oklahoma personal income tax return is Form 511, which must be filed with the Oklahoma Tax Commission by April 15th of the following year, for each taxable year. Partnerships, or entities taxable as partnerships, such as LLCs, are not subject to state income taxation in Oklahoma, but must file an information return with the Oklahoma Tax Commission each year, showing each partner's share of the partnership's taxable income, losses, and credits, on Form 514. The partnership information return is due by April 15th of the following year, in the case of a calendar year partnership. Partnerships are also exempt from the Oklahoma franchise tax, which applies only to corporations. Pass-through entities, such as partnerships, LLCs and S corporations, are required to withhold Oklahoma income tax from distributions to partners, LLC members, or S corporation shareholders who are nonresidents and pay over such withheld tax at least once each year or else on a quarterly basis, if the total to be withheld for the year can reasonably be expected to exceed $500. The entity is also required to make quarterly estimated tax payments of such withheld tax, in amounts equal to 70% of the current year tax required to be withheld, or 100% of the prior year tax. However, nonresidents may avoid the withholding provisions, generally, if they voluntarily submit to the tax jurisdiction of the state of Oklahoma by filing an affidavit (Form OW-15) to that effect with the Tax Commission. Withholding is also not required for nonresident partners if the partnership files a composite tax return for its nonresident partners and pays Oklahoma income tax on their behalf. Such partners may not be included in a composite return if they have other Oklahoma-sourced income than from the partnership or if they are pass-through entities themselves. Individual taxpayers doing business as sole proprietors (or who are partners in partnerships, members of LLCs, or shareholders in S corporations), who have taxable income from the business, will generally be required to make advance payments of estimated Oklahoma individual income taxes, if their net tax liability (not covered by withholding) exceeds $500. No estimated tax payments are required if the tax for the current year is less than $1,000, or if the tax liability for the preceding full taxable year was zero. Estimated tax payments are due in four installments, on the 15th day of the 4th, 6th, and 9th months of the taxable year, and the 15th day of the first month of the following year. To avoid penalties for underpayment of estimated tax, you must either pay in 70% of the current year's tax, or 100% of the previous year's tax. In the event of an underpayment of estimated tax, the underpayment penalty is computed like interest, at 20% per annum, from the date of underpayment until the tax is paid. The Oklahoma corporate income tax rate, on corporations other than S corporations, is 6% of taxable income. The state corporation income tax return is Form 512, which must be filed with the State Tax Commission by the 15th day of the third month following the end of the taxable year (by March 15th in the case of a corporation whose taxable year is the calendar year). Corporations are required to make an estimated tax declaration and make payments of their state corporate income tax in advance, if their tax liability for the year equals or exceeds $500. Estimated tax payments are due in advance, in four equal installments, on the 15th day of the 4th, 6th, 9th, months of the taxable year, and the 15th day of the first month of the following taxable year. Penalties will be imposed for failure to make the required estimated tax payments on a timely basis. However, no underpayment penalty will be imposed if the tax liability shown on the return is less than $1,000 or if the tax liability for the preceding full taxable year was zero. S corporations are exempt from the Oklahoma income tax. However, like other "pass-through entities," S corporations are generally required to withhold Oklahoma state income tax on distributions to nonresidents of the state, unless the shareholder voluntarily submits to the tax jurisdiction of the state of Oklahoma by filing an affidavit (Form OW-15) to that effect with the State Tax Commission. Corporations that do business in Oklahoma are also subject to a corporate franchise tax. Once your corporation is formed or is qualified to do business in the state, it will be required to file annual franchise tax reports and pay state corporation franchise tax each year. After the first year, for which the initial filing fees satisfy the franchise tax requirement, a corporation must pay a franchise tax equal to $1.25 per $1,000 of "capital" (as defined) that is employed in the state of Oklahoma, with a minimum annual tax (until July 1, 2006) of $10, and a maximum tax of $20,000. However, the minimum franchise tax was eliminated by an act of the legislature in 2005, effective July 1, 2006, and if the computed tax is $10 or less on or after that date, no tax is imposed, but a franchise tax return must still be filed. (Effective January 1, 2008, if the computed franchise tax is $250 or less, no tax will be due.) The franchise tax is imposed at the same rate for both domestic (Oklahoma) and foreign corporations. However, foreign corporations must pay an annual $100 registered agent fee with their franchise tax returns. The franchise tax return, Form 200, is due on July 1 of each year, and becomes delinquent on August 31. Corporations that owe either zero tax or the maximum $20,000 can file a simplified short form franchise tax return, Form 215. The latter form is filed by corporations with $8,000 or less of taxable capital (no tax due) or more than $16 million of taxable capital (maximum tax of $20,000 is due). Starting in 2008, corporations with $200,000 or less of taxable capital (no tax due) will be able to file the simplified short form. IMPORTANT NOTE: For tax forms and more information on corporate income and franchise taxes in Oklahoma, see the contact information for the offices of the Oklahoma Tax Commission, listed in Section VI(a). TAXATION OF LIMITED LIABILITY COMPANIES In Oklahoma, a limited liability company (LLC) is treated the same way as a partnership, thus avoiding the possible double taxation of income that can occur with a corporation. However, as in the case of other partnerships or S corporations, LLCs with nonresident members are generally required to withhold state income tax on behalf of such nonresidents, unless the nonresident executes an affidavit, Form OW-15, agreeing to be subject to Oklahoma's taxing jurisdiction. Under IRS regulations, effective since 1997, an LLC is able to elect to be treated as a partnership if it has more than one owner, or as a sole proprietorship if it does not, for federal income tax purposes. Oklahoma law now recognizes the validity of a one-owner LLC. Note that it is not always entirely clear whether an LLC is a "single-member LLC" or not, where the "single owner" is a married couple who hold the entire ownership of the LLC in some form of co-tenancy, such as joint tenants with right of survivorship, tenants by the entirety, or as tenants in common. The federal Internal Revenue Service (IRS) has taken a very lenient position in Rev. Proc. 2002-69, where a couple hold the LLC interest as community property, ruling that the IRS will accept whatever choice the couple make, either to disregard the LLC as an entity (treating it as a "single-member LLC") or to treat it as a partnership between the husband and wife. However, Oklahoma is not a community property state, so where the LLC is owned by a husband and wife in some form of co-tenancy, it is unclear whether the IRS treatment would be as lenient as for community property owners, since the IRS has not issued any published rulings on whether an LLC can be a disregarded entity if held in one of the various forms of co-tenancy by a married couple, rather than being held as community property. Thus, it is also unclear, where an LLC is owned by a husband and wife as co-tenants, whether Oklahoma would treat the LLC as a single-member LLC or as a partnership. UPDATE NOTE: LLCs are not subject to the Oklahoma franchise tax, which applies only to corporations. For tax forms and more information on income taxes in Oklahoma, see the contact information for the offices of the Oklahoma Tax Commission, listed in Section VI(a). (d) Sales and Use Tax. Oklahoma imposes a general sales tax on retail sales of tangible personal property and certain types of services at the statewide rate of 4.5%. In addition, local governments are allowed to adopt local sales taxes, at varying tax rates. A 6% tax applies to auto rentals of up to 90 days. Sellers are required to obtain a seller's permit and to collect and pay over the state and local sales and use taxes to the Oklahoma Tax Commission. Some of the types of services that are taxable include:
There are numerous exemptions from the sales tax, the most important of which is the resale exemption. If you are a wholesaler or retailer who purchases goods that you will resell, your purchase of such goods may qualify as an exempt sale for resale. Similarly, if you sell goods to wholesalers or retailers for resale by them, your sale may also qualify as an exempt sale for resale. In any such transaction, the exemption is ordinarily available only if the purchaser gives the seller a valid resale certificate, certifying that the items are being purchased for resale, and not for use or consumption by the buyer. A shadow tax, the use tax, is also imposed at the same rate as the sales tax. It is primarily intended to tax property that is acquired from sources outside of the state, in transactions not subject to sales tax, when such property is used or consumed within Oklahoma. Use tax may also apply to items purchased on an exempt basis, such as for resale, if such items end up being used or consumed, instead of being resold. Before making any taxable sales, you will need to register with the State Tax Commission on a business registration form, which can also serve as your registration for employer withholding and various state excise taxes, such as cigarette and beer taxes. There is a minimum $20 permit fee for sales tax registration, plus $10 for each additional location. Large taxpayers, who owed an average of $2,500 or more of total sales taxes per month in the preceding year, are required to make sales tax payments by EFT (electronic funds transfer) and participate in the Tax Commission's EFT and EDI (electronic data interchange) programs, in addition to reporting and paying tax on a semi-monthly basis, under State Tax Commission rules. Vendors are allowed to keep 2.25% of sales tax collected, up to $3,300 per month, to cover the costs of complying with the sales tax laws, if making tax payments by EFT, and if payments and returns are filed on a timely basis. Non-EFT filers generally are allowed only a 1.25% credit, but may be allowed to retain 2.25% if unable to participate in the EFT or EDI programs. For more information on Oklahoma sales and use tax registration and compliance, see contact information for the offices of the Oklahoma Tax Commission in Section VI(a). (e) Real and Personal Property Taxes. In Oklahoma, as in every other state, any business real estate you own will be subject to real property taxes. In general, there is little that you must do, unless you wish to challenge your assessed valuation, since the assessor will bill you for each year's property taxes as they come due. Oklahoma is notable for its low property taxes, typically less than 1% of the value of assessed property. In addition, the Oklahoma Constitution provides that the fair cash value of any parcel of locally assessed real property may not increase by more than 5% in any taxable year unless it is transferred, changed, or conveyed to another person. If such an event occurs, the property will then be assessed for that year based on its fair cash value. However, transfer of property to an LLC, where the property owners are the only owners of the LLC, is not considered a transfer that would trigger a reassessment. Oklahoma also imposes personal property taxes on tangible personal property. ("Personal property" is any kind of property that is not real estate.) Business personal property is assessed as of January 1 each year, at which time local assessors send out Form 920-R for businesses to complete, showing all personal property owned, less depreciation. The assessment ratio can vary dramatically from county to county, which makes for widely differing tax rates. Taxpayers must complete and return the personal property tax return no later than March 15th. While Oklahoma generally taxes tangible personal property, including business inventories, it does not impose a property tax on intangible personal property, such as stocks, bonds, promissory notes, and other such paper assets. (f) Other Business Taxes. Oklahoma imposes a number of excise and other taxes on businesses, some of which may affect you. These include:
(g) Trade Names. A trade name, also known as a fictitious or assumed name, is any name used in the course of business that does not include the actual legal names of all the owners of the business. Thus, if your business goes by any name other than your own real name, it is operating under a trade name. The same is true of a corporation, if it operates under a name other than its legal name. A trade name might also be one that suggests the existence of additional owners, by using such words as "company," "associates," or "group." In most states where you do business, it will be necessary to register a trade, fictitious, or assumed name, so that people who do business with you can find out who the actual owners of your business are. You may also want to register any such trade name, as a means of protecting against other companies usurping that particular trade name. In Oklahoma, any form of business which operates in the state under a trade name, including a corporation or any unincorporated business, is required to file a fictitious name statement with the secretary of state. There is a $25 filing fee. Unincorporated businesses should also file certified copies of the statement with the county clerk in the county where the principal place of business is located. V. EMPLOYER REQUIREMENTS IF YOU HAVE EMPLOYEES (a) Employer Registration and Withholding. If you have any employees, you will already be withholding federal income tax and FICA taxes from their wages. Since Oklahoma imposes a state income tax on the income of individuals, you will need to also withhold Oklahoma income tax from the wages of your employees. Before you begin to pay wages, you must register as an employer with the Oklahoma Tax Commission. The same Business Registration Application form also allows you to register for a state sales and use tax seller's permit, if you will be making any taxable sales. However, if you have employees, you must register separately for state unemployment tax, as discussed in Section V(b). For more information on Oklahoma income tax withholding and registration requirements for employers, see the contact information for the offices of State Tax Commission, listed in Section VI(a). WITHHOLDING ON PAYMENTS TO INDEPENDENT CONTRACTORS Effective November 1, 2007, a new Oklahoma law requires all businesses that make payments to independent contractors for their services to withhold state income tax at the maximum tax bracket rate, unless the contractor provides documentation that he or she is authorized to work in the United States. This is intended to be a means of collecting state income tax from illegal immigrant laborers who might not voluntarily report such income. Tax is to be withheld when payments exceed the minimum amount ($600 at present) that requires a federal Form 1099-MISC to be filed by a payor. (b) Unemployment and Other State Payroll Taxes. If your business employs one or more individuals in each of 20 different weeks during any calendar year or if your payroll amounts to $1,500 in any calendar quarter, you, as an employer will be required to pay state unemployment tax based on the amount of such wages paid. Employers subject to the Oklahoma unemployment tax are required to register with the Oklahoma Employment Security Commission (OESC) and will be assigned a contribution rate after an initial period. Register with the OESC by filing Form OES-1, Status Report. New employers are required to pay tax at a rate of 1.8% in 2007 on the first $13,200 of wages paid to each employee. Tax rates for experience-rated employers in 2007 can range from 0.2% to 5.8%. After you have had employees for a while, you will develop an unemployment tax experience rating. This rating is based on the number of employees you terminate who then claim unemployment benefits and the amount of such benefits paid to those former employees, under complex formulae. The state will inform you when they have assigned you an individual tax rate based on your firm's experience rating. That rate may be higher or, if you have had relatively few benefit claims charged to your account, lower than the standard new employer tax rate you initially were paying. All state unemployment taxes are imposed upon you as the employer, and, under Oklahoma law, cannot be charged to your employees or withheld from their wages. For more information on your Oklahoma unemployment tax obligations as an employer, see the contact information for the offices of the Oklahoma Department of Employment Security, listed in Section VI(a). (c) Workers' Compensation. In Oklahoma, virtually all businesses with one or more employees are required by law to have workers' compensation insurance, except those allowed to self-insure. Note, however, that a sole proprietor or a partner in a partnership is generally not considered an employee. Similarly, an employee of a corporation who owns 10% or more of the stock of the corporation or a member of a limited liability company who owns a 10% or greater interest in the LLC is not required to be covered for workers' compensation purposes. In addition, any licensed real estate broker or associate is considered not to be an employee, under the workers' compensation law. Since 1997, state law has also exempted small family-owned businesses from coverage where there are five or fewer employees, all related by blood or marriage to the employer. However, according to a 2007 opinion issued by the state Attorney General, this exemption applies only where the employer is a natural person (a sole proprietor) and not where the employer is a corporation, LLC, partnership, or other artificial legal entity. Workers' compensation provides wage loss and medical benefits to employees injured on the job and it protects you, as an employer, from legal action for damages for injuries or job-related illnesses suffered by your employees. In effect, it is a "no-fault" insurance system for work-related injuries or illnesses. Thus, CAUTION: As an employer, you must notify injured employees of their benefits and post a notice, Form 1A, in the workplace informing your employees of their workers' compensation coverage. The form may be obtained from either the Oklahoma Department of Labor or the Workers' Compensation Court. To obtain workers' compensation insurance coverage, contact your insurance carrier or Compsource Oklahoma (formerly the Oklahoma State Insurance Fund) at the address listed in Section VI(a). For more detailed information regarding your obligations as an employer under the Oklahoma workers' compensation laws, contact your insurance carrier or see the contact information for the offices of the Department of Labor, Workers Compensation Division, listed in Section VI(a). (d) State Wage and Hour Laws. Some employees of certain small firms not engaged in interstate commerce are not covered by the federal minimum wage and overtime laws. However, even if few or none of your employees are covered by the federal wage-hour laws, if, for example, because your firm does less than $500,000 a year in gross sales and the employees in question are not deemed to "...engage in (interstate) commerce...," they will still generally be subject to the Oklahoma wage-hour laws, which provide for a state minimum hourly wage that is the same as the federal minimum, $5.85 an hour, as of July 24, 2007. The Oklahoma minimum wage will automatically increase again when the federal minimum wage increases on July 24th of 2008 and 2009. Oklahoma's minimum wage law applies to companies that either have at least ten full time employees at any one location or that do at least $100,000 of business annually. For any other employers, the minimum wage is $2.00 an hour for any employee who is 18 or older. Note that, as under federal wage-hour laws, certain classes of executive, administrative, and professional employees, as well as outside salespersons, are exempted from the Oklahoma wage-hour rules. In addition, part-time employees employed less than 25 hours a week in a temporary position are not covered by the $5.85 an hour Oklahoma minimum wage (but will usually be covered under the federal minimum wage law). Oklahoma's labor law does not specifically require payment of time-and-a-half for overtime for employees who are not covered by the federal overtime pay requirements. Besides the federal wage-hour posters that you must display in the workplace, you must also display a state wage-hour poster, which you can obtain from the Oklahoma Department of Labor. There is a $25 per week penalty for each week you are required to display the poster but fail to do so. In addition to wage-hour laws, most businesses are subject to federal child labor laws, which put numerous restrictions on the working hours and kinds of work in which minors under the age of 18 may engage. Your business must also be cognizant of similar state child labor laws in Oklahoma. State law prohibits minors from working more than 40 hours a week and generally forbids employment of any child under the age of 14. Exceptions are made for children working for their parents or doing newspaper delivery. Employers must also be aware of compulsory school attendance laws, when school is in session, and of the requirement, before hiring children under age 16, of obtaining an employment and age certificate and proof of school attendance. Oklahoma's child labor laws generally prohibit children under the 16 from working in various occupations or settings except those permitted under federal law and regulations. In addition, 16- and 17-year-olds are prohibited from working in hazardous industries, including:
Children under age 16 may not work more than 3 hours on a school day or (generally) on a day preceding a school day, or more than 8 hours on a nonschool day. However, if the employer is not covered by the Federal Labor Standards Act (FLSA), such minors may work 8 hours on a nonschool day which precedes a school day. They may also not work more than 18 hours a week when school is in session, or 40 hours when it is not. Such children must also be allowed at least a one-hour cumulative rest period for each 8 consecutive hours worked and may not work more than 5 hours without at least a one-half hour cumulative rest period. State law also prohibits a child under age 16 from working before 7 a.m. or after 7 p.m. (9 p.m. from June 1 through Labor Day and, if the employer IS NOT COVERED by the FLSA, 9 p.m. on any day followed by a nonschool day). For more details on how the Oklahoma wage/hour and child labor laws differ from the federal, contact the Oklahoma Department of Labor, which administers these state laws, at the address listed for that agency in Section VI(a). (e) State Occupational Safety and Health Laws. Employers in Oklahoma must comply with state and federal job safety laws designed to prevent injuries resulting from unsafe or unhealthy conditions in the workplace. The Oklahoma Department of Labor, OSHA Division, enforces health and safety standards issued under the laws of Oklahoma. However, since Oklahoma has not adopted a federally-approved plan for enforcing health and safety laws in the state, the primary responsibility for enforcing health and safety standards in Oklahoma, as in a majority of other states, remains with the federal Occupational Safety and Health Administration (OSHA) agency. Note that while you may obtain a free safety consultation from federal OSHA experts, they must and will cite you for any violations they discover at your workplace. This is not the case with state safety inspections. If you request a safety consultation from the Oklahoma Department of Labor and they detect violations, they will not cite you if you promptly correct the unsafe conditions. UPDATE NOTE: For information on your job safety and health obligations as an employer, required posters, and possible on-site safety consultations, see the contact information for the Oklahoma City offices of the OSHA Division of the Oklahoma Department of Labor, listed in Section VI(a). (f) Other Miscellaneous State Labor Laws. Other Oklahoma labor laws you need to be aware of, as an employer, include the following: (1) Wage payments to employees. An employer is required to pay wages at least twice a month (once a month for exempt employees). When an employee quits or is fired, he or she must receive the final paycheck no later than the next regular payday or it must be mailed to the employee if requested, postmarked no later than the next regular payday after termination. Failure to make a timely payment to an employee whose employment has terminated will subject the employer to liability for damages payable to the former employee in the amount of 2% of the unpaid wages for each day that payment is late, up to 100% of the late payment. Fines of $500 may also be assessed by the Commissioner of Labor if an employer commits two or more violations of the wage payment requirements in a six-month period. (2) Right-to-work laws. About half the states have enacted "right-to-work" laws, which guarantee that no person may be denied employment for refusing to join a union or for not paying union dues, thus banning either "union shop" or "agency shop" agreements, or both. In a union shop, an employee not belonging to a union may be hired but then must join the union, usually within 30 days. In an agency shop, an employee need not join the union but, to remain employed, must pay union dues. Oklahoma has a right-to-work law, in its state constitution, which makes it illegal to deny employment to anyone on account of their membership or non-membership in a labor union and which also prohibits agency shop agreements in collective bargaining contracts. (3) State anti-discrimination laws. In addition to complying with federal anti-discrimination laws, employers must also be aware of and comply with state civil rights laws in Oklahoma. Oklahoma law prohibits discrimination in employment, based on race, color, religion, sex, national origin, age, or handicap unless such action is related to a bona fide occupational qualification reasonably necessary to the normal operation of the employer's business or enterprise. The state law applies to any employer who has fifteen or more employees for each working day in each of twenty (20) or more calendar weeks in the current or preceding calendar year, or a person who as a contractor or subcontractor is furnishing the material or performing work for the state or a governmental entity or agency of the state. For more information on the administration and enforcement of Oklahoma's civil rights laws, contact the Oklahoma Human Rights Commission, at the address listed in Section VI(a). (4) Reporting new hires. Under federal welfare reform laws, employers in all states are now required to report newly-hired (or rehired) employees to a designated state agency (the Oklahoma New Hire Reporting Center for Oklahoma employers) within 20 days after the date of hire. Reports should be filed on Form OES-112, which can be downloaded from the website of the Oklahoma Employment Security Commission. (See link to the OESC site at Section VI(c).) If filing electronically, reports must be filed twice a month (if needed), on dates not less than 12 days nor more than 16 days apart. See the new hire reporting contact information in Section VI(a). VI. STATE SOURCES OF HELP AND INFORMATION (a) Key State Agencies Contact Information. Oklahoma, as many states have done in recent years, has set up a "one-stop" center to help your new or existing businesses to obtain all necessary state licenses and permits from a single office and provide other assistance to small or startup businesses. The Oklahoma Department of Commerce is the state agency that assists small and startup businesses in Oklahoma. They publish a booklet entitled the "Guide to Doing Business in Oklahoma," which you may find useful if you will operate a business in the state of Oklahoma. To obtain business registration forms and information on starting or relocating your business in Oklahoma, contact: Oklahoma Department of Commerce Addresses and other contact information for other key state and federal government agencies in Oklahoma, mentioned in preceding sections of this book, are listed below for your convenience. SECRETARY OF STATE. Contact the office of the secretary of state for information on:
Oklahoma Secretary of State TAXES. Obtain state income, sales and use tax, and other miscellaneous business tax forms, instructions and information from the Oklahoma Tax Commission, which is the main tax collection agency in Oklahoma. Also register with this agency as an employer, for state income tax withholding purposes. Oklahoma Tax Commission STATE LABOR LAWS. Contact the following agency about your obligations as an employer under various state labor laws, including:
Oklahoma Department of Labor STATE LICENSES. For information on state licensing and business registration, contact the Oklahoma Tax Commission, at the address listed above for that agency. There is no general state license required to own and operate a business in Oklahoma, although there are many types of businesses that require some type of state licensing, such as restaurants and beauty salons. STATE SALES TAX. Obtain your sales and use tax license or permit and information on the Oklahoma sales and use tax law, from the Oklahoma Tax Commission, at the address listed above for that agency. EMPLOYER WITHHOLDING. Contact the State Tax Commission to register as an employer, for purposes of Oklahoma income tax withholding, at the address listed above for that agency. STATE UNEMPLOYMENT TAX. Contact the following state agency to determine whether you are an employer subject to payment of state unemployment taxes, and for registration as an employer if you are subject. Oklahoma Employment Security Commission NEW HIRE REPORTING. Report newly hired or rehired employees to the Oklahoma Employment Security Commission (OESC) at the following address: Oklahoma New Hire Reporting Center WORKERS' COMPENSATION INSURANCE. If you employ workers for whom you must supply workers' compensation coverage, contact the Oklahoma Department of Labor at the address listed above for that agency for further information, or, to obtain a quote from the state compensation insurance fund, contact Compsource Oklahoma (formerly the Oklahoma State Insurance Fund) at: Compsource Oklahoma STATE OSHA PROGRAM. There is no state OSHA program in Oklahoma. The federal government provides federal OSHA enforcement instead. For required posters and information on federal occupational safety and health laws that affect you as an employer in Oklahoma, contact: Oklahoma Department of Labor STATE ANTI-DISCRIMINATION LAWS. Contact the following state agency for more detailed information on Oklahoma civil rights laws that may apply to your business, and to obtain the fair employment notices you are required to post in the workplace: Oklahoma Human Rights Commission (b) Small Business Development Centers. A number of Small Business Development Centers (SBDCs) are located throughout Oklahoma to assist you. These centers, usually located on college campuses, provide a wealth of start-up information and sponsor frequent business-oriented seminars. Contact the lead office below for information, or for the location of other SBDCs nearer to you. Oklahoma SBDC (c) Internet Sites. For anyone with access to the Internet, there is a wealth of state and even local business information provided by state and local governments. All states now have a state government Web page, and most major Oklahoma state agencies also have sites on the Internet where you can obtain useful small business information on matters such as state taxes, financing sources, or the addresses and phone numbers (or e-mail addresses) of various state and federal agencies' offices in Oklahoma. Since new sites are appearing frequently, you might also want to search for other Oklahoma government Web sites by using one of the popular Internet search engines, such as Google, AltaVista or Yahoo. To start your Internet search for Oklahoma government information, you may want to begin with the following Internet sites: State of Oklahoma home page: Oklahoma Secretary of State web page (filing information and forms for incorporation, LLCs, limited partnerships, and limited liability partnerships, and registration of assumed business names): Oklahoma Department of Commerce web page (Business Development Division, financing sources): State Tax Commission web page (tax information and tax forms available for downloading): Oklahoma Department of Labor (wage-hour laws, workers' compensation, OSHA consultations, and other state labor law enforcement): Oklahoma Employment Security Commission (state unemployment tax): (d) Financing Sources. For information and help on locating financing for your small business, contact the nearest U.S. Small Business Administration office in Oklahoma, or contact the Business Development Division of the Oklahoma Department of Commerce for referrals to state sources of financing, at the address listed in Section VI(a) for the Department of Commerce. The address of the main SBA Office in Oklahoma is: U.S. Small Business Administration |
Copyright © 2007 Michael D. Jenkins
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