Starting a business in Iowa can be both an exciting and stressful time. One major consideration that needs to be made prior to starting your business is what business structure you would like to use. There are two main benefits to incorporating a business. The first is protection from personal liability. The number one reason why most people incorporate their business is that business entities shield the owners from liability. Shareholders of a corporation or members of an LLC are not liable for the entity. If the company gets sued or owes money, those pursuing the company can only recover assets owned by the company, leaving assets of the owners shielded. The second benefit of incorporating a business are the tax implications. Incorporating allows many state and federal tax benefits to shareholders and members of a corporation or LLC.
The State of Iowa recognizes a number of different business structures. The business structures recognized in Iowa are as follows:
- Sole Proprietorships
- General Partnerships (Iowa Code Ch. 486A)
- Limited Partnerships (Iowa Code Ch. 488)
- Limited Liability Partnerships (Iowa Code Ch. 486A)
- For Profit Corporation (Iowa Code Ch. 490)
- Nonprofit Corporation (Iowa Code Ch. 504)
- Professional Corporation (Iowa Code Ch. 496C)
- Limited Liability Company (Iowa Code Ch. 489)
The following will be an overview of these business structures, outlining some benefits and drawbacks for each to help you decide what structure is right for you.
Sole Proprietorships in Iowa
In Iowa, sole proprietorships are more or less the “basis” format for a business. Sole proprietorships aren’t a legal business entity. It is considered one and the same from the person operating the entity. Because there is no difference between the individual and the business, sole proprietors do not need to file business tax returns. The business’s profits or loses will be on their personal tax returns. As for liability, because there is no difference between you and the business, you are liable for anything the business is, whether it be a contract you make on behalf of the business or any litigation against the business.
To start a sole proprietorship, it’s as easy as starting to work. Because it is not a separate entity, you typically do not need to acquire a federal tax ID number (EIN). Should you want to use a name other than your own name, you can file for a DBA. This will allow you to use your business name to hold a bank account and enter into contracts under the name with others. This is fairly simple process, involving checking the name you’d like to use with the Iowa Secretary of State then submitting paperwork with the name you desire to use.
Finally, there is the issue of business licensing. While many tax, regulatory or occupational licensing may or may not apply to your sole proprietorship, you do want to check to confirm. Check with your state, county and city to see if you need to acquire any business licensing, specifically if your business is a restaurant or rental property.
General Partnerships in Iowa
If two people want to go into business with each other, they may want to form a partnership. Partnerships can be created simply, through written agreements or informally through handshake agreements. The agreement should at least cover the primary terms of the relationship. A general partnership typically should be registered with the county recorder in the county you are located in.
With a partnership, the business becomes a separate entity from the two or more partners. In a general partnership, both partners will be liable for company debts without limitation to their investment in the company. General partners have the right to operate and manage the business.
Limited Partnerships and Limited Liability Partnerships
In a limited partnership, you will have both general and limited partners. General partners remain the same. They hold the right to manage and operate the business. They also are liable parties to the partnership. A limited partner has limited rights in the partnership, often having limited to no direct role in the business and financial liability limited to the amount they have invested into the business. Limited partners are often investors with the general partner(s) being the ones running the partnership’s business.
A partnership can also be structured as a limited liability partnership. The key difference here is that the partners are not liable for the negligence of other partners, but remain liable for their own actions.
Limited Liability Companies (LLC) and Professional Limited Liability Companies (PLLC)
The Limited Liability Company or LLC is the most popular business designation used by businesses. This is due to the relative simplicity of the entity, as they are governed fairly informally, have flexibility in how to split financial interests and distributions, and are easier to set up compared to Corporations. This option is perfect for small and local businesses who do not wish to follow a corporate structure, but wish simply to have liability protection and some guidelines for how they do business.
In order to create an LLC, you first need to file a Certificate of Organization with the Secretary of State. This Certificate of Organization is governed by Iowa Code Chapter 489, Section 201. In short, you will need to include:
- The name of the limited liability company;
- The street address of the initial registered office;
- The name of the registered agent for service of process;
- Designation as to whether the LLC is Member-managed or Manager-managed; and
- Duration (can be open-ended).
This document needs to be submitted online, through the Iowa Secretary of State’s website, or in person at the Iowa Secretary of State’s office, and a filing fee of $50 needs to be paid. Approval of your LLC filing takes up to 3-4 weeks.
In short, the Operating Agreement is the set of rules or governance to which your business operates. Although not required by law, you will next want an Operating Agreement and have it approved by the members of your LLC. If you should decide not to create your own Operating Agreement, Iowa Code 489 provides standardized governance for LLC operation. Additionally, should your Operating Agreement not cover a certain topic, Iowa Code 489 will supplement. The Operating Agreement typically covers the following main issues:
- Operation and management systems for the LLC;
- The manner in which profits and losses are divided/shared;
- Procedures for addition or departure of members of the LLC;
- The value or valuation technique to use for the LLC;
- Ownership interests for LLC members, including voting rights and profit sharing.
Owners of an LLC can choose to have members (the owners) or designated managers manage the LLC. For a member-managed LLC, members participate together in the decision making processes of the LLC. Each member is an agent, which gives them the power and authority to make decisions on behalf of the company as well as vote in business decisions. For a manager-managed LLC, authority is given to managers to act as agents of the LLC. Members may be managers, but do not have to be. The key is that the members elect or appoint managers, then set out the managers powers and authority to act on behalf of the LLC. In either situation, the powers and authority of managers should be outlined by the Operating Agreement. Should you want to grant authority or restrict the powers of these managers, you may do so in the Operating Agreement.
Iowa Code 489 Article 11 allows the creation of professional limited liability companies. These companies are designed for certain licensed professions including architecture, accounting, architecture, medicine, veterinary medicine, real estate, and law among others who require licensing to practice. The members of these companies must practice within the practice area specified by the corporation.
Series LLC’s (New for 2020/2021)
The series LLC is a relatively new concept in the business world. In short, a series LLC is a collection of LLCs that are grouped together under one parent LLC. Here, a business can keep various parts of their company separated with their own LLCs, allowing them to isolate the liability of those various business segments from each other and the main company.
Filings for a series LLC are nearly identical to a regular LLC. You will have to identify the individual series LLCs under the parent LLC along with what their line of business is. Additionally, filing fees typically are more expensive than a single LLC.
This business structure can be very helpful for conglomerates as well as landlords. Each business unit or property can be treated as its own business all the while being wholly owned by the parent company. Any liabilities of the individual business unit or property will stay within the property, protecting the assets of both the parent company as well as the other individual series companies.
Corporations (S and C designations)
Corporations are another common entity option for new businesses. The main benefit to Corporations over LLC’s is their familiarity with investors, bankers and other business advisors. Specifically, if your business hopes to obtain outside financing at some point from either a venture capital or private equity fund, or other outside investors, a Corporation is likely the right option for you. However, if such benefits aren’t of interest to you, Corporations are generally more complex and aren’t necessarily worth the extra work compared to a simpler to form and operate LLC.
In order to create a Corporation, you first need to file Articles of Incorporation with the Secretary of State. The Articles of Incorporation are governed by Iowa Code Chapter 490, Section 202. In your Articles, you will need to include the following:
- A corporate name which must be different from other names on file and must end with the word “Incorporated,” “Company,” “Corporation,” Limited,” or an abbreviation of those words.
- The purpose of the corporation
- The number of shares the corporation is authorized to issue
- The street address of the corporation’s initial registered office
- The name of its initial registered agent at that office
- The name and address of each incorporator.
In addition, Iowa Code 490.202 also allows the Articles to include various other information, such as the names and addresses of the initial directors, the purpose of the corporation, par value of the original stock, and financial compensation to be paid to directors. Once completed, this document will need to be submitted online, through the Iowa Secretary of State’s website, or in person at the Iowa Secretary of State’s office. A filing fee of $50 will also need to be paid.
Similar to LLC’s Operating Agreements, Corporations have Bylaws, which describe the corporation’s structure, rules, and procedures for operation. These Bylaws are typically kept at the corporation’s principal place of business. They are not required by law, nor do they need to be filed with the Secretary of State. Should your Corporation not have Bylaws, Iowa Code Chapter 490 provides guidelines for business operation typically found in the Bylaws. The following subjects are typically covered in the Bylaws:
- Corporate Authority
- Offices
- Meetings of Shareholders
- Directors rights and authority
- Officers rights and authority
- Capital Stock issuance/sale
- Dividend distributions
- Corporate Record Keeping
- Amendments to the bylaws
Bylaws are typically more complicated than Operating Agreements due to the increased complexity of Corporations over LLC’s. Though it is possible to draft you own Bylaws, it is highly recommended to seek legal help to draft them.
Corporations also differ from LLCs in their management structure. Shareholders of the Corporation nominate a board of directors. The board of directors’ job is to oversee corporate affairs and to handle major decisions such as major purchases or the sale of most or all of the business’s assets. The board does not handle daily operations. Instead, the directors elect officers (CEO, CFO, President, Vice President, etc.) to manage the day-to-day operations of the business.
Typical corporations are referred to as “C” corporations. The owners in the company (typically stockholders) are only liable for corporate debts/obligations to the extent of their investments in the company. Additionally, C corporations are taxed as an entity separate from its owners. This can be seen as a disadvantage as the income passing from the corporations to the shareholders will be taxed both at the corporate level then at the shareholder level. This is known as double taxation.
If certain specific requirements are met, corporations may be designated under “subchapter S” of the federal tax code. These “S” corporations enjoy the liability limitations and structure of a C corporation but is taxed like a partnership. The shareholders /owners can pass through profits and losses similar to an LLC or partnership. To become an S corporation requires additional filings with the Internal Revenue Service within a specified time period after the corporation's creation. Additional limitations are also required including having one class of stock, no corporate shareholders and no more than 75 total shareholders. To learn more about the differences read our article, The Difference Between C Corporations and S Corporations.
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