One of the first and most important decisions to make when starting your business is choosing a legal structure. The most common forms are sole proprietorship, partnership, corporation, and limited liability corporation. The structure you choose depends on several factors, but some considerations are how the business will be taxed, record keeping needs, and importantly - liability (how much risk are you personally willing to take). You should visit with an accountant or lawyer for advice and assistance when choosing your structure. Here’s a brief overview of the basic forms.
The majority of businesses in Iowa are sole proprietorships, owned by one person who is responsible for day-to-day business operations. Sole proprietorships own all the assets of the business and the profits generated by it. However, they also assume complete responsibility for any of its liabilities or debts. Basically, you and the company are one and the same. To register as a sole proprietor, contact your local county recorder.
- This is the easiest and least expensive form of ownership to start, as well as to dissolve.
- Income and expense of the business are included on your personal tax return.
- You have control over operations.
- As the owner, you are personally and legally responsible for all debts and liabilities, so your business and personal assets are at risk.
- Your income may not be tax deductible since as owner, you are not considered an employee.
- The business may have a limited life, as it could cease with the death of the owner.
In a Partnership, two or more people share ownership of a single business. Partnerships can be easily created, but it is important that a legal agreement be set up to clearly identify how decisions will be made, ownership percentages, how disputes will be resolved, etc. There are two types of partnerships: general and limited.
In a general partnership, all partners are responsible for management and liability of the business, as well as profit and loss, as determined by a partnership agreement. To register as a general partnership, contact your local county recorder
Limited Partnership and Limited Liability Partnership
In a limited partnership, you will have both general and ‘limited’ partners. A limited partner typically is an investor in the business with limited or no direct role in the management of the business, and their liability is limited to the amount of the investment in the business. To register your business as a limited partnership, contact the Iowa Secretary of State
A partnership can also be structured as a ‘limited liability partnership’ where the partners are not liable for the negligence of partners, but are responsible for their own actions. This type of partnership is more complex than a general partnership.
- Partnerships are relatively easy to establish.
- May be easier to obtain capital or raise funds, as there are multiple partners
- There may be tax advantages, as profits and losses flow directly through to the partners’ personal tax return.
- General partners are jointly and individually liable for the actions of the other partners.
- Profits must be shared with others.
- Since decisions are shared, disagreements can occur.
- The partnership may have a limited life, as it may end upon the withdrawal or death of a partner.
“C” corporations are completely independent legal entities, separate from the owners. Owners of the company are shareholders, and are not liable for any debts or obligations of the corporation, except to the level of their shares. Shareholders elect a board of directors and this board is responsible for major policy and decisions.
An S corporation is basically the same as a C corporation, with the exception that its structure has met certain requirements which allows it to have the liability limitations of a C corporation, but it is taxed as if it were a partnership. This allows any profits or losses to be passed on to shareholders and are reported on their personal tax forms.
To register your business as a corporation, contact the Iowa Secretary of State.
- Shareholders have limited liability for the corporation’s debts or judgments against the corporation.
- Generally, shareholders can only be held accountable for their investment in stock of the company. (Note however, that officers can be held personally liable for their actions, such as the failure to withhold and pay employment taxes.)
- Corporations can raise additional funds through the sale of stock.
- Can elect S Corporation status if certain requirements are met. This election enables company to be taxed similar to a partnership.
- The corporation has a life of its own and does not dissolve when ownership changes.
- The process of incorporation requires more time and money than other forms of organization.
- Corporations are monitored by federal, state and some local agencies, and as a result may have more paperwork to comply with regulations.
- Incorporating may result in higher overall taxes. Dividends paid to shareholders are not deductible from business income; thus this income can be taxed twice.
Limited Liability Company (LLC):
A limited liability company (LLC) is a new form of business structure that provides some of the limited liability benefits of a corporation, with some of the tax benefits of a partnership. Basically they can provides owners with less liability exposure (so less risk), without having to pay double taxes. Limited liability companies are registered through the office of the Iowa Secretary of State
- Owners can maintain majority control of the business with limited liability for debts and other business obligations.
- Owners can choose whether the LLC is taxed as a corporation or a partnership.
- There are still some jurisdictions in the country that do not recognize a limited liability company as an accepted business structure.
For more information on the different business structures, the Iowa State Bar Association
provides an overview of the basics of common business entities used in structuring a business. Again, working with a qualified business professional can help you make the right decision for your new organization. You can find a qualified business attorney via the Iowa State Bar Association's Find-a-Lawyer tool