By Cally Reed, UNI Center for Business Growth and Innovation
Choosing a business structure can be a confusing process for a first time entrepreneur. As I am a part of the Business Concierge team, and I love to help bring clarity to situations, it’s my pleasure to help answer Iowa business questions whenever possible. Since I do not provide legal advice to clients, I can’t tell you what type is right for you; but I will explain some of the most common business structures many first time entrepreneurs chose, but always consult your CPA or lawyer for business specific advice.
To start this process, and to get an idea of where in the startup process a client is, I usually ask my clients, "How would you like to structure your business?" If the client responds with a clear cut answer, the process is straight forward from there. But if no answer is given, I start to list the common legal structures a business can take in the state of Iowa: Sole Proprietorship, L.L.C. or Corporation.
The most basic of the structures is the Sole Proprietorship or Doing Business As (DBA) for first time entrepreneurs. For simplicity's sake, let's start there and build up to the rest!
Sole Proprietorship (Sole Prop.)
According to Nolo.com compared to an LLC, a sole proprietorship is less complex and less expensive and demands less paperwork to start because in Iowa, because you don’t have to file with the state government to begin. As a sole proprietorship you get the advantages of cheap and simple registration with county recorder (about $7 to register a trade name or “Doing Business As,” (DBA)). Easier still, if your business name is your given name, you do not need to register your business at all.
And if you are looking to keep your income record keeping simple a clear advantage to operating as a sole proprietor is that you don’t have to worry about intermingling your business funds with your personal funds because in the eyes of the law they’re regarded as one and the same. That fact is a double edged sword, because as a sole proprietor or if you do business under a DBA, The Sole Proprietor assumes all liability and risk, and all business revenue passes through your personal income for tax purposes.
If you use a business name that is different from your legal name, Iowa requires you to file a trade name report. This is a mandatory requirement in Iowa. To file your trade name, you have to fill out the trade name report available from the county recorder’s office in the county where your business is located. If your business has employees, you are required to obtain a Federal Employee Identification number. All business with employees are required to report wages to the IRS using their EIN.
Limited Liability Company (LLC)
Benefits of the LLC -- as silly as this may sound, one of the main advantages of an LLC over a sole prop is limited liability. Unlike a sole proprietorship, in which the person who owns the company is fully responsible for all debts and liabilities of the business, in an LLC the company itself is responsible for all debts and liabilities.
According to Nolo.com’s article Corporations vs. LLCs there may be tax benefits to having an LLC vs. a corporation, depending on your situation, “LLC owners avoid double taxation because the business's tax liabilities are passed through to them; the LLC itself does not pay a tax on its income.”
Disadvantages of the LLC - compared to the humble sole proprietorship - they are more costly due to a higher filing fee, there is responsibility to carry out all Iowa laws that govern LLCs, you must have a registered agent who is a resident of Iowa, reports must filed with the Secretary of State on an annual basis.
Compared to the LLC--where ownership in the company is not typically free and transferable--corporations offer an easier shareholder process by which interest in the company can be bought and sold at market.
Something unique about corporations to consider is that they are typically owned (or at least led) by a board of directors who do not oversee daily operations but instead make major decisions and handle corporate affairs. Instead, they elect officers who manage daily business affairs.
A possible disadvantage is that Corporations seem to have more paperwork and more time investment overall to start up than any of the other business structures mentioned in this article.
Still wondering what business structure is right for your startup? Read more in this short and snappy article about the advantages and disadvantages of sole proprietorships, llcs, and corporations, and partnerships on the Basics of Business Entities IASourcelink page to help you make this important business decision.
Additional Iowa Business Structure Resources:
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.
https://www.sba.gov/business-guide/launch/choose-business-structure-types-chart You should choose a business structure that gives you the right balance of legal protections and benefits.
Disclaimer: The information in this site is for general purposes, to help you understand the basics. It's not intended to be tax or legal advice. Consult your CPA or attorney to discuss your specific business questions.