In this article, we discuss the different types of corporations available to business owners in Iowa and how to choose which one is right for your business. We will answer the questions:
- What are the Benefits of Incorporating?
- What is a C-Corporation?
- What is an S-corporation?
- What is a Limited Liability Company?
- What is a Sole Proprietorship?
- What Partnership Options are Available in Iowa?
- How Do I Choose the Right Business Entity?
What are the Benefits of Incorporating?
There are a number of benefits a business owner can take advantage of by incorporating her business, but the two primary benefits are:
- Protection from Personal Liability: Probably the biggest reason to incorporate your business is to protect yourself from liability. Shareholders of a corporation and members of an LLC ordinarily are not liable for the debts of the corporation. This is important when the company invariable gets sued or runs into financial trouble. Those suing the company can only recover assets that are owned by the corporation or LLC, leaving the assets of the individual protected.
- Tax Benefits: Incorporating allows certain tax benefits to shareholders and members of an LLC, including income tax benefits and self-employment tax benefits.
What is a C-Corporation?
C-Corporations are the most common choice for large companies. They offer liability protection and other incentives, but the tax benefits are not as great as S-Corporations. C-Corporations are essentially taxed twice: the corporate profits are taxed at the corporate level, and then taxed a second time when the company pays individual distributions to shareholders. One of the primary benefits of C-Corporations and the reason it is used by large companies like Bank of America is that it allows an unlimited number of shareholders.
What is an S-Corporation?
S-Corporations provide similar liability protection to C-Corporation but are not subject to the double tax structure of C-Corporations. Taxes pass-through directly to the individual shareholders’ tax returns. What this means is that any profits and losses are passed on to the shareholders and recorded on their personal tax forms. S-Corporations also have beneficial tax treatment for self-employment tax. Both S- and C-Corporations must maintain a regular schedule of meetings for shareholders and directors and follow other corporate formalities in order to maintain their business entity status.
What is a Limited Liability Company?
Commonly referred to as an LLC, a limited liability company provides some of the limited liability benefits of an S-Corporation with the tax benefits of a partnership. LLCs are a great option for smaller companies who want to be taxed as a partnership or as an S-Corporation but don’t want to keep the rigid business formalities associated with C-Corps and S-Corps. LLCs ultimately allow for a smaller less formal decision making and business process where all the members are actively involved.
What is Sole-Proprietorship?
Most businesses in Iowa are set up as Sole-Proprietorships. Sole-Proprietorships are owned by one person who is responsible for the day-to-day business operations, owns all the assets and profits of the business, and assumes complete responsibility for all of the business’ liability and debts. Essentially, the company and individual are one and the same under a Sole-Proprietorship.
What Partnership Options Are Available In Iowa?
In Partnerships, two or more people share ownership of the business. Partnerships are easier and cheaper to start, but it’s still important to have a clear business plan and legal agreement between the partners that explains how decisions will be made, ownership percentages, how to resolve disputes, etc. There are two types of partnerships available in Iowa:
- General Partnership. In General partnerships, all partners are responsible for running the business, profit and loss, and share liability, all according to the partnership agreement.
- Limited Partnership and Limited Liability Partnership. These types of partnerships involve two different types of partners: investors and working partners. The investors usually have no direct management or involvement in the day to day operations of the business and their liability is limited to the amount of their investment.
Partnerships are typically simple to create and it can be easier to raise funds if there are multiple partners. There are some tax advantages to partnerships as the profits will apply directly to the partner’s tax returns. The biggest issue with partnerships is often how to resolve disputes and disagreements between the partners.
How Do I Choose The Right Business Entity?
When choosing the right business entity there are a few questions to consider:
- How much liability are you and any other principals are comfortable with?
- How can you make the tax advantages of each business type work most in your favor and possibly avoid multiple layers of taxation?
- How will you raise capital, funds, and attract potential investors?
- Do you want to be able to offer ownership to future employees?
- What type of business entity is appropriate for the amount of profit the business will generate?
- Where do you perceive the company will go over the next 1, 5, and 10 years?
Picking the right business entity is important but it shouldn’t be taking up all your bandwidth. The good news is that you’re not locked into the business entity you choose when forming your business. The structure of most businesses will change over time. The business will need more employees, take on more liability, possibly require more funding, etc. Certain tax advantages will make more sense at different phases in the company’s lifetime. If you’re really not sure about where to start, don’t hesitate to call our office and speak with one of our qualified business attorneys. They can help guide you through the process of choosing the right business entity for your new or existing business.
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