This is a part of an on-going series of posts which will form the Legal Guide for Starting a Business in Iowa.
You are considering forming an Iowa small business. What type of business structure should you choose? In Iowa, your choices generally are a sole proprietorship, a partnership, S corporation, C corporation, or a limited liability company. There are others but these are the main entities to research.
Some of the factors to consider in choosing a business structure are:
1) Personal liability protection;
2) How profits are taxed;
3) Ability to take advantage of fringe benefits;
4) Ease in raising capital.
A sole proprietorship is the easiest to set up (you generally do not need to take legal action) but you have unlimited personal liability. In today’s sue happy society it is probably a good idea to consider a form of business that provides you with personal liability protection like a corporation or LLC.
Similarly, a partnership is also easy to set up and involves two or more people. A partnership requires no formal documentation but a partnership agreement is preferred. Like sole proprietorships, you and your partners have unlimited liability. With the ease of setting up and operating a limited liability company, a partnership is usually not recommended given today’s litigious society.
Traditionally, most small business owners selected the S corporation as their form of business. The S corporation is often a good choice because it provides you the limited liability you need but you avoid double taxation because all business profits are taxed to you as an individual.
The limited liability company has exploded in popularity over the past decade and also provides limited liability and avoidance of double taxation. An LLC may offer flexibility not available with corporations when it comes to ongoing requirements, its ownership and how the owners are paid.
The C corporation has traditionally been used for larger businesses but accountants may recommend this entity because the owners can take advantage of certain fringe benefits. Also if you need outside capital, a C corporation may make it easier to attract investors such as venture capitalists.
So which business structure should you choose? Before choosing a business structure it is wise to talk with an accountant. The accountant can review your financial situation with you and advise you on the best strategy for your business. In my view the choice of a business structure usually boils down to tax treatment. So talk to your accountant first and then go to the business lawyer to set up the business entity.
Our next posts in the Legal Guide to Starting a Business in Iowa series will examine the S corporation, limited liability companies and C corporations in more detail.