Over the last several years, the limited liability company (LLC) has become the entity of choice for the majority of new business owners. In Iowa, there are approximately twice as many filings for the LLC each year than there are for corporations. People tend to like the flexibility afforded by the LLC. With an LLC, you receive the limited liability protection of a corporation and plus the flexibility of being taxed as partnership, corporation or sole proprietorship depending on your needs. Further, if you are forming a sole member LLC, you can choose to become a "disregarded entity" which means you are not required to file a separate tax return for your business which can save you accounting costs each year.
The owners of LLCs are called members and ownership is evidenced by "membership units". In Iowa, the filing and ongoing fees are reasonable compared to many other states. Here is an outline of the steps you need to follow in order to form an LLC in Iowa:
1. Find out the availability of your proposed business /LLC name. You can do a quick search on the Iowa Secretary of State Web site to see whether your name is available. If you enter the name of your proposed business and it doesn’t appear, chances are very likely you’ll be able to register that name in Iowa. If the name is available you may want to reserve the name through the Secretary of State but you are not required to do so before forming your business entity. You should consider whether any company outside Iowa has your business name. You can conduct a free search on the U.S Patent and Trademark Web site or use a paid service to research trademarks nationwide. It is also a good idea to check whether someone has your proposed Internet domain name. An Iowa intellectual property attorney could also be very helpful in this process.
2. Pick a Place to Form Your Limited Liability Company (LLC). I am sometimes asked whether an Iowa company should form an LLC in another state such as Delaware or Nevada. In general, an Iowa small business is probably better off incorporating or forming an LLC here in Iowa. The filing fees are low ($50.00) and the ongoing fees for registering the business in Iowa are among the lowest in the country. (Only $30.00 every two years if you file your biennial report online).
3. Choose the Members. If you are forming an LLC who will be the members in the company? These are the owners of the company. Determine how much capital you will need. Do you have enough capital or access to capital in order to start the business on your own? If not you may need to consider other investors.
In many cases the members of the small business are also the managers. You may consider whether you want or need an outside manager? There may be good reasons to have outside manager but think this over carefully before you elect to do so. Electing to have an outside manager may limit your control over the business.
3. Create your Certificate of Organization. The certificate of organization for an LLC act as a charter to start your new business in Iowa. The filing fee with the Secretary of State is currently $50.00. It is generally a good idea to have an Iowa business lawyer prepare your certificate of organization and associated company documents. The LLC laws in Iowa changed in 2009 and frankly many document filing companies on the Internet may not be fully aware of all the changes in the Iowa law.
4. Prepare your LLC operating agreement. The operating agreement of the LLC set out the operating standards and procedures the business company will follow.
5.Create meeting minutes, resolutions and agreements. It is a good idea to document the initial meeting minutes of the company including the meeting of the members. At this time, you will elect the officers of the company including the president, vice-president, secretary and treasurer. You may also issue membership certificates at this stage. If you have multiple members you will also likely need a buy-sell agreement.
6. Obtain your employer identification number (EIN). Your LLC will need to obtain an employer identification number from the IRS. This can be done through a convenient online application process.
7. Elect your tax status. There are several different options for how your LLC could be taxed. Make sure to talk with both your accountant and lawyer about which form of business entity is the most advantageous for your situation.
8. Open a bank account. You will typically need the EIN and a banking resolution in order to do this.
9. Obtain any licenses and permits. You will need to check the federal, state and local regulations to determine whether you need and licenses or permits to operate your business.
10. Follow the corporate formalities of running a business. In Iowa, this includes registering your LLC by filing a biennial report every two years with the Secretary of State’s office. You may also draft company minutes at least on an annual basis but with an LLC in Iowa you are not required to do so. It’s best to sign all documentation using your title as a company officer or designating your signature as "member" so that others will know you are operating with LLC rather than as a sole proprietorship.
An Iowa LLC is for business owners that want a separate business entity for limited liability protection, but with fewer formalities than a corporation. You can also choose between pass-through or corporate taxation, as well as the ability to allocate profits and losses in differing proportions than ownership interests.
For more information on forming an Iowa LLC, please click the following link for my Small Business Formation Package.