Choosing A Business Organization

A Guide To Iowa's Most Commonly Used Business Organizations

Introduction

Starting, owning, and operating your own business can be a complicated process. The process is filled
with decisions for everything from choosing what types and shares of stock to issue for a corporation to
choosing a name for the business. All of these decisions must be made in the backdrop of a multitude of
legal and practical considerations.

One of the first decisions an entrepreneur must make is to determine the legal structure i.e. sole
proprietorship, partnership, corporation, etc. that is right for the business objectives of the company and
of all those involved. This decision can be complex because business law incorporates aspects of
statutory law, case law, procedural rules, and common law concepts. On top of all the legal aspects,
there are also many practical considerations to examine. For instance, structural concerns about
management and control of the business should play an important role in your decision. There are also
different filing and regulatory obligations that accompany almost every form of business organization.

To help you sort through the process of deciding which business organization is right for you, the Iowa
Secretary of State's Office has assembled A Guide to Iowa's Most Commonly Used Business
Organizations. The Guide reviews some of the more common business organizations used in the state
of Iowa. Those covered, however, are not the only business organizations available to individuals
wanting to transact business in this state.

The Guide provides a general description of many forms of business organizations and identifies some
of their advantages and disadvantages. A summary of the procedural aspects associated with each
organization focuses on the statutory requirements for forming, dissolving, merging, registering a
foreign entity, and the fees associated with filing certain documents. There is also a key attributes
section which provides information on how the organization is created, liability for the owners,
managing the organization, and reporting requirements, to name a few. There are also links to resources
which provide useful information on business taxes and licensing regulations.

Disclaimer

This information is provided to give you a basic understanding of the various forms of business
available. It is not a substitute for professional legal advice. It is encouraged that you contact an attorney
to discuss these options further.

Forms of Business Ownership

1. Sole Proprietorship
• Easy and inexpensive to create and operate.
• Decision-making is entirely in hands of the owner.
• Hard to raise funds. Sources of funds limited to the owner’s personal funds and the funds
that outsiders are willing to provide.
• Register business name with your county recorder for $6.
• You may be co-sole proprietor with a spouse. Co-sole proprietors can split profits and
file separate tax returns or file a joint Schedule C or Schedule SE Form 1040.

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 • Use your Social Security number for business operations if you have no employees. If
you do have employees, file a SS4 for a Federal Employer Identification Number (FEIN).
Businesses that sell alcohol, tobacco, or firearms must also file for a FEIN.
• A sole proprietorship is taxed twice for Social Security (once as an employer and once as
an employee).
• Unlimited personal liability if something bad would happen. You could lose your car,
home, etc. if someone sued your business. Creditors can take personal and business
assets
• You have no job security and are completely responsible for the success for your
business. You don’t have worker’s compensation or unemployment insurance.
• The business terminates with the death, disability, or retirement of the owner.

2. General Partnership (Iowa Code chapter 486A)

• Easy and inexpensive to create and operate. No filings with the Secretary of State are
required for formation. No fees associated with creating a general partnership.
• Owners/Partners report their share of profit or loss on their personal tax returns Schedule
SE or Schedule E Form 1040. The partnership reports it’s income on Form 1065
• Owners/Partners are personally liable for business debts. Profits and losses are divided
any way the partners choose. Assets of any partners can be used to cover business
liabilities regardless who incurred the liabilities. Liability is limitless.
• Can raise cash without involving outside investors in management of business.
• File for FEIN (see above) even if not going to hire employees.

3. Limited Partnership (Iowa Code chapter 487) Domestic or Foreign

• Limited partners have limited personal liability for business debts as long as they don’t
participate in management.
• File a Certificate of Limited Partnership with the Secretary of State and copies on
counties where the partnership has places of business or real estate.
• More expensive to create than a general partnership.
• Suitable for businesses that mainly invest in real estate.

4. Limited Liability Company (LLC) (Iowa Code chapter 490A) Domestic or Foreign
• More protection than sole proprietorships but more expensive to create.
• Owners have limited personal liability for business debts even if they participate in
management.
• Profits and losses can be allocated differently than ownership interests.
• The IRS allows the LLC to be taxed as a partnership or as a corporation.
• Check with your attorney and accountant to determine if an LLC is right for you.
• Register your trade name with the Secretary of State for $10-$15 to protect business
name and prevent a business name change in the future.

5. Limited Liability Partnership (Iowa Code chapter 486A) Domestic or Foreign

• Mostly of interest to partners in professions such as law, medicine, and accounting.
• Owners/Partners are not personally liable for the malpractice of other partners.
• Owners report their share of profit or loss on their personal tax return.
• Unlike and LLC or PLLC, owners remain personally liable for many types of obligations
owed to business creditors, lenders, and landlords.
• Availability of this form limited to selected list of professions.
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6. Regular Corporation
• Separate legal and taxable entities. Owners have limited personal liability for business
debts.
• Fringe benefits can be deducted as business expenses.
• Owners can split corporate profits among the owners and the corporation, thus paying
lower overall tax rate.
• Adopt Bylaws and observe all necessary formalities.
• File income tax on Form 1120 and report any property that was transferred tax free to the
corporation.
• More expensive to create than a partnership or sole proprietorship.
• Must file for a FEIN (see above) even if not going to have any employees. Be aware of
the differences between employees and independent contractors. Find out by checking
with the Iowa Department of Revenue and Finance or the US Treasury Department’s IRS
Division.
• File Articles of Incorporation. You can prepare these documents yourself but it is
recommended to use an attorney. It could cost between $500 and $1000 but it could
alleviate serious future problems. If you choose to file the papers yourself you may do so
on the Secretary of State’s website.
• Must obtain federal tax deposit coupons in time to make estimated tax payments.

7. S Corporation
• Separate legal and taxable entities. Owners have limited personal liability for business
debts.
• Owners report their share of corporate profits or losses on their personal tax returns.
• File income tax return on Form 1120-S.
• Owners can use corporate loss to offset income from other sources.
• More expensive to create than a partnership or sole proprietorship.
• Takes more paperwork than a LLC, which offers similar advantages.
• Income allocated to owners according to ownership interests.
• Fringe benefits limited for owners who own more than 2% of shares.
• File Articles of Incorporation and file for a FEIN as listed above for a Regular
Corporation.

8. Professional Corporation (Iowa Code chapter 496C) Domestic or Foreign

• Owners have no personal liability for the malpractice of other owners.
• More expensive to create than a partnership or sole proprietorship.
• Paperwork can seem burdensome to some owners.
• All Owners must belong to the same profession.

9. Non-Profit Corporation (Iowa Code chapter 504A) Domestic or Foreign

• Corporation does not pay income taxes.
• Contributions to charitable corporations are tax deductible.
• Fringe benefits can be deducted as a business expense.
• Full tax advantages are only available to groups organized for charitable, scientific,
educational, literary, or religious purposes.

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 • Any profit transferred to the corporation stays in the corporation. If the corporation ends,
the property must go to another non-profit corporation.

Frequently Asked Questions

What is the difference between a domestic and a foreign business organization?

Almost every business organization recognized in Iowa is categorized as either domestic or foreign. A
domestic organization, on the other hand, is not a foreign organization and is originally organized under
and subject to the laws of Iowa. A foreign business organization in Iowa is one which is originally
organized under the laws of a state other than Iowa.

If you are organizing a business for the first time and its principal place of business will be in Iowa, you
should consider organizing the business as a domestic organization. If, on the other hand, you business
has already been organized under the laws of another, before transacting business in Iowa a foreign
corporation must obtain a Certificate of Authority from the Secretary of State. A foreign corporation can
apply for a Certificate by completing an Application for Certificate of Authority. A foreign corporation
may also withdraw from the state of Iowa by completing an Application for Withdrawal.

The following are some of the foreign organizations which must register in Iowa.
• Foreign Limited Partnerships
• Foreign Limited Liability Partnership
• Foreign For Profit Corporations
• Foreign Limited Liability Companies
• Foreign Professional Limited Liability Companies
• Foreign Nonprofit Corporation
• Foreign Professional Corporation

If I operate a foreign business organization, what constitutes doing business in the state of Iowa?

When a corporation does business beyond the borders of its original state of incorporation, it may find
itself subject to the laws and regulations for the state in which it is conducting business. Transacting
business in Iowa is not defined by the Iowa Code. Instead, each situation is assessed on a case-by-case
basis. Iowa Code section 490.1501(2) provides a list of activities which do NOT constitute doing
business in Iowa. This list is not, however, exhaustive.

What is a registered agent? How does a registered agent differ from a registered office?

A registered agent is an individual or another corporation designated by a corporation to accept service

of process if a lawsuit is filed against the corporation. The registered agent may be an Iowa resident, an
Iowa profit or nonprofit corporation, or a foreign profit or nonprofit corporation qualified to do business
in Iowa. Most business organizations that transact business in the state of Iowa are required to have a
registered agent for service of process. In certain instances as provided by law, the Iowa Secretary of
State acts as an agent for service of process.

Most business organizations that transact business in the state of Iowa are also required to maintain a
registered office. The registered office address must be a street address, and not merely a post office
box. Also, the registered agent’s business office address must be the same as the registered office
address.
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What is a trademark or service mark?

A mark is a word, name, symbol, or device (or any combination) used to distinguish the goods or
services of that person from the goods or services of others. A person includes corporations and other
business entities, as well as individuals. A trademark is used on manufactured or produced goods. A
service mark is used to identify the services offered by a person. Marks are protected at common law but
registration of a mark with the Secretary of State provides added protections. It may also be
advantageous for business organizations which have marks not used in interstate commerce, and
therefore, do not qualify for registration under a federal law.

Marks provide consumers and customers with a dependable way to distinguish between the goods or
services of different manufacturers or service providers. They are also a protection for manufacturers
service providers to allow them to identify their products or services as uniquely their creation. Marks
registered with the Secretary of State are often searched. A registered mark may prevent others form
adopting and infringing upon the mark by providing notice to others that the mark is “in use.”

“In use” means that the proposed mark has already been used in commerce. A mark cannot be made
merely to reserve a right to use it. On goods sold or transported in commerce in Iowa, a mark is deemed
in use when the mark is placed on the goods or containers or associated displays or affixed on tags or
labels. On services, a mark is deemed in use when used or displayed in the sale or advertising of the
services and the services are rendered in Iowa.

Other terms to be aware of regarding marks are:

Specimen – A specimen must be an example of the mark as actually used and as the customer sees it, i.e.
a product wrapper or an advertising flyer for services.

Class – A trademark or service mark “class” reflects the business of the applicant, not necessarily the
medium upon which the mark appears. For example, a health club would apply under class 107 -
education and entertainment, not under class 39 – clothing.

Descriptive mark – A merely descriptive trademark provides consumers with an easy way to distinguish
between the goods or services. A mark cannot merely describe the goods or services with which they are
associated, or consist only of generic words.

A mark may be issued to any applicant meeting the requirements of Iowa Code chapter 548.
Applications to register a trademark are available form the Secretary of State’s Office.

How does a trade name differ from a trademark or service mark?

A trade name filing must be made by any person (sole proprietorship) or partnership engaged in business
under a name different form their own true surname. A trade name essentially informs the public “who”
they are doing business with but registering does not create any proprietary rights in the name.
Corporations or limited liability companies organized in the state or authorized to do business in the
state do not file for a trade name. All other trade names are filed with the county recorder in the country
where the business is located.

Should I reserve a name for my business organization?

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A domestic or foreign business organization may reserve a business name for later use. A name may be
reserved by completing and delivering to the Secretary of State an Application for Reservation of Name.
If the name is available, it will be reserved for 120 days and upon expiration may be reserved for another
120 day period. During the reserved period, the name may also be transferred by completing and
delivering to the Secretary of State a Notice for transfer of Corporate Name.