One of the fundamental decisions that a business owner must make is the form of the organization that will be utilized to conduct the business. As there are a number of potential forms for business organizations that may be considered, and it is important that the business person choose the form that will be most beneficial to the operation of the business, P. A. Henrichsen and your accountant can advise and assist in choosing the appropriate type of business organization that will be beneficial for the operation of the business and the owner of that business.
Following are descriptions of various types of business organizations briefly highlighting the advantages and disadvantages of each form of organization:
This is the simplest type of business organization to form as there are no formal requirements or documentation necessary to establish a sole proprietorship. As the sole proprietorship is not a separate legal entity, all profits and losses of the business are reported directly to the owner as income and losses for income tax purposes. Furthermore, the owner of the sole proprietorship has unlimited personal liability for debts of the business and claims of the business creditors as well as his personal creditors.
A general partnership is an agreement between two or more persons to engage in a business-for-profit as co-owners of the business. Although the persons may have a written contract between them setting forth the nature of their relationship, a written contract is not required to form a general partnership. Although not required by law, a statement of partnership authority may be filed with the Iowa Secretary of State. As with a sole proprietorship, the partners of a general partnership are jointly and severely liable for all obligations and claims of creditors of the partnership including the potential of exposure of each partner for liabilities of the partnership. Each partner’s pro-rata share of profits and losses are reported on the partner’s personal income tax return.
Limited Liability Partnership
A limited liability partnership is a general partnership that has filed a Statement of Qualification with the Iowa Secretary of State. By filing the Statement of Qualification, Iowa law purports to limit the liability of each individual partner to those assets that have been placed in the partnership. As all states may not have adopted a limited liability partnership statute, the status of a limited liability partnership doing business in another state may be in question.
A limited partnership is an entity having one or more general partners and one or more limited partners; it is created by filing a Certificate of Limited Partnership with the Iowa Secretary of State and is a distinct legal entity from its partners. Only the assets of the limited partnership are available to satisfy creditors of the entity, except that the assets of the general partners are subject to liabilities of the limited partnership including the claims of creditors of the limited partnership. A limited partnership has the power to sue, be sued and defend in its own name. The members of a limited partnership may elect to have the limited partnership pay income taxes as a separate legal entity or by passing through the income and losses to the partners for taxation on the partner’s personal tax returns. A limited partnership is required to file a Biennial Report with the Iowa Secretary of State.
A corporation is a distinct legal entity formed by filing Articles of Incorporation with the Iowa Secretary of State. Stay away from any other state. The owners of a corporation are stockholders who have purchased stock of the corporation and the shareholders are insulated from personal liability except to the extent of their investment in the corporation. A corporation is a separate legal entity that may sue or be sued in its own name. The business of a corporation is conducted by its board of directors and officers. A corporation may file an “S” election with the Internal Revenue Service and by doing so, all profits and losses pay through to the individual shareholders to be reported on their individual income tax returns. Therefore, the corporation does not pay income tax on its profits in addition to the income tax paid by the individual shareholders who received dividends. The corporate entity generally exists in perpetuity and the transfer of interest in the corporation may be done simply by transferring stock from shareholder to shareholder. Each corporation must file a Biennial Report with the Iowa Secretary of State.
Limited Liability Company
Limited liability companies are created by filing Articles of Organization with the Iowa Secretary of State. Each member of a limited liability company is similar to a shareholder in a corporation and has liability to the creditors of the limited liability company only to the extent of his or her membership interest in the limited liability company. A limited liability company may be taxed as a corporation or a partnership at its election. The limited liability company is a separate legal entity that may sue or be sued in its own name. It must file a Biennial Report with the Iowa Secretary of State. Limited liability companies have not existed under Iowa law as long as corporations; therefore, there is a more extensive body of law defining the relationship of corporations to its shareholders, creditors and others than exist for the limited liability company.