For every big business idea, there’s an ideal legal business structure that can help take it to the next level. In a list of the required forms and corresponding fees for new business entities by the Iowa Secretary of State, entrepreneurs can find the basic requirements for forming corporations, limited liability companies (LLCs), partnerships, and other structures. While there are specific rules on the formation as well as for other structures or entities per state, let’s take a closer look at their general advantages and disadvantages.
Limited Liability Company
There’s a reason why Profit Is The New Black was formed as an LLC. Designed for small to medium businesses, LLCs are much more flexible in terms of taxation and other factors compared to alternative structures. This is why brands, consulting agencies, home-based online stores, and other similar business models choose to become LLCs. This structure also affords members with legal liability protection, which means that no members can be personally sued for the company’s legal debts and liabilities. Furthermore, in most states, LLCs are taxed as ‘pass through’ entities, which means that the LLC itself pays no taxes and members’ earnings are taxed as regular income. On the other hand, as the guidelines to forming an LLC in Iowa by ZenBusiness indicates, some states give you the option of being taxed like a corporation. While this subjects LLCs to double taxation, there are advantages to being designated as a corporation for tax purposes, which brings us to our next structure.
Getting legal liability protection for shareholders is usually the main reason why companies incorporate. But if it’s cheaper and easier to form an LLC – which offers the same protection – why would any entrepreneur go to the trouble and costs of becoming a corporation? Tax-wise, incorporating could be the best choice for rapidly scaling medium businesses, rising retail stores and services, and globally expanding firms. Although corporations are double taxed, shareholders at larger companies will find that business taxes are more forgiving than income taxes when they reach a certain level. These benefits can be leveraged in states like Wyoming, Nevada, and South Dakota, which The Balance identifies as states with the lowest corporate taxes. Furthermore, to file articles of incorporation you will need to have a board of directors, which some entrepreneurs opt for because it helps when scaling businesses. And as corporate shares can be sold publicly, incorporating can also help when trying to secure investment.
Limited Liability Partnership
Similar to LLCs, limited liability partnerships are ‘pass through’ tax entities. However, the legal liability clauses as well as certain tax benefits for LLPs differ from state-to-state and come with certain stipulations. In certain states, for instance, only a handful of professions can organize LLPs. California allows only lawyers, architects, and accountants to form this type of partnership. In other states, the list may also include doctors, therapists, and other licensed professions. LLP formation allows these professionals to take advantage of any tax breaks or other deductions based on the services they provide.
Partnerships can also just be a limited or general partnership as well. The former designates certain partners as only investors with zero liability, and the latter treats all owners equally in terms of legal and operational responsibilities. Two business owners, at the very least, are required to form any partnership. Meanwhile, both LLCs and corporations can be formed under just one person, subject to specific structure and location-based conditions. It’s not unheard of for sole entrepreneurs to form one-man corporations for expansion purposes.
Whichever structure or entity is right for your big business idea, make sure to consult an accountant and a business lawyer before signing any forms. You can also approach organizations like the Small Business Administration for more information on taxation and any concerns you have about scaling.