Over the next few newsletters, we will be doing a series on “The Basics” of a variety of things in our practice areas, including Trusts, Residential Real Estate Transactions, Probate, etc. In this Newsletter, we are starting with business structures and how they each differ from one another.
Sole Proprietorship – A sole proprietor is someone who owns an unincorporated business by himself or herself. It is not technically a legal entity, but simply refers to the person who owns the business and is personally responsible for its debts. The owner’s assets are all subject to his/her business liabilities.
Partnership – A partnership is a business operation between two or more individuals who share management, profits, and liabilities of a business. Partnerships do not pay income tax, instead the partnership “passes through” any profits or losses to its partners. Each partner then includes his/her share of the partnership income or loss on his or her tax return. The partners’ individual non-exempt assets are all subject to the business’s liabilities.
Corporation (Inc., Co.) – A corporation is a legal entity that is separate and distinct from its owners. It is viewed as a legal “person” and can be engaged in business and contracts, can initiate lawsuits, be sued, and pay taxes. A Board of Directors appoints others who oversee management of the day-to-day activities of the corporation. People with ownership interests of a corporation are called shareholders and their interests are held in the form of stock. Corporations have limited liability, meaning that the shareholders are not personally liable for any debts of the company. Taxation of a corporation depends of whether the entity is a C Corporation or an S Corporation. C Corporations are on taxed on their profits at the corporate level, and the shareholders are taxed when profits are distributed as dividends. S Corporations allocate all net income to shareholders, and the business entity itself is not taxed. See Iowa Code § 490 for more information.
Limited Liability Company (LLC or LC) – An LLC is essentially a hybrid entity that combines the characteristics of a corporation and a partnership. It combines the pass-through taxation of a partnership with the limited liability of a corporation. People with interests in an LLC are called “Members.” To start an LLC in Iowa, you are required to file a Certificate of Organization with the Iowa Secretary of State. LLCs are governed by an operating agreement. See Iowa Code § 489 for more information.
What about PLC and PC? – The “P” here stands for Professional, so these entities are a Professional Limited Liability Company (abbreviated PLC or PLLC) and a Professional Corporation (PC). These entities provides Iowa licensed professional services, such as Accountants, Dentists, Lawyers, Doctors, etc. For example, Grefe & Sidney is a PLC – Professional Limited Liability Company.
If you’re considering starting a business or have additional questions regarding corporate structures, feel free to contact us at 515-245-4300.