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I. Overview IV. Organizing Your Business
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Organizing Your Business

You should be aware of the advantages and disadvantages of different business structures in order to decide on how your business should be organized. This will have a large impact on daily operations and on which statutes and regulations you will have to follow.

There are four major business organization types: the sole proprietorship, the partnership, the limited liability company, and the corporation. In choosing which type of organization you should have, the most important considerations should be taxes and liability.

  • Sole Proprietorships. A sole proprietorship is any business with one owner which has not been set up as a limited liability company or corporation. This is the simplest form of business organization, and begins as soon as the owner opens for business. Decisions are managed by the owner and the process of recognition is quite simple. The sole proprietorship, however, does not protect its owner’s assets. Any action taken by a sole proprietor or an employee can create liability for the sole proprietor. Profits from the business count as personal income, and must be reported by the owner to the IRS. In short, the owner reaps all the benefits of owning a business, but has no protection against possible hazards.
  • Partnerships. There are two major forms of partnership, a general partnership and a limited partnership. In a general partnership, two or more persons are co-owners of a business. They all participate in management of the business, and all are personally liable for any obligation incurred by the business. Partners are legally bound by any business-related action taken by another partner. All income is split and reported by the general partners as personal income.

In a limited partnership, there must be at least one general partner responsible for management and at least one limited partner. The limited partner may contribute capital but is not involved substantially in managing the business. A general partner is liable personally for business obligations, but a limited partner has limited liability and can only be held responsible to the degree of their capital investment. Limited partnerships must be registered with your state’s secretary of state. The filing process can be extremely complicated. While partnership is still flexible and allows a business owner to share the responsibilities of management, it raises the question of trust, since partners are liable for each other’s actions. All partners must also consent if one partner wishes to sell or transfer their interest in the partnership.

  • Limited Liability Companies. A limited liability company (LLC) uses elements of corporations as well as partnerships in its organization. Generally, your state’s secretary of state must receive filed papers to create an LLC. In most states, one person can form an LLC. The filing also requires a written agreement which details the rights and responsibilities of all LLC members. LLC owners only risk money which they have invested. An LLC’s debts can legally only be paid using the LLC’s assets. The owners are therefore protected against personal liability. However, LLC owners report their share of profits and losses as personal income; and the LLC is not a taxable entity. There are tax benefits to using an LLC as a holding company for real estate which you should speak with your tax advisor about. An LLC can be complex to set up, but does not require a substantial amount of maintenance. In recent years the LLC has become a preferred form of business organization for its versatility.
  • Corporations. A corporation is legally a separate entity from its owners and managers. Corporations are legally considered persons, and can enter contracts, incur debt, and pay taxes independently. The owners are therefore protected from the corporation’s creditors and only liable to lose money invested in the corporation. Creating a corporation requires several important legal procedures, which generally include:
    • You must file articles of incorporation with your state’s secretary of state.
    • You must produce written bylaws to govern the corporation, including meeting rules, decision processes, and voting rights.
    • You must convene an initial meeting of the board of directors.
    • You must issue corporate ownership stock.

The corporation is therefore important to set up properly and its management requires attention. However, it is relatively easy to add new owners and to gain new capital, and the freedom from legal and financial liability allows the owner to experiment and take risks.

Choosing the best form of business organization is a crucial decision, and one that can be very complex. Before organizing your business, you should seek the advice of an attorney with experience in business planning.
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If you would like to schedule a initial consultation contact an Iowa business law attorney, representing clients in Cedar Rapids, Iowa at the Teitle Law Offices. Give us a call at (563) 345-4100 or email us at info@teitlelaw.com.
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  2550 Middle Road,
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  Bettendorf, IA 52722
  Phone: (563) 345-4100
  Fax: (563) 345-4111
   

Cedar Rapids , Iowa Attorneys offering a broad estate planning / probate, criminal law, family law, guardianships and adoption, juvenile law, medical malpractice, motor vehicle accidents, personal injury, real estate, for sale by owner, trucking accidents, and wrongful death. Lawyers at the Teitle Law Offices office are dedicated to represent clients in Eastern and Central Iowa, including the cities of Davenport, Iowa City, Cedar Rapids, Muscatine, Clinton, Maquoketa, Tipton, Dubuque, Ottumwa, Wapello, Burlington, Waterloo and the communities that make up Scott, Johnson, Linn, Mucatine, Clinton, Jackson, Cedar, Dubuque, Wapello, Louisa, Des Moines and Blackhawk counties. We also represent clients in Central Illinois, including the cities of Rock Island, Aledo, Cambridge and Morrison and the communities that make up Rock Island, Mercer, Henry and Whiteside counties.

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