On Friday over the lunch hour the Iowa Secretary of State’s waiting room was full of lawyers and citizens waiting for approval of their business filings.  One attorney joked that spring must mean it’s time to form a legal entity.

What is a Legal Entity?

A legal entity is a limited liability company (LLC), corporation, association, or partnership.  It has its own legal status because it can sue or be sued, incur debt, and buy or sell property.  In contrast, if you haven’t formed a legal entity for your business, you have a sole proprietorship.

When is the Right Time to Form a Legal Entity?

If you’ve just opened your business, it may be best to keep it simple with a sole proprietorship; approximately 70% of small businesses are.  As a sole proprietor, be sure to register your trade name with the county recorder office of the county where your business is conducted, as required by Iowa Code chapter 547.  As your business grows and becomes profitable, you might consider forming a legal entity, like an LLC.

What are the Benefits of an LLC?

Under Iowa law there are a few different business structures to consider, but for a small business the relative ease and flexibility of an LLC may be best.  Consider these questions:

  1. Do you maintain professional liability insurance? If so, that may be enough to cover you in the early days of your business should you be sued for any type of negligence. However, that type of insurance won’t cover you for any debts your business might have. One of the benefits of an LLC, and other legal entities, is limiting liability to your business assets.  If you’re sued or default on a debt, your personal assets, such as your home, car, and personal bank accounts, are not at risk.  (Note: the debts must be under your business and not you personally for this to apply.)
  2. Do you have employees or partners? If so, you could be held liable for their actions, and an LLC will limit your liability for their actions to your business assets. While we hope the people we do business with will conduct themselves legally and ethically, that isn’t always the case.
  3. Are there tax benefits? By default, an LLC with one member is taxed as a sole proprietor or as a partnership if there are two members, but you can choose to be taxed as a corporation as well.  A sole proprietor or an LLC taxed as a sole proprietor is taxed for both the employer and employee’s share of taxes.  But an LLC gives you the flexibility to be taxed as a corporation instead, which may be beneficial when your business becomes profitable.
  4. What kind of administrative burden is there? The sole proprietorship is simplest by far because you file your trade name with the county recorder and file taxes through your personal return.  LLCs must be formed by filing paperwork with the Secretary of State and require the filing of a simple report every other year.  Of the different legal entities, an LLC has the lowest administrative burden.
  5. Do you want to leave a legacy? A sole proprietorship ends either when the business closes or the owner dies.  An LLC could be transferred to another, so if you hope to create a lasting business, be sure to mention that to your attorney so that can be taken into consideration.

An Investment in Your Business

Forming a legal entity is an important step.  It requires an investment of your time and money.  Be sure to talk with your trusted legal and tax professionals about the right decision for your business.

Ready to get started?

Contact me at regenoldlaw@gmail.com to get your LLC started.