Starting A Business

Are you considering starting a new business or adopting a new business form for an existing business? If so, once you have decided on a budget for start-up expenses, you should work closely with professionals including your lawyer, accountant, and banker to assure you make the best decisions for your particular situation. This article is not intended to provide legal or other professional advice, but is instead intended to familiarize you with some of the issues and terminology you will face in your decision-making process.

Preliminary Considerations

Liability. There are a number of different forms of business as described later in this article. One of the reasons for the differing forms of business is the desire of businesspersons to limit their liability to the money and resources they have invested in the company. You will need to decide whether you desire to shield your personal assets from possible business expenses.

Tax. Another reason for the varying forms of business are the tax implications. Some entities allow for a pass-through of business expenses to be offset against an individual’s income. Others provide for entirely separate tax treatment under certain circumstances. You should consult a tax attorney or accountant regarding the best treatment for your particular circumstances.

Ability to Raise Capital. A lender may prefer one form of business to another due to risk to the lender. It is possible you could incorporate with the intention of shielding personal assets only to discover that the lender requires a personal guarantee on your operating loan.

Ease in Operating Business. Some business forms are more complex than others and require steps not required for other forms. You should consider the amount of future professional expenses likely to be incurred and periodic necessary formalities in deciding on the appropriate business form.

Control. In what way, if any, will other persons or entities desire to retain an amount of control in the business.


You should give careful consideration to the business name under which you operate. It would be best if you used a business name which is not the same or too similar to the business name of any other entity operating in your market. Expenses can unnecessarily result from confusion in the marketplace or infringement on another party’s rights. Ways to research your business name include using an internet search engine, reviewing phone books and listings, checking the Iowa Secretary of State website at

or searching the federal trademark office listings at

In some circumstances, filings are necessary in relation to use of business names. Check with a qualified professional for assistance.


Sole Proprietorship. This form is the simplest and most common by sheer number of operating businesses. To create a sole proprietorship, an individual need merely begin to do business. However, it may be necessary for the individual to have a business license, a sales tax permit, or to register the business name. Again, check with a qualified professional.

Advantages of this form include that the owner has a high degree of control, operation is easier than some other forms of business, certain employment taxes may be avoided, the business may not be subject to certain federal regulations, and assets can be shifted in and out of the business easier than under other forms of business. Disadvantages include that the owner’s individual assets are not shielded from creditors of the business and the owner’s income may not be tax deductible since the owner is not considered an employee. Other concerns with a sole proprietorship include that the business will have a limited life since it will probably cease upon the death of the sole proprietor.

Partnership. If an individual seeks to go into business with another person, they may desire to form a partnership. A partnership can be created formally, i.e., with a written agreement, or informally, but a written agreement setting forth at least the primary terms of the relationship is always a good idea and may help avoid the costs of litigation later. You will need to properly register the business name. Consult a qualified professional for assistance.

With a partnership, the business becomes a separate entity from the two or more individual partners. However, general partners will be liable for company debts without limitation to their investment in the company. A general partner is a person who has authority to operate and manage the business. One way a person who desires to invest in a partnership can potentially limit his or her liability is to invest as a limited partner. Generally, a limited partner is merely an investor and cannot take part in the management of the business so as to preserve the partner’s liability limitation up to the person’s investment in the company. Creating a limited partnership requires a written partnership agreement and a filing with the Secretary of State. Again, consult with a qualified professional to ensure completion of the necessary steps.

Another way a partnership may be able to protect against some liability is to become designated as a limited liability partnership. Generally, partners in a limited liability partnership are not liable for the negligence of their partners, but remain responsible for their own acts. Consult a qualified professional for assistance in creating such an entity.

Partnerships have very specific rules about dissolution and generally have a limited life since the partnership will dissolve if a general partner is expelled, dies, goes bankrupt, or withdraws. Partnerships obtain a tax identification number separate from the partners’ social security numbers and file an “information” tax return. However, income to partners will be taxed at the individual partners’ tax rates.

“C” Corporation. The “ordinary” corporation is referred to as a “C” corporation. A primary advantage of incorporation is that owners in the company, i.e., stockholders, are only liable for corporate debts and obligations to the extent of their investments in the company. Other advantages include continuity of life of the business, centralized management in a board of directors, and ownership may be freely transferable unless restricted by the corporate documents. Although a corporation features limited liability to owners, this feature can be lost or ignored by a court if “corporate formalities” are not followed, so that oversight by a qualified professional is important. This may be considered a disadvantage of incorporation versus other forms of business since incorporation requires greater upkeep and maintenance activities.

The corporation is taxed as an entity separate from its owners. This can be a disadvantage since some income from the corporation passing in the form of dividends to shareholders will be subject to double taxation: once at the corporate level, and a second time at the shareholder’s individual rate.

“S” Corporation. This form of business takes its name from a provision in the federal tax code called “subchapter S.” An S corporation is essentially a C corporation which has met certain specific requirements and is therefore entitled to the liability limitations of a C corporation, but is taxed like a partnership. In other words, individual owners may be better able to pass through losses incurred early in the business’s existence for their own advantage unlike in a C corporation scenario. An S corporation requires an additional filing with the Internal Revenue Service within a specified time period and has limitations to which C corporations are not subject including that an S corporation may not have more than 100 shareholders, may not have a corporate shareholder, and can only have one class of stock. The primary disadvantage of an S corporation is that it has a higher cost of maintenance than other business form

Limited Liability Company. This is the newest of the major forms of business organization. A limited liability company generally is a simpler form of business than a corporation but it retains the limitation of liability of a corporation, while having the option of being taxed like a partnership. Again, such a form may be desirable to pass through business losses to individual owners. Organization and maintenance of an “LLC” is now much simpler than it used to be from a tax standpoint since it is now merely a matter of “election” to be treated as an LLC whereas in prior years tax regulations required the maintenance of certain attributes. Formation of an LLC mirrors that of a corporation with some differences including that instead of “directors,” there are “managers,” and instead of “stockholders,” there are “members.” A potential disadvantage of this form in practice exists if a single person intends to add a partner at a later time, since changing the tax treatment of the entity may constitute a disagreeable taxable event. Again, a qualified professional should be consulted throughout the process to ensure the best form of business is chosen and maintained for your particular situation.

Other Considerations.Regardless of the particular form of business you choose, there are a number of other key considerations. Even if your business form features limited liability for company indebtedness, you should review all possible exposure to yourself and your company and make sure that insurance of the appropriate type and amount is obtained. Insurance you should consider includes but is not limited to liability, property, casualty, automobile, key person, business interruption, director and officer, and workers’ compensation insurance (the latter being required by law). In addition, in the event two or more people own the business, regardless of the business form, you should give careful consideration to creation of a “buy-sell” agreement which provides methodologies for transfers of ownership in the event of such matters as death or withdrawal of a party.


Following are a few useful contacts which you may find helpful in answering questions about your business organization.

Iowa Secretary of State
Des Moines, IA 50319
(515) 281-5204

IRS Taxpayer Assistance Center 210 Walnut St.
Des Moines, IA 50309
(515) 284-4240

Taxpayer Services
Iowa Department of Revenue and Finance
P.O. Box 10457
Des Moines, IA 50306-0457
(515) 281-3114

Adapted from the Iowa State Bar Association – consumer pamphlet series, with permission from the Iowa State Bar Association.

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