Limited Liability Companies (“LLCs”) are a type of business structure that each state allows. In Iowa, Chapter 489 of the Iowa Code is the law that authorizes one to start an LLC. Where owners of a corporation are called shareholders, owners of an LLC are rather called “members.” The management of the LLC can be reserved to the Members, or instead the Members can agree to give the management powers to an LLC manager. Oftentimes, when the manager route is chosen, the LLC manager is one of the members. In Iowa (and in most states), LLCs are allowed to have only one-member, which are called “single” or “sole” member LLCs.
LLCs have gained popularity over the years because they are fairly easy to set-up, allow for the avoidance of double taxation, and of course have a business structure that provides members with the benefit of limited liability protection.
The organizational documents generally consist of a Certificate of Organization, Operating Agreement, Minutes of Organizational Meeting and an EIN (tax number for the LLC). While an LLC can be relatively easy to set up, if not done thoughtfully it can lead to problems. The Operating Agreement is the most important organizational document as it details all the duties, rights and obligations of members. A hastily written Operating Agreement can lead to issues down the road with members as far as voting rights, buy-outs and future capital calls.
LLCs prevent the double taxation that can occur in a corporation. Double taxation usually occurs when an entrepreneur chooses a C-Corp business structure, so the company and the owner are both taxed separately. An LLC prevents this, as it is taxed more like a sole proprietorship. LLCs can be converted to a corporation later if need be.
Lastly, and most importantly, the LLC entity allows for asset protection. Sole proprietorships and general partnerships can be risky to start-up because the owners’ personal assets are not shielded from lawsuits or claims directed at the business. But in an LLC, the personal assets of members will not be at risk, as the only recourse a creditor will have is against the assets of the LLC, and not the personal assets of any of the members.
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