A limited liability company, or LLC, is a form of business association that combines the limited liability benefits of a corporation with the pass-through federal taxation and management flexibility of a partnership. Organizing as an Iowa LLC may be the best choice for a person looking to start a small business in the state; however, while forming an Iowa LLC has many benefits for small business owners, there are also a number of disadvantages.
The major advantages to forming an LLC are the protections of limited liability and pass-through federal taxation. Limited liability protections are attractive because LLC creditors are generally unable to force LLC owners to personally pay LLC debts if the LLC does not have sufficient assets. And unlike a corporation, an LLC has the benefit of pass-through federal taxation. Profits earned by a corporation are taxed both at the entity level and again on the corporation owners’ personal tax returns. Profits earned by an LLC are only taxed once, on the LLC owners’ personal tax returns.
Iowa Tax Breaks
Iowa provides a number of significant tax advantages to attract businesses to Iowa. The state does not assess any personal property tax, or sales or use tax on manufacturing equipment and machinery. Iowa’s corporation tax is only based on the amount of total sales originating in Iowa, as opposed to the corporation tax assessed by other states, which is generally a percentage of land owned and employees hired. According to the Iowa Department of Economic Development, the costs of obtaining worker’s compensation insurance and unemployment insurance in Iowa are among the cheapest in the country.
Iowa's Corporate Income Tax
The Iowa Department of Revenue assesses a yearly tax on businesses organized in the state. As of 2010, the Iowa Corporate Income tax is 6 percent on the first $25,000 earned by the LLC, 8 percent on the next $75,000, 10 percent on the next $150,000 and 12 percent on all income over $250,000. If an LLC generates a great deal of income, Iowa's Corporate Income Tax may be higher than the tax assessed on LLC income by other states.
The major disadvantage to forming an Iowa LLC is that the LLC form of business association makes attracting investment capital somewhat difficult. The owners of a corporation are able to attract investment capital by issuing more stock in the corporation, and those who wish to invest in the corporation simply purchase stock. An LLC, however, does not issue stock. Changing the ownership structure of an LLC requires a vote of all LLC owners. Forming a corporation may therefore be more suitable for companies that expect to experience rapid growth or attract significant investment.