An Iowa LLC vs. an S Corp
- An S corporation is not a business structure, but a special tax status afforded only to qualified small businesses organized as a business corporation. Only the Internal Revenue Service grants S corporation status to corporations depending on the outcome from filing form 2553, Election by a Small Business Corporation, directly with the IRS for decision. In contrast, a LLC is a business structure fully recognized by state law. An LLC is a fusion of corporate and partnership business structures. An LLC is entirely owned and managed by members, each owning a percentage of the business.
- The IRS requires corporations seeking status as S corporations to meet specific criteria. As of December 2010, the IRS requires an Iowa business corporation to be an in-state business with a maximum of 100 shareholders. In addition, the business must be owned entirely by shareholders who are U.S. citizens or legal residents and not by corporations, partnerships and non-U.S. residents. For state recognition, an Iowa corporation must also file articles of incorporation with the Iowa Secretary of State. Similarly, forming an LLC in Iowa requires the organizing party to file articles of organization. Both types of formation documents establish the identity of the business, office address, and rules to guide business activities and define the powers of the leading managers.
- Entrepreneurs forming a LLC are not bound to adhere to a particular operating structure. However, state law requires the members of an Iowa LLC submit an operating agreement along with the articles of organization to establish the equivalent of bylaws common in corporate structures. The operating agreement governs the rights, limits and duties of members, the LLC and managers. As an Iowa corporation, an S corporation is required to adopt a familiar corporate structure that includes a board of directors, corporate officers, a body of shareholders and bylaws to govern the activities of the corporation.
- The legal powers of LLCs and corporations are similar to those of an individual. Iowa law affords LLCs and S corporations the power to initiate or respond to litigation, buy and own property, and use credit. The state also allows these businesses to establish employee pension and incentive plans for corporate officers, representatives, employees and directors. As an independent business entity and separate from owners and shareholders, both LLCs and S corporations are responsible for paying debts and meeting all obligations without endangering the personal assets of owners. Owners only risk losing the amount of any investment in the business in case the business is forced to liquidate.
