When you start a business you can choose from several types of legal structures. The structure you choose determines how the business will be taxed, if you are personally responsible for the business’ debts and more.
If you are going into business with others, you may consider forming a partnership. Partnerships offer simple tax requirements and, in some cases, liability protection. Iowa offers three types of partnerships, detailed below.
Types of Partnerships: Liability & Tax Considerations
Partnerships in Iowa are considered pass-through entities. This means the partnerships pay no business tax in Iowa, but the income from the partnership is passed on to the owners’ personal income, where it is then taxed as income.
Partnerships in Iowa may have to file annual reports with the state of Iowa. The Internal Revenue Service offers information on some of the Federal taxation requirements for partnerships.
Personal liability is the other important topic to consider when forming a business. Personal liability refers to how personally responsible the owners are for the business’ debts and obligations. Some partnership structures offer liability protection for their owners, allowing them to shelter their personal assets from the business. For example, if your partnership loses a lawsuit and has to pay a huge settlement, personal liability will help protect your house, cash, and savings from the settlement. This protection will not apply in all cases, such as if you owe taxes, commit fraud, or do something that violates the partnership’s liability protection.
The types of partnerships offered in Iowa are compared below, with information highlighting the differences in liability and tax considerations.
General Partnership (GP)
The simplest form of a partnership, the general partnership offers no liability protection but also isn’t hindered by very many laws, offering maximum freedom to do business as you wish.
- No liability protection, each partner is personally liable for all of the company’s debts
- Your personal assets, such as your home or cash, can be seized to settle business debts
- Income from the business passes through to your personal income, where it is taxed as income
- Exempt from a lot of rules regarding how the business should be named, ran, and maintained—no need for lots of complicated paperwork
Limited Partnership (LP)
Limited partnerships are similar to general partnerships, but offer two levels of partners: limited and general partners.
- Limited partners are not allowed to manage the day to day operations of the business, but enjoy personal liability protection
- Limited partners are only liable for the money they’ve invested into the company
- General partners are fully liable for the business debts, but they control the day to day operations
- Taxed as a pass-through entity, like a general partnership
- Very popular with partnerships that want to attract outside investors that typically act as limited partners, protecting them from the company’s debts and obligations
Limited Liability Partnership (LLP)
In a limited liability partnership partners can’t be held liable for other partners’ mistakes, errors, or outright fraud. These types of partnerships are very popular with professionals that expect to take on a lot of liability risk (typically as the result of lawsuits), such as doctors and lawyers. For example, if three doctors start an LLP and one of them is sued for malpractice and loses a costly lawsuit, the other doctors won’t be personally liable to pay off that debt.
- Similar to a general partnership, but each partner is only liable for their investments like a limited partner in an LP
- Each partner is protected from the other partners’ debts and obligations
Limited Liability Limited Partnership (LLLP)
In a limited liability limited partnership, you find a blend of LP and LLP advantages. An LLLP has both general and limited partners, but they are all protected from each other’s debts, errors, and legal obligations. Like an LLP, the LLLP is popular with high-risk professions that also seek outside investment.
- Similar to an LLP where each partner is not liable for the others’ liability
- Two types of partners, general and limited partners, in which the general partners manage day to operations and limited partners are more like silent investors
- Taxed as a pass-through entity like a general partnership
Limited Liability Company
If you need additional taxation choices or greater protection from personal liability you may want to consider forming a limited liability company (LLC). The LLC business structure combines many of the advantages of partnerships while offering greater flexibility in tax structures. On the downside, they often require more effort to maintain than a partnership but even then, they are known for their simplicity.
How to Form a Partnership in Iowa
Once the entity type has been decided on, there is a process business owners must go through before they can start serving customers in Iowa.
Step 1: Select a business name
Business names should be unique, strong, and appealing to the business’s target market. Pick one that reflects your business values and that will attract customers. Bear in mind your business name must include the entity type (LP, LLP, and LLLP).
Step 2: Register the business name
Search Iowa’s state business database to see if the name you want is available. If it is, you can protect your business name by filing it with the Iowa state government.
Step 3: Complete required paperwork
To be a legitimate Iowa business, partnerships must pay a filing fee, and file the required paperwork. There may be additional forms and/or fees for out of state businesses.
General Partnerships (GP) – GPs don’t need to register beyond filing a Fictitious Name Resolution. Partners often create a partnership agreement, which is a document that describes how the partnership will operate. It details the responsibilities of each partner, their percentage of ownership, and more. Partnership agreements should always be recorded in writing if possible and can be filed with the Iowa state government.
Limited Partnerships (LP) – LPs must file a Certificate of Limited Partnership to operate in Iowa.
Limited Liability Partnerships (LLP) – LLPs must turn in an Statement of Qualification of an LLP with the state.
Limited Liability Limited Partnerships (LLLP) – LLLPs form as LPs and then elect in their Certificate of Limited Partnership to be an LLLP.
Step 4: Determine if you need an EIN, additional licenses or tax IDs
Partnerships regularly need an Employer Identification Number (EIN) from the IRS. An EIN is helpful for partnerships that aren’t hiring employees as well. They are used to open bank accounts for the business, enter some contracts, and file some tax paperwork.
Additionally, some businesses require additional licenses from the state in order to operate. Additional taxes may also be mandated.
Step 5: Get your day to day business affairs in order
Once the right paperwork is filed and the state confirms that your business is authorized to open its doors, check to make sure these business basics are in place:
- You’ll need to open a bank account in your business’s name to keep your liability protection in tact (if your partnership type offers liability protection).
- You’ll need a physical address where the business can receive mail and legal notices.
- Make sure you have a partnership agreement on hand. This is a document that outlines how the partnership will be ran and includes details such as how to deal with partners that leave, adding new partners, changing the business, or shutting the business down.
LegalZoom will help you choose which partnership may be right for you. We can also file the paperwork to form your business, help you find a registered agent, and get you in touch with an attorney or tax professional.