How to Form an LLC in Iowa!

Forming an LLC in Iowa can provide a number of legal benefits.

Freedom of Contract

The Iowa LLC Act gives members contractual freedom to create voting and non-voting classes of membership and customize their capital contributions and shares of profits and losses.  Section 489.110 provides that an LLC agreement governs the “[r]elations among the members as members and between the members and the limited liability company.”  Members can use this flexibility to tailor their income streams and risks of loss and facilitate everything from complex, high-dollar-volume transactions to succession planning in family businesses and estate planning by gifts of non-voting interests.

Privacy for Owners

The Act does not require filing of members’ names.  A “person” may form an LLC by filing its certificate of organization with the Iowa Secretary of State.  The definition of “person” is not just a natural person, but includes almost any kind of business or legal entity.  An LLC’s members may therefore have an entity or person who is not a member file the LLC’s certificate of organization.

Perpetual Duration

The Act provides for an LLC’s unlimited life.  Section 489.104 states that every limited liability company has perpetual duration.  An LLC’s existence can therefore outlive its members’ lifetimes.

Benefits for Business Partners

The Iowa LLC Act gives members contractual freedom to customize the duties each party to the LLC agreement owes to the other parties.  Section 489.409 has a default rule that members in member-managed LLCs and managers in manager-managed LLCs have fiduciary duties of loyalty and care.  The duty of loyalty is defined as (1) not competing with the LLC or taking a business opportunity away from the LLC, (2) not dealing with the LLC on behalf of parties who have an interest that is adverse to the LLC, and (3) acting as a trustee of the LLC’s property.  The duty of care is defined as acting with the care that “a person in a like position would reasonably exercise under similar circumstances and in a manner the member reasonably believes to be in the best interests of the company.”

The Act gives members and managers contractual freedom to “opt out” of most of the default rules, however, by including provisions in an LLC agreement that modify the duties.  Regarding the duty of care, section 489.110 provides an LLC agreement that may alter it, “except to authorize intentional misconduct or knowing violation of law.”

Regarding the duty of loyalty, section 489.110 provides that if not “manifestly unreasonable,” an LLC agreement may restrict or eliminate the three elements in section 489.409.  In addition, it provides an LLC agreement that may “[i]dentify specific types or categories of activities that do not violate the duty of loyalty.”  Furthermore, it provides an LLC agreement “may specify the method by which a specific act or transaction that would otherwise violate the duty of loyalty may be authorized or ratified by one or more disinterested and independent persons after full disclosure of all material facts.”  This ratification procedure is a “safe harbor” provision for “interested” transactions, which are transactions between an LLC and one or more of its members or managers.  This provision gives members and the LLC certainty in business planning and the ability to take advantage of mutually beneficial opportunities.

Protections Against Unwanted Parties

The Iowa LLC Act allows members to protect their control of an LLC.  An LLC agreement may prohibit members from transferring their membership interests.  But if an LLC agreement does not prohibit it, a transfer does not dissolve the LLC or entitle the transferee to participate in management or to become a member.  Instead, the transferee may receive only the distributions to which the transferor would have been entitled, and all the other members must consent to the transferee becoming a member.

Creditors Only Get Passive Rights, Not Control Rights

If a judgment creditor of a member obtains a charging order against the member’s membership interest, it “constitutes a lien on a judgment debtor’s transferable interest and requires the limited liability company to pay over to the person to which the charging order was issued any distribution that would otherwise be paid to the judgment debtor.”  A court may foreclose on the lien and order the membership interest to be sold.  A purchaser at the foreclosure sale obtains only the rights of a transferee and cannot become a member unless the non-transferring members consent.  Under section 489.503, obtaining a charging order and a foreclosure sale are the judgment creditor’s exclusive remedies.

In addition, the Act states that a person ceases to be a member of an LLC when the person makes an assignment for the benefit of creditors, becomes a debtor in bankruptcy, or fails to contest a petition seeking the appointment of a trustee, receiver, or liquidator of the person or of all or substantially all of the person’s property.  These events are considered “events causing dissociation.”

Here are the steps you will need to follow to set up an LLC in Iowa.

Step 1. Choose a Name

Every Iowa LLC name must contain one of the following designations: “limited liability company,” “limited company,” “L.L.C.,” “LLC,” L.C.,” or “LC.” The name you pick must also be distinguishable on the Secretary of State’s records from all other business entities incorporated, organized, or authorized to do business in Iowa.

Step 2. Appoint a Registered Agent in Iowa

An Iowa LLC must continuously maintain an agent for service of process in the state.  A commercial registered agent service may act as an Iowa registered agent.

Step 3. File a Certificate of Organization

To form your Iowa LLC, you must pay a $50 filing fee and submit a Certificate of Organization to the Iowa Secretary of State. Iowa law only requires that your Certificate of Organization list the name of the LLC and the name and address of the LLC’s registered agent. While these are the only required provisions, the organizer can include any other provisions that they want.

Step 4. Prepare an Operating Agreement

Your Iowa LLC will be governed by an operating agreement, whether or not you explicitly make one. Iowa law says this agreement can be oral, written, or implied, and suggests that 2 members agreeing to form an LLC constitutes an operating agreement. We recommend writing your operating agreement down and having all members execute it to avoid any possible trouble down the road.

There are some additional steps you will need to take after you form your New Hampshire to finish setting up and maintaining your business.

Get an EIN Number

If you will employ other people or have multiple members in your LLC, you will need a Federal Employer Identification Number (FEIN or EIN). You can obtain this directly from the I.R.S., or you can pay a small fee to an incorporation service to remove the hassle.

File Biennial Reports

Every two years, Iowa LLCs have to file a biennial report with the Secretary of State. This report must state the name of the LLC, the street address of the LLC’s principal office, and the name and address of the LLC’s registered agent. If the registered agent listed is different from the registered agent that the Secretary of State has on file, there must be a signed consent from the new registered agent. This report is accompanied by a filing fee of $30 if filed online, and $45 if filed on paper.