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.”
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