TRANSACTIONAL TRACKBusiness Formation

12:30 p.m.- 1:30 p.m.

Presented bySean W. Wandro

Meardon, Sueppel & Downer P.L.C.122 S. Linn St.

Iowa City, IA 52240Phone: 319-338-9222

2014 Nuts & Bolts SeminarCoralville

2014 Nuts & Bolts SeminarCoralville

THURSDAY, OCTOBER 30, 2014THURSDAY, OCTOBER 30, 2014

Business Formation

Presented by

Sean W. Wandro Meardon, Sueppel & Downer P.L.C.

122 S. Linn Street Iowa City, IA 52240

Telephone: (319) 338-9222 Facsimile: (319) 338-7250

E-mail: seanw@meardonlaw.com www.meardonlaw.com

2

I. Introduction and assumptions.

A. This outline focuses on the nine (9) most common business entity

options in Iowa. B. There are two (2) general categories of these business entity

options: for profit and nonprofit.

C. All business entity options discussed herein are domestic business entities.

D. Domestic business entities are defined as a business organized

under and subject to the laws of Iowa.

E. Foreign business entities, or those organized under laws other than those of Iowa, should seek legal counsel before transacting business in Iowa. Permission from the Secretary of State of Iowa may be required and the business entity options available to foreign business entities may not include those discussed herein.

F. The selection of a business entity is a complicated process that

should only be undertaken after sufficient due diligence and consultation with appropriate advisors, including but not limited to attorneys, accountants and bankers.

G. Initial meetings. H. What, where, who, when, how and why? I. Conflict checks. J. Tax issues. K. Financing. L. Insurance.

3

II. For profit entities.

A. Sole proprietorships.

1. Typically the most simple business entity to form and administer, as there is essentially nothing to do to form one.

2. There are no statutes in Iowa that govern the formation or operation of sole proprietorships.

3. Very common form of business entity.

4. As the name implies, they are a “one person shop”.

5. No distinction between the owner and the sole proprietorship, which from an owner/operator perspective, creates the leading advantage to sole proprietorships: total control.

6. Total control also creates the leading disadvantage to sole

proprietorships: total liability.

7. Another disadvantage is that sole proprietorships do not always enable succession planning.

8. An additional disadvantage is that sole proprietorships may

have difficulty obtaining financing.

9. Another issue to consider is taxation. Owners/operators of sole proprietorships are taxed at the taxation rate of owners/operators.

10. One final disadvantage to sole proprietorships is the issue of separation.

11. This is more of a counseling issue.

12. Sole proprietorships are advantageous for a new business that

will operate on a small scale with limited exposure to liability and which will not require the time, cost and effort of entity formation.

4

B. General partnerships. 1. General partnerships in Iowa are governed by the Iowa

Uniform Partnership Act (Chapter 486A of the Iowa Code).

2. Section 486A.101(6) defines a partnership as “an association of two or more persons to carry on as co-owners a business for profit formed under section 486A.202, predecessor law, or comparable law of another jurisdiction.”

3. Section 486A.202 provides that: “1. Except as otherwise

provided in subsection 2, the association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intend to form a partnership. 2. An association formed under a statute other than this chapter, a predecessor statute, or a comparable statute of another jurisdiction is not a partnership under this chapter…”

4. General partnerships are essentially a sole proprietorship for two.

5. No fees.

6. Oral agreements are permissible, written agreements are

preferred.

7. No reporting requirements.

8. Section 486A.303 provides that a filed Statement of Partnership Authority must include:

a. Name;

b. Street address, if one exists;

c. The names and mailing addresses of all the partners,

or of an agent appointed and maintained by the general partnership for the purpose of the above subsection; and

d. The names and mailing addresses of the partners, or

of an agent authorized to execute an instrument

5

transferring real property held in the general partnership’s name.

9. SAMPLE STATEMENT OF PARTNERSHIP AUTHORITY.

10. Section 486A.303 provides that a Statement of Partnership

Authority may state the authority, or limitations on the authority, of some or all of the partners to enter into other transactions on behalf of the partnership, and any other matter.

11. A filed Statement of Partnership Authority is canceled by operation of law five (5) years after the date on which the Statement, or the most recent amendment thereto, was filed, unless canceled earlier.

12. General partnerships are subject to pass-through taxation.

13. Partners can agree on management and control of general

partnerships, but in the event that partners have no agreement with respect to management and control, see Section 486A.401(6).

14. Partners can agree on capital, but in the event that partners have

no agreement with respect to capital, see Section 486A.204.

15. Partners can divide their profits and losses by agreement, but in the event that partners have no agreement with respect to profits and losses, see Section 486A.401(2).

16. Partners can agree on the transferability of ownership of general

partnerships, but in the event that partners have no agreement with respect to transferability, see Section 486A.503.

17. The key disadvantage to general partnerships is that the individual assets of all partners can be used to cover any liability incurred by general partnerships. Even if another partner incurred the liability, all partners are liable for it. See Section 486A.306.

18. Partners can agree on the duration of general partnerships,

which can be dissolved through the filing of a Statement of Dissolution with the Secretary of State of Iowa.

6

19. With respect to dissolution, Section 486A.801 provides that: “A partnership is dissolved, and its business must be wound up, only upon the occurrence of any of the following events: 1. In a partnership at will, the partnership's having notice from a partner, other than a partner who is dissociated under section 486A.601, subsections 2 through 10, of that partner's express will to withdraw as a partner, or on a later date specified by the partner. 2. In a partnership for a definite term or particular undertaking if any of the following occur or are present: a. The expiration of ninety days after a partner's dissociation by death or otherwise under section 486A.601, subsections 6 through 10, or wrongful dissociation under section 486A.602, subsection 2, unless before that time a majority in interest of the remaining partners, including partners who have rightfully dissociated pursuant to section 486A.602, subsection 2, paragraph “b”, subparagraph (1), agree to continue the partnership. b. The express will of all of the partners to wind up the partnership business. c. The expiration of the term or the completion of the undertaking. 3. An event agreed to in the partnership agreement resulting in the winding up of the partnership business. 4. An event that makes it unlawful for all or substantially all of the business of the partnership to be continued, but a cure of illegality within ninety days after notice to the partnership of the event is effective retroactively to the date of the event for purposes of this section. 5. On application by a partner, a judicial determination that concludes any of the following: a. The economic purpose of the partnership is likely to be unreasonably frustrated. b. Another partner has engaged in conduct relating to the partnership business which makes it not reasonably practicable to carry on the business in partnership with that partner. c. It is not otherwise reasonably practicable to carry on the partnership business in conformity with the partnership agreement. 6. On application by a transferee of a partner's transferable interest, a judicial determination that it is equitable to wind up the partnership business at any of the following times: a. After the expiration of the term or completion of the undertaking, if the partnership was for a definite term or particular undertaking at the time of the transfer or entry of the charging order that gave rise to the transfer. b. At any time, if the partnership was a partnership at will at the time of the transfer or entry of the charging order that gave rise to the transfer.”

7

C. Limited partnerships.

1. Limited partnerships in Iowa are governed by the Uniform Limited Partnership Act (Chapter 488 of the Iowa Code).

2. Section 488.102(13) defines a limited partnership as, except in the phrases “foreign limited partnership” and “foreign limited liability limited partnership”, as “an entity, having one or more general partners and one or more limited partners, which is formed under this chapter by two or more persons or becomes subject to this chapter under article 11 or section 488.1204, subsection 1 or 2. The term includes a limited liability limited partnership.”

3. Limited partnerships are entities distinct from their partners.

4. To be formed, limited partnerships must file a written

Certificate of Limited Partnership with the Secretary of State, with a required $100.00 filing fee.

5. Section 488.201 provides that Certificate of Limited Partnership

must include:

a. The name.

b. The street and mailing address of the initial designated office and the name and street and mailing address of the initial agent for service of process.

c. The name and the street and mailing address of each

general partner.

d. Whether the limited partnership is a limited liability limited partnership.

e. Any additional information required by article 11.

6. SAMPLE CERTIFICATE OF LIMITED PARTNERSHIP.

7. Section 488.201 provides that a Certificate of Limited Partnership may also contain any other matters.

8

8. Section 488.201 further provides that if there has been substantial compliance with subsection 1, subject to section 488.206, subsection 3, a limited partnership is formed when the secretary of state files the Certificate of Limited Partnership. The Secretary of State's filing of the Certificate is conclusive proof that all conditions precedent to formation of the limited partnership have been satisfied except in a proceeding by the state to cancel or revoke the Certificate or involuntarily dissolve the limited partnership.

9. The Certificate may be amended, but any amendments must be

filed with the Secretary of State, with a required fee of $100.00.

10. Limited partnerships must have both general partners and limited partners.

11. The relationship of the parties is to be governed by a written

partnership agreement.

12. Partners can agree on management and control of limited partnerships, but in the event the partners have no agreement with respect to management and control, see Section 488.100.

13. Partners can agree of capital, but in the event that partners have no agreement with respect to capital, see Section 488.110.

14. Partners can divide their profits and losses by agreement, but in

the event that partners have no agreement with respect to profits and losses, see Sections 488.501 through 488.509.

15. Partners can agree on the transferability of ownership of limited

partnerships, but in the event that partners have no agreement with respect to transferability, see Sections 488.701 through 488.704.

16. The key advantage to limited partnerships is that an obligation

of a limited partnership, whether in contract, tort, or otherwise, is not the obligation of a limited partner. A limited partner is not personally liable, directly or indirectly, by way of contribution or otherwise, for an obligation of the limited partnership solely by reason of being a limited partner, even if the limited partner participates in the management and control of the limited partnership.

9

17. A limited partner does not have the right or the power as a

limited partner to act for or bind limited partnerships.

18. Section 488.104 provides that limited partnerships are perpetual.

19. Dissolved limited partnerships that have wound up business

may file a Statement of Termination with the Secretary of State.

20. SAMPLE STATEMENT OF TERMINATION.

21. With respect to non-judicial dissolution, Section 488.801 provides that limited partnerships are dissolved and their activities must be wound up, only upon the occurrence of any of the following:

a. The happening of an event specified in the

partnership agreement.

b. The consent of all general partners and of limited partners owning a majority of the rights to receive distributions as limited partners at the time the consent is to be effective.

c. After the dissociation of a person as a general partner,

upon occurrence of either of the following: 1. If the limited partnership has at least one remaining general partner, the consent to dissolve the limited partnership given within ninety days after the dissociation by partners owning a majority of the rights to receive distributions as partners at the time the consent is to be effective. 2. If the limited partnership does not have a remaining general partner, the passage of ninety days after the dissociation, unless before the end of the period, all of the following occur: (a) Consent to continue the activities of the limited partnership and admit at least one general partner is given by limited partners owning a majority of the rights to receive distributions as limited partners at the time the consent is to be effective. (b) At least one person is

10

admitted as a general partner in accordance with the consent.

d. The passage of ninety days after the dissociation of

the limited partnership's last limited partner, unless before the end of the period the limited partnership admits at least one limited partner.

e. The signing and filing of a declaration of dissolution

by the secretary of state under section 488.809, subsection 3.

22. Limited partnerships must file Biennial Reports during odd-

numbered years following the calendar year in which formed or authorized to transact business in Iowa. There is a filing fee for the Biennial Report, which varies based on whether it is done electronically or in hard copy.

11

D. Limited liability partnerships.

1. Limited liability partnerships in Iowa are governed by the Iowa Uniform Partnership Act (Chapter 486A of the Iowa Code).

2. Section 486A.101 definition: “…a partnership that has filed a statement of qualification under section 486A.1001 and does not have a similar statement in effect in any other jurisdiction.”

3. Section 486A.1001 provides that “1. A partnership may become

a limited liability partnership pursuant to this section. 2. The terms and conditions on which a partnership becomes a limited liability partnership must be approved by the vote necessary to amend the partnership agreement except, in the case of a partnership agreement that expressly considers obligations to contribute to the partnership, by the vote necessary to amend those provisions. 3. After the approval required by subsection 2, a partnership may become a limited liability partnership by filing a statement of qualification….”

4. The Statement of Qualification must contain:

a. The name;

b. The street address of the partnership's chief executive

office and, if different, the street address of an office in this state, if any;

c. The address of a registered office and the name and

address of a registered agent for service of process in this state, which the partnership is required to maintain as provided in section 486A.1211;

d. A statement that the partnership elects to be a limited

liability partnership; and

e. A deferred effective date, if any.

5. SAMPLE STATEMENT OF QUALIFICATION.

6. Section 486A.1001 also provides that the Statement of Qualification shall be executed by one or more partners

12

authorized to execute the Statement of Qualification on behalf of the partnership.

7. The status of a partnership as a limited liability partnership is

effective on the later of the filing of the Statement of Qualification or a date specified in the Statement of Qualification, and payment of a $50.00 fee for the filing of a Statement of Qualification.

8. The Statement of Qualification may be amended, but any

amendments must be filed with the Secretary of State, with payment of a fee of $20.00.

9. Section 486A.1001 further provides that the status remains

effective, regardless of changes in the partnership, until the Statement of Qualification is canceled pursuant to section 486A.105, subsection 4.

10. The key advantage to a limited liability partnership is that all

partners, whether general or limited, are provided with full-shield liability.

11. The relationship of the parties is to be governed by a written

partnership agreement.

12. Partners can agree on management and control of limited liability partnerships, but in the event that partners have no agreement with respect to management and control, see Section 486A.401(6).

13. Partners can agree on capital, but in the event that partners have

no agreement with respect to capital, see Section 486A.204.

14. Partners can divide their profits and losses by agreement, but in the event that partners have no agreement with respect to profits and losses, see Section 486A.401(2).

15. Partners can agree on the transferability of ownership of limited

liability partnerships, but in the event that partners have no agreement with respect to transferability, see Section 486A.503.

16. Limited liability partnerships are governed by many of the same provisions that govern general partnerships, but

13

remember that they do not share the liability characteristics of general partnerships or limited partnerships.

17. Section 486A.306 provides in relevant part that “…3. An

obligation of a partnership incurred while the partnership is a limited liability partnership, whether arising in contract, tort, or otherwise, is solely the obligation of the partnership. A partner is not personally liable, directly or indirectly, by way of contribution or otherwise, for such an obligation solely by reason of being or so acting as a partner. This subsection applies notwithstanding anything inconsistent in the partnership agreement that existed immediately before the vote required to become a limited liability partnership under section 486A.1001, subsection 2.”

18. Partners can agree on the duration of limited liability

partnerships. They can be cancelled by filing a Statement of Cancellation of Qualification and payment of a $20.00 filing fee.

19. SAMPLE STATEMENT OF CANCELLATION OF

QUALIFICATION.

20. With respect to dissolution, Section 486A.801 also provides that: “A partnership is dissolved, and its business must be wound up, only upon the occurrence of any of the following events: 1. In a partnership at will, the partnership's having notice from a partner, other than a partner who is dissociated under section 486A.601, subsections 2 through 10, of that partner's express will to withdraw as a partner, or on a later date specified by the partner. 2. In a partnership for a definite term or particular undertaking if any of the following occur or are present: a. The expiration of ninety days after a partner's dissociation by death or otherwise under section 486A.601, subsections 6 through 10, or wrongful dissociation under section 486A.602, subsection 2, unless before that time a majority in interest of the remaining partners, including partners who have rightfully dissociated pursuant to section 486A.602, subsection 2, paragraph “b”, subparagraph (1), agree to continue the partnership. b. The express will of all of the partners to wind up the partnership business. c. The expiration of the term or the completion of the undertaking. 3. An event agreed to in the partnership agreement resulting in the winding up of the partnership business. 4. An event that makes it unlawful for all or

14

substantially all of the business of the partnership to be continued, but a cure of illegality within ninety days after notice to the partnership of the event is effective retroactively to the date of the event for purposes of this section. 5. On application by a partner, a judicial determination that concludes any of the following: a. The economic purpose of the partnership is likely to be unreasonably frustrated. b. Another partner has engaged in conduct relating to the partnership business which makes it not reasonably practicable to carry on the business in partnership with that partner. c. It is not otherwise reasonably practicable to carry on the partnership business in conformity with the partnership agreement. 6. On application by a transferee of a partner's transferable interest, a judicial determination that it is equitable to wind up the partnership business at any of the following times: a. After the expiration of the term or completion of the undertaking, if the partnership was for a definite term or particular undertaking at the time of the transfer or entry of the charging order that gave rise to the transfer. b. At any time, if the partnership was a partnership at will at the time of the transfer or entry of the charging order that gave rise to the transfer.”

21. There is no Biennial Report or reporting requirement required for limited liability partnerships.

15

E. For profit corporations.

1. For profit corporations in Iowa are governed by the Iowa Business Corporation Act (Chapter 490 of the Iowa Code).

2. Section 490.140(5) definition: a domestic corporation for profit,

which is not a foreign corporation, incorporated under or subject to this chapter.

3. For profit corporations are an association of individuals with

powers and liabilities independent of its shareholders.

4. For profit corporations are separate entities from the individuals who control, operate and own them.

5. They own their assets and owe their debts. Shareholders are

protected from individual losses, save for the value of their investment.

6. They are managed by boards of directors that are typically

elected by the shareholders of the for profit corporations.

7. They are governed by Articles of Incorporation and Bylaws.

8. SAMPLE ARTICLES OF INCORPORATION.

9. For profit corporations are formed by adopting and filing of Articles of Incorporation with the Secretary of State of Iowa and the payment of a $50.00 filing fee.

10. Section 490.202 provides that Articles of Incorporation must

include:

a. A corporate name for the corporation that satisfies the requirements of section 490.401.

b. The number of shares the corporation is authorized to

issue.

c. The street address of the corporation's initial registered office and the name of its initial registered agent at that office.

16

d. The name and address of each incorporator.

11. Amendments to Articles of Incorporation may be made, but must be filed with the Secretary of State, with the payment of a $50.00 filing fee.

12. Bylaws are not filed with the Secretary of State and may be amended as needed.

13. For profit corporations generally take one of two general forms:

a. Closely held for profit corporations.

b. Publicly held for profit corporations.

14. For profit corporations generally take one of two tax structures:

a. Subchapter S. b. Subchapter C.

15. Corporations typically are perpetual.

16. The key disadvantage of for profit corporations is that they are

subject to double taxation.

17. Section 490.801 provides that generally each corporation must have a board of directors. All corporate powers shall be exercised by or under the authority of, and the business and affairs of the corporation managed by or under the direction of, its board of directors, subject to any limitation set forth in the articles of incorporation, or in an agreement authorized under section 490.732.

18. Section 490.623 provides that capital is governed by the Articles

of Incorporation, but in the event the Articles of Incorporation do not address capital, Section 490.623 provides a default.

19. Section 490.640 provides that profits and losses are governed by

the Articles of Incorporation, but in the event the Articles of Incorporation do not address profits and losses, Section 490.640 provides a default.

17

20. Shares of for profit corporations are generally freely transferable. Any transfer is subject to any restrictions set forth in for profit corporations’ Articles of Incorporation. See Section 490.627.

21. The liability of shareholders of for profit corporations is addressed by Section 490.622. Generally, a purchaser from a for profit corporation or a shareholder is not liable.

22. The liability of directors of for profit corporations is addressed

by Section 490.831.

23. The liability of officers of for profit corporations is addressed by Section 490.842.

24. For profit corporation must file Biennial Reports during even-numbered years following the calendar year in which they were formed in Iowa. There is a filing fee for the Biennial Report, which varies based on whether it is done electronically or in hard copy.

25. For profit corporations may dissolve by filing Articles of

Dissolution with the Secretary of State. Section 490.1420 provides for administrative dissolution and Section 490.1430 provides for judicial dissolution.

26. SAMPLE ARTICLES OF DISSOLUTION.

18

F. Professional corporations.

1. Professional corporations are governed in Iowa by the Professional Corporation Act (Chapter 496C of the Iowa Code).

2. Section 496C.2 defines professional corporations as a corporation subject to the Professional Corporations Act, except a foreign professional corporation.

3. Professional corporations must be formed for the sole purpose

of rendering professional services and may only be formed by certain defined professionals.

4. Professional corporations are governed by Articles of

Incorporation and Bylaws.

5. Professionals include many more professions than may be readily apparent.

6. Professional corporations do not protect professionals against

their own negligence.

7. They do protect professionals against the negligence of professional associates, which can supplement protection provided by malpractice insurance.

8. Professional corporations are formed by adopting and the filing

of Articles of Incorporation with the Secretary of State, and payment of a filing fee of $50.00.

9. Generally, the Articles of Incorporation must include the same

elements as required with for profit corporations.

a. The corporate name, b. The number of shares the professional corporation is

authorized to issue, c. The street address of the professional corporation’s initial

registered office and the name of its initial registered agent at that office; and

d. The name and address of each incorporator.

10. The name shall contain the words “professional corporation” or the abbreviation “P.C.”

19

11. Amendments to Articles of Incorporation may be made, but

must be filed with the Secretary of State of Iowa, with the payment of a filing fee of $50.00.

12. Bylaws are not filed with the Secretary of State and can be

amended as needed.

13. Professional corporations typically are perpetual.

14. Generally each professional corporation must have a board of directors. Section 496C.16 provides that all directors of a professional corporation and all officers of a professional corporation, except assistant officers, shall at all times be individuals who are licensed to practice in this state a profession, or a lawful combination of professions pursuant to section 496C.4, which the corporation is authorized to practice.

15. Section 496C.10 provides that capital is governed by the Articles of Incorporation, but in the event the Articles of Incorporation do not address capital, Section 496C.10 provides a default.

16. Section 496C.3 provides that profits and losses are governed by the Articles of Incorporation, but in the event the Articles of Incorporation do not address profits and losses, Section 496C.3 provides a default.

17. Section 496C.11 provides that transfers of ownership are

governed by the Articles of Incorporation, but in the event the Articles of Incorporation do not address transfer of ownership, Section 496C.11 provides a default.

18. Section 496C.9 provides that liability is governed by the Articles

of Incorporation, but in the event the Articles of Incorporation do not address liability, Section 496C.9 provides that the liability of the shareholders of professional corporations, as shareholders, shall be limited in the same manner and to the same extent as in the case of a corporation organized under the Iowa Business Corporation Act, set forth in Chapter 490.

19. Professional corporations must file Biennial Reports during even-numbered years following the calendar year in which they were formed or authorized to transact business in Iowa. There is

20

a filing fee for the Biennial Report, which varies based on whether it is done electronically or in hard copy.

20. With respect to dissolution, Section 496C.19 provides that

violation of any provision of this chapter by a professional corporation or any of its shareholders, directors, or officers shall be cause for its involuntary dissolution, or liquidation of its assets and business by the district court, as provided in the Iowa Business Corporation Act. Upon the death of the last remaining shareholder of a professional corporation, or whenever the last remaining shareholder is not licensed or ceases to be licensed to practice in this state a profession which the corporation is authorized to practice, or whenever any person other than the shareholder of record becomes entitled to have all shares of the last remaining shareholder of the corporation transferred into that person's name or to exercise voting rights, except as a proxy, with respect to such shares, the corporation shall not practice any profession and it shall either be promptly dissolved or shall promptly elect to adopt the provisions of the Iowa business corporation Act, as provided in section 490.1701(2). However, if prior to such dissolution all outstanding shares of the corporation are acquired by one or more persons licensed to practice in this state a profession which the corporation is authorized to practice, the corporation need not be dissolved and may practice the profession as provided in this chapter.

21

G. Limited liability companies.

1. Limited liability companies are governed in Iowa by the Revised Uniform Limited Liability Company Act (Chapter 489 of the Iowa Code).

2. Section 489.102(10) definition: “…except in the phrase “foreign limited liability company”, [means] an entity formed under this chapter.”

3. Limited liability companies are an unincorporated

associations with one or more members.

4. Section 489.104 provides that limited liability companies are entities distinct from their members.

5. Section 489.304 provides that with respect to liability: “1. For

debts, obligations, or other liabilities of a limited liability company, whether arising in contract, tort, or otherwise all of the following apply: a. They are solely the debts, obligations, or other liabilities of the company. b. They do not become the debts, obligations, or other liabilities of a member or manager solely by reason of the member acting as a member or manager acting as a manager. 2. The failure of a limited liability company to observe any particular formalities relating to the exercise of its powers or management of its activities is not a ground for imposing liability on the members or managers for the debts, obligations, or other liabilities of the company.”

6. Limited liability companies are formed by filing a Certificate

of Organization with the Secretary of State, with a $50.00 filing fee.

7. SAMPLE CERTIFICATE OF ORGANIZATION.

8. The relationship of the parties is to be governed by an

Operating Agreement.

9. SAMPLE OPERATING AGREEMENT.

22

10. The Certificate of Organization may be amended, but amendments must be filed with the Secretary of State, with a filing fee of $50.00.

11. The Certificate of Organization must contain:

a. The name;

b. The street address of the initial registered office and

the name of the initial registered agent for service of process on the company; and

c. The Certificate of Organization must be signed by an

organizer of the limited liability company.

12. Section 489.104 provides that limited liability companies have perpetual duration.

13. The ultimate advantages to limited liability companies are that like for profit corporations, limited liability companies’ owners are not generally liable for obligations of limited liability companies, but unlike for profit corporations, limited liability companies enjoy pass-through taxation, not double taxation.

14. Partners can agree on management and control of limited

liability companies. In the absence of such agreement, see Section 489.110.

15. Members can agree on the transferability of ownership of limited liability companies. In the absence of such agreement, see Section 489.502.

16. Members can agree to dissolve limited liability companies. They can be dissolved by filing a Statement of Dissolution, with a $5.00 filing fee.

17. SAMPLE STATEMENT OF DISSOLUTION.

18. With respect to dissolution, Section 489.701 provides that “1.

A limited liability company is dissolved, and its activities must be wound up, upon the occurrence of any of the following: a. An event or circumstance that the operating

23

agreement states causes dissolution. b. The consent of all the members. c. Once the company has at least one member, the passage of ninety consecutive days during which the company has no members. d. On application by a member, the entry by a district court of an order dissolving the company on the grounds that any of the following applies: (1) The conduct of all or substantially all of the company's activities is unlawful. (2) It is not reasonably practicable to carry on the company's activities in conformity with the certificate of organization and the operating agreement. e. On application by a member or transferee, the entry by a district court of an order dissolving the company on the grounds that the managers or those members in control of the company have done any of the following: (1) Have acted, are acting, or will act in a manner that is illegal or fraudulent. (2) Have acted or are acting in a manner that is oppressive and was, is, or will be directly harmful to the applicant. 2. In a proceeding brought under subsection 1, paragraph “e”, the court may order a remedy other than dissolution.”

19. Limited liability companies must file Biennial Reports during odd-numbered years following the calendar year in which they were organized. There is a filing fee for the Biennial Report, which varies based on whether it is done electronically or in hard copy.

24

III. Nonprofit entities.

A. Nonprofit corporations.

1. Nonprofit corporations are governed in Iowa by the Revised Iowa Nonprofit Corporation Act (Chapter 504 of the Iowa Code).

2. Section 504.141 defines a corporation under the Revised Iowa Nonprofit Corporation Act as a public benefit, mutual benefit, or religious corporation.

a. Mutual benefit nonprofits are neither public benefit

nor religious and may be clubs, fraternal organizations and homeowners associations.

b. Public benefit nonprofits are exempt under 501(c)(3) of the Internal Revenue Code.

c. Religious.

3. Nonprofit corporations are an association of individuals

with independent powers and liabilities.

4. They are separate entities from the individuals who control and operate them.

5. They own their assets and owe their debts.

6. They are managed by boards of directors that are typically

elected by the for nonprofit corporations’ members or boards of directors.

7. They are governed by their Articles of Incorporation and

Bylaws.

8. Nonprofit corporations are formed by adopting and filing of Articles of Incorporation with the Secretary of State, with payment of a $20.00 filing fee.

9. SAMPLE ARTICLES OF INCORPORATION.

25

10. Section 504.202 provides that Articles of Incorporation must include:

a. A name;

b. The address of the nonprofit corporation's initial

registered office and the name of its initial registered agent at that office;

c. The name and address of each incorporator;

d. Whether the nonprofit corporation will have

members. A nonprofit corporation incorporated prior to January 1, 2005, may state whether it will have members in either the articles of incorporation or in the corporate bylaws; and

e. For corporations incorporated after January 1, 2005,

provisions not inconsistent with law regarding the distribution of assets on dissolution.

11. Section 504.202 also provides that the Articles of

Incorporation may set forth: a. The purpose for which the nonprofit corporation is

organized, which may be, either alone or in combination with other purposes, the transaction of any lawful activity.

b. The names and addresses of the individuals who are to serve as the initial directors.

c. Provisions not inconsistent with law regarding all of

the following:

1.) Managing and regulating the affairs of the nonprofit corporation;

2.) Defining, limiting, and regulating the powers of the nonprofit corporation, its board of directors, and members, or any class of members; or

3.) The characteristics, qualifications, rights, limitations, and obligations attaching to each or any class of members.

26

d. A provision eliminating or limiting the liability of a

director to the nonprofit corporation or its members for money damages for any action taken, or any failure to take any action, as a director, except liability for any of the following:

1.) The amount of a financial benefit received by a

director to which the director is not entitled; 2.) An intentional infliction of harm on the

nonprofit corporation or its members; 3.) A violation of section 504.835; or 4.) An intentional violation of criminal law.

A provision set forth in the articles of incorporation pursuant to this paragraph shall not eliminate or limit the liability of a director for an act or omission that occurs prior to the date when the provision becomes effective. The absence of a provision eliminating or limiting the liability of a director pursuant to this paragraph shall not affect the applicability of section 504.901.

e. A provision permitting or requiring a nonprofit

corporation to indemnify a director for liability, as defined in section 504.851, subsection 5, to a person for any action taken, or any failure to take any action, as a director except liability for any of the following:

1.) Receipt of a financial benefit to which the person

is not entitled; 2.) Intentional infliction of harm on the nonprofit

corporation or its members; 3.) A violation of section 504.835 or 4.) Intentional violation of criminal law.

f. Any provision that under this chapter is required or

permitted to be set forth in the bylaws.

12. Amendments to the Articles of Incorporation may be made, but must be filed with the Secretary of State of Iowa, with a required filing fee of $10.00.

27

13. Bylaws are not filed with the Secretary of State and can be amended as needed.

14. SAMPLE BYLAWS.

15. Nonprofit corporations are not always tax-exempt

organizations, but tax-exempt organizations are always nonprofit corporations, trusts or associations.

16. To become a tax-exempt organization, an entity must file

Form 1023 or 1024 with the Internal Revenue Service.

17. If an entity obtains tax-exempt status, it will have an ongoing annual reporting requirement (Form 990).

18. Nonprofit corporations must file Biennial Reports during

odd-numbered years following the calendar year in which they were formed in Iowa. There is no filing fee due with the Biennial Report.

28

B. Unincorporated nonprofit associations.

1. Unincorporated nonprofit associations are governed in Iowa by the Revised Uniform Unincorporated Nonprofit Association Act (Chapter 501B of the Iowa Code).

2. The Revised Uniform Unincorporated Nonprofit Association

Act (“RUUNAA”) governs the operation in Iowa of all unincorporated nonprofit associations formed or operating in Iowa. It also provides that unless the unincorporated nonprofit associations’ governing principles specify a different jurisdiction, the law of the jurisdiction in which the unincorporated nonprofit association has its main place of activities governs the internal affairs of the unincorporated nonprofit association.

4. Unincorporated nonprofit associations are defined as legal

entities distinct from their members and managers.

5. Unincorporated nonprofit associations are perpetual unless their governing principles provide otherwise.

6. Unincorporated nonprofit associations may acquire, hold,

encumber or transfer in their names, an interest in real or personal property. They may also be a beneficiary or a trust or contract, a legatee or a devisee.

7. Any debts arising in contract, tort or otherwise are solely the

debt, obligation or other liability of the unincorporated nonprofit association. Such debts do not become the debts of a member, manager, employee or volunteer solely because of their actions as a member, manager, employee or volunteer. Members, managers, employees or volunteers are not personally liable for any action taken or failure to act in the discharge of his or her duties except for:

a. The amount of any financial benefit to which the

person is not entitled;

b. An intentional infliction of harm on the unincorporated nonprofit association or the members;

c. An intentional violation of criminal law; or

29

d. Improper distributions.

8. Unincorporated nonprofit associations may sue or be sued. 9. Unless it provides otherwise in its governing principles, an

unincorporated nonprofit association must have member approval to do any of the following: a. Admit, suspend, dismiss or expel a member;

b. Select or dismiss a manager;

c. Adopt, amend or repeal the governing principles;

d. Sell, lease, exchange or otherwise dispose of all, or

substantially all, of the unincorporated nonprofit association’s property, with or without the unincorporated nonprofit association’s goodwill, outside the ordinary course of its activities;

e. Dissolve or merge;

f. Undertake any other act outside the ordinary course

of the unincorporated nonprofit association’s activities; or

g. Determine the policy and purposes of the

unincorporated nonprofit association.

10. Governing principles may deal with suspension, dismissal or expulsion of members. If no such governing principle applies, a member may be suspended, dismissed or expelled by a vote of the members.

11. Governing principles may also deal with resignation and in

their absence a member may resign at any time. 12. Memberships are non-transferable. 13. Unless the governing principles apply otherwise, all of the

following apply with respect to the selection of managers:

30

a. Only members may select manager(s). b. A manager may be a member or non-member.

c. If no manager is selected, all members are managers.

d. Each manager has equal rights in the management of

the unincorporated nonprofit association’s activities.

e. All matters relating to the unincorporated nonprofit association’s activities shall be decided by the managers except for matters reserved for approval by members.

f. A difference among managers is decided by a

majority of the managers.

14. Managers owe to the unincorporated nonprofit association and its members the fiduciary duties of loyalty and care.

15. Members do not have a fiduciary duty to unincorporated

nonprofit associations or other members solely by being a member.

16. Members who are managers then, have different duties than

their fellow members. 17. Managers shall manage the unincorporated nonprofit

association in good faith, in a manner the manager reasonably believes to be in the best interests of the unincorporated nonprofit association, and with such care, including reasonable inquiry, as a prudent person would reasonably exercise in a similar position and under similar circumstances. A manager may rely in good faith upon any opinion, report, statement or other information provided by another person that the manager reasonably believes is a competent and reliable source for the information. Managers that make business judgments in good faith satisfy the duties of loyalty and care if:

a. The manager is not interested, directly or indirectly,

in the subject of the business judgment and is otherwise able to exercise independent judgment.

31

b. The manager is informed with respect to the subject

of the business judgment to the extent the manager reasonably believes to be appropriate under the circumstances.

c. The managers believes that the business judgment is

in the best interest of the unincorporated nonprofit association and in accordance with its purposes.

18. Members shall discharge the duties to the unincorporated

nonprofit association and other members, and exercise any rights under the Iowa Code consistent with the governing principles of the unincorporated nonprofit association and the obligation of good faith and fair dealing.

19. Distributions are prohibited but compensation and

reimbursement are generally permitted. 20. Winding up and termination of an unincorporated nonprofit

association requires:

a. All known debts and liabilities must be paid or provided for.

b. Any property subject to a condition requiring return

to the person designated by the donor must be transferred to that person.

c. Any property subject to a trust must be distributed in

accordance with the trust agreement.

d. Any remaining property must be distributed as required by law, in accordance with the governing principles or in their absence, to the members per capita or as they direct.

e. If neither law nor governing principles apply, then

pursuant to Chapter 556.