CONSIDERATIONS

C CORPS

S CORPS

PARTNERSHIPS

IOWA LLCs

Election

Not Required

Required – All shareholders must agree

Not required

Number of Owners/

Eligible Owners

No limit; no restrictions on

ownership

100 shareholder limit;

C corporations, LLCs,

partnerships, nonresident

aliens, certain estates and

certain trusts are not

eligible owners

No limit on maximum number; minimum of 2; no

restrictions on ownership

No limit on maximum number; minimum of 1; no restrictions on ownership

Classes of Ownership

Unlimited classes of common and preferred stock or other securities

Only one class of stock permitted; voting differences allowed

General partners and one or more classes of limited partners

Unlimited classes of membership interests

Continuity of Legal Existence

Perpetual

Termination by agreement, or on a general partner's death, bankruptcy, dissolution or other disaffiliation (unless consent of partners to continue)

Non perpetual, also terminates by agreement, on or on a member's death, bankruptcy, dissolution or other disaffiliation (unless unanimous consent to continue)

Transfer of Ownership Interest

Readily and easily marketable by transfer of certificate of stock but, shareholder agreements may restrict transfer.

Addition of new partner or transfer of partner's governance interest often requires consent of other partners

Financial gains freely assignable; transfer of governance rights requires unanimous consent of member

CONSIDERATIONS

C CORPS

S CORPS

PARTNERSHIPS

IOWA LLCs

Termination of Entity Status for Tax Purposes

No restrictions

Elections of shareholders owning 50% or more of the stock; events causing failure to meet S corporation eligibility requirements (e.g., transfer of shares to an ineligible shareholder)

Single owner; sale or exchange of 50% or more of partnership/membership interests within 12-month period; or cessation of operations

Liability Exposure (special exceptions may apply for professional liability)

Shareholders are only liable for capital contributions

General partners are personally, jointly and severally liable for partnership obligations; limited partners liable for capital contributions only

All members with governance rights may participate in management (without risking loss of limited liability)

Ownership/Management Responsibility

No limitation on shareholder participation in management

All general partners participate in management and share joint responsibility; limited partners cannot participate in management

All members with governance rights may participate in management (without risking loss of limited liability)

Ownership of Subsidiaries

No restrictions

No restrictions but can't file consolidated return with C corporation

No restrictions

Treatment of Income and Losses

All corporate income taxed at corporate level and again taxed at shareholder level when distributed as dividends; some C corporations taxed as personal holding companies or personal service corporations and can be taxed on excess accumulated earnings; capital gains taxed as ordinary income

Corporate income determined at entity level and passed through to each shareholder regardless of whether distributed; some S corporations pay tax on built-in gains and excess net passive income; income and loss items generally retain character; accumulated earnings tax not an issue

Same as S corporation, except no entity-level tax on built-in gains or tax on passive income

Special Allocations of Income and Deductions

Each class of stock and securities must generally be treated the same

Not permitted; allocation on a per-share/per-day basis

Permitted, if substantial economic effect

CONSIDERATIONS

C CORPS

S CORPS

PARTNERSHIPS

IOWA LLCs

Deductibility of Losses

Deductible only by the corporation in a year that it has offsetting income; unused losses (NOL's) carried back 2 years and forward 15 years on Federal returns. State laws may vary.

Losses pass through to shareholders and are deductible to the extent of their stock and debt basis; subject to at-risk rules, passive loss limitations, and hobby loss limitations

Permitted, if substantial economic effect

Distributions of Cash

Distributions taxed as ordinary income to the extent of earnings and profits

Currently have 5% or 15% tax rate.

Distributions are taxed to the extent they exceed a shareholder's basis in stock and debts or are made out of C corporation earnings and profits

Distributions taxed to the extent they exceed partner's/member's basis in partnership/LLC interest; adjustments to inside basis of entity's property may be elected

Non-liquidating Distributions of Appreciated Property

C corporation will generally recognize gain and pay tax on distribution of appreciated property; taxable to shareholder as either dividend or capital gain or loss

S corporation recognizes gain on distribution of appreciated property which is passed through and taxed only to shareholders if built-in gain rules do not apply; fair market value of distributed property taxed to shareholder like cash distribution

Partnership/LLC does not recognize gain or loss on distribution of appreciated property; no gain or loss recognized by partner/member from distribution; adjustments to inside basis of entity's property may be elected

Liquidation of Business

Double tax on corporate and shareholder levels

No tax at corporate level (except for built-in gains or certain passive income)

No tax at entity level

Sale of Ownership

Interest

All capital gain unless corporation is collapsible; step-up to buyer generally unattractive unless section 338(h) (10) election available

All capital gain unless corporation is collapsible; no election available to step-up inside base of entity's assets for purchaser

May be part capital gain and part ordinary income; election available to step-up basis of entity's assets for purchaser (not available to single member LLC)

CONSIDERATIONS

C CORPS

S CORPS

PARTNERSHIPS

IOWA LLCs

Tax Year

No restrictions, except for certain professional corporations

Generally, must use a calendar year unless it establishes a business purpose for a fiscal year or an election to use a non-required tax year is made

Generally, the same tax year as the partners/members who own a majority interest in profits and capital, unless a business purpose is established or an election to use a non-required tax year is made

Federal Tax Return

Form 1120

Form 1120-S

Form 1065

Form 1065 or Schedule C with 1040 if single owner in LLC

Fringe Benefits

Shareholder-employees may receive tax qualified fringe benefits without restriction

Owner of more than 2% of S corporation shares generally cannot receive tax-free benefits

Partners/members generally not eligible for tax-free fringes

Employment Taxes

FICA tax payable by the corporation and the employees

Self-employment tax generally applies to compensation of partners/members

Ownership of Iowa

Agricultural Land

Acceptable if in conformity to Chapter 172C of the Iowa Code

Not permitted