Should your Iowa small business be an S corp? This article reviews the benefits and drawbacks of filing for S corp status with the IRS. You’ll also learn if your business entity qualifies and how to start an S corporation in Iowa.
S Corporation in Iowa: Key Points
An S corporation is a business entity with S corp status from the IRS.
Corporations or LLCs with the S corp tax classification gain pass-through taxation and lower self-employment taxes, among other benefits.
Eligible businesses must file Form 2553 to elect S corp status.
What Is an S Corporation?
Because it seems analogous to a C corporation, the term “S corporation” is often discussed as a business structure. But this isn’t accurate.
An S corporation is a business entity with S corp status from the IRS. This special tax classification is reserved for qualifying businesses who file Form 2553—an S corporation election—to the IRS.
A limited liability company (LLC), C corporation, or partnership can be an S corp. But they must meet specific requirements, and the tax classification will only benefit certain businesses.
Tax Considerations for an S Corporation in Iowa
In general, S corp status allows C corporations the benefits of pass-through taxation. Being an S corp can also reduce the self-employment tax burden for members of highly profitable LLCs.
Iowa Tax Treatment of S Corporations
In Iowa, S corporations are recognized by state law and taxed according to Federal guidelines. They are seen as “pass-through” entities, and while they file an income tax return at the state level, that income is generally paid by the S corporation shareholders on their personal tax returns.
If your S corporation has non-resident shareholders, you’ll have to fill out a composite return to pay state income tax on behalf of those shareholders.[1]
Iowa Franchise Tax for S Corporations
Iowa’s franchise tax applies to financial institutions, so if your small business is outside of the banking sector, you won’t need to worry about it.[2]
Pass-Through Taxation
C corporations are subject to what is sometimes called “double taxation.” Most states and the Federal government charge corporate income taxes, and shareholders who draw profit from the business also pay income tax on their take-home pay.
But if that C corp operates as an S corporation, it only pays one Federal income tax. Instead of corporate tax, its profits or losses “pass-through” to the company’s shareholders, avoiding double taxation. This tax treatment is the main reason companies will elect S corp status.
Potential Self-Employment Savings
S corporations must pay everyone who works for the company as an employee. This can create extra tax paperwork versus an LLC, but it may provide tax advantages for shareholders. After shareholders have received “reasonable” pay for their work, they can draw distributions out of the company’s profits free of self-employment tax.
Requirements for Forming an S Corporation in Iowa
Not every business can become an S corporation. To qualify for S corp status, the company must meet the following requirements:[3]
Be a domestic limited liability company (LLC), C corporation, or partnership
Have a maximum of 100 S corporation shareholders, excluding partnerships, corporations, and “non-resident aliens”
Only issue one class of stock
If your business violates any of these requirements, your S corp election will be rejected. Some financial institutions are ineligible.
Filing as an S Corp in Iowa
Here’s what it takes to start an S corporation in Iowa. If you don’t have an eligible Iowa business entity registered with the Secretary of State, you must first form one. Then, you can file for S corp status with the IRS.
Step 1: Choose a Business Name
First, your S corporation in Iowa will need a unique business name so you never get mixed up with another business in the state database. If you have names in mind, conduct a business name search on the Secretary of State website or with our free business name search tool to see if it’s already taken.
If a name on file seems close to the one you want, your name must be “distinguishable” by having “one or more different letters” or containing “a different sequence of letters or numerals.” A variation in corporate signifiers, punctuation, or capitalization would not make two names distinguishable.[4]
Your business name must contain the word Incorporated, Corporation, Limited, Company, or any abbreviation. The name also can’t imply that you are a government agency or that you’re doing a type of business that you’re not actually doing.[5]
When you find a name that fits these guidelines, purchase an adequate web domain and establish social media handles so your business can have a healthy online marketing presence.
Once you’ve selected your perfect business name, reserve it for just $10 with the Iowa Secretary of State’s office. Your name reservation is good for 120 days.
Step 2: Appoint Directors and a Registered Agent
If you’re forming an LLC, there’s no mandated corporate structure. But C corporations need to do a little more planning.
Shareholders own corporations. These shareholders may or may not have anything to do with the day-to-day functioning of the business. But they must appoint a board of directors of at least one person. These directors take responsibility for the solvency and growth of the company, and they usually hire corporate officers to do the work.
The board of directors must meet on an annual basis. Your S corporation shareholders must have a list of S corp directors committed to overseeing the corporation before you get started. You can be the only shareholder and director if you're the only one involved.
Selecting an Iowa Registered Agent
Every business in Iowa needs a registered agent in the state with a street address on file (not a P.O. Box). This address is essential to your business. If you are ever sued or summoned to court, the government will contact you via your registered agent. This is why you want to select a professional and reliable Iowa registered agent.
We have a registered agent service that you’ll be glad to have on your side if a crisis occurs. Missed correspondence could sink you much deeper into trouble, so choose your Iowa registered agent carefully.
Step 3: File Articles of Incorporation
The articles of incorporation are the founding document of your business. For LLCs, these are generally called articles of organization. In Iowa, this is what you’ll need to put on your articles of incorporation:[6]
Business name
Number of shares your business is authorized to issue
Name and address of your business office and registered agent
Incorporators name and address
Your articles of incorporation can also lay out the corporation’s purpose, directors, and other information. But you might save these and further details for your bylaws.
Once complete, you can mail your articles to the Iowa Secretary of State or upload them to GovConnectIowa. The filing fee is $50.
Once officially incorporated, you’ll owe the state a biennial report twice a year. Similar to annual reports in other states, it just keeps the basic information of your business up to date. You’ll also owe relevant taxes, such as franchise tax, if you’re a bank.
Step 4: Create S Corp Bylaws
Bylaws are critical for the success of your business. They detail necessary procedures and responsibilities that firm up your corporate structure.
Before getting into business, it’s wise to develop bylaws and get all the business owners to sign. LLCs have a similar document called an operating agreement.
Step 5: Apply for an Employer Identification Number
Your corporation’s Employer Identification Number is commonly known as an EIN, Tax ID, or Federal Tax ID. This is like your business entity’s social security number. It’s a number issued by the IRS that identifies your business as a taxpaying entity.
Without an EIN, you won’t be able to apply for business bank accounts or credit cards, register to pay state tax such as income or employment taxes, or acquire permits and licenses you need to do business. Fortunately, it's easy to get your EIN for free.
Step 6: File Form 2553 for S Corporation Election
Your business is not an S corp until you go to the IRS and file an S corporation election. Luckily, getting S corp status is simple as long as your business entity meets the S corp limitations and filing deadlines. All shareholders must sign Form 2553, an S corporation election, and then you can file the form with the IRS.
As long as you meet the deadlines for the current tax year, which is two months and 15 days from the start of the year, you can usually get S corp status immediately. The IRS estimates about a 60-day turnaround for the form. You can file anytime for S corp status for the coming tax year.
If your LLC has missed the filing deadline for this year, make sure you file Form 8832, a separate IRS form, concurrently with Form 2553.
Iowa S Corp vs. Iowa LLC
Should you stick to an LLC or try to become an S corp? Below we compare the pros and cons of S corp status with a standard limited liability company (LLC).
Advantages of Starting an LLC in Iowa
An LLC is remarkably straightforward to operate and tax. It cannot issue stock like a corporation, but corporations and other LLCs can be members. Its pass-through tax status is beneficial for most businesses, and it maintains the liability protections of a corporation.
Disadvantages of Starting an LLC in Iowa
LLCs have one major weakness in their tax treatment compared to companies with S corp status. An LLC’s income is subject to self-employment tax when it passes to its members’ personal tax returns. In modest amounts, this is unavoidable, but for highly profitable businesses, members may be paying taxes they wouldn’t have to with S corp status.
Advantages of forming an S Corporation in Iowa
A business owner would file an S corporation election for their Iowa LLC for tax purposes. This would ultimately cut down the LLC member’s self-employment tax burden. After an S corp shareholder or LLC member is paid a “reasonable” salary for their work on the business, they can take distributions free of self-employment tax.
If you’re taking significant distributions, you’ll want to make sure you can justify to the IRS that you’re being paid reasonably for your work.
Disadvantages of forming an S Corporation in Iowa
Compared with an Iowa LLC, an S corp will need to benefit significantly from its new tax treatment to outweigh the additional costs of doing business with S corp status. Taxes are more complex, state fees are higher, and you’ll have to run payroll.
In addition, the S corp limitations can be troublesome depending on your Iowa LLC’s business plan. But if you see yourself taking on partnerships with other LLCs, you might not want to commit to S corp status.
Ready to File for S Corp Status in Iowa?
Now you know all the steps to start an S corporation in Iowa. Our formation service can get your small business ready and filed with S corp status, and you don’t have to fill out a single page of paperwork.
As a business owner, you have more important things to do than squint at the S corp limitations and download IRS forms. Get Swyft Filings on board, and we’ll do the work quickly and professionally, letting you return to the work you want to do.
Frequently Asked Questions
What is an S Corporation in Iowa?
An Iowa S corporation is an eligible business entity with elected S corp status from the IRS.
Does Iowa recognize S corporations?
Yes, Iowa recognizes S corporations.
What is the turnaround time for filing for S corp status with the IRS?
The IRS estimates processing an S corporation election will take around 60 days.
What is the difference between an S corp and an LLC?
While an S corp has elected the S corp tax status with the Federal government, an LLC has chosen the LLC business structure. An LLC may also be an S corp.
What are the requirements for an S corporation in Iowa?
S corporations can only have 100 shareholders or fewer, and those shareholders cannot be partnerships, corporations, or non-resident aliens. They also can only issue one class of stock, among other limitations.
Are taxes for LLCs and S corps the same?
LLCs and S corps are taxed differently. They are both pass-through entities, but S corporations must hire anyone who works for the corporation as an employee, and they are also able to allocate distributions in addition to this work free of self-employment tax.
What is the S corp tax rate?
S corps are taxed on the personal income tax returns of their shareholders.
How do I dissolve an S corporation in Iowa?
S corps can file articles of dissolution on the Iowa Secretary of State website for a $10 filing fee.
Bibliography
Iowa Department of Revenue. “Iowa Composite Returns for Tax Year 2022 and Later.” Accessed March 8, 2023.
Iowa Department of Revenue. “Franchise Tax.” Accessed March 8, 2023.
Internal Revenue Service. “S Corporations.” Accessed March 8, 2023.
Iowa Secretary of State. “Understanding Name Availability in Iowa.” Accessed March 8, 2023.
Iowa Code 2023. “490.401 Corporate name.” Accessed March 8, 2023.
Iowa Code 2023. “490.202 Articles of incorporation.” Accessed March 8, 2023.