Business Formation

Choosing the right entity

The right entity depends on what the business does, how many owners are involved, how the income will be taxed, and what the owners need to be protected from. We form three kinds: LLCs, partnerships, and S corporations. Each carries different tax treatment, governance, and operating requirements.

Most of our clients ask for an LLC, and most should: the structure is flexible, the tax treatment is generally favorable, and the operational requirements are reasonable. Partnerships, and the partnership agreements that govern them, are common in LIHTC and other tax credit deals, where the investor and developer relationship is built around allocations that partnership tax rules handle well. S corporations still have their place, but with the flexibility an LLC offers, clients rarely need one today.

We advise on the entity decision based on the substance of the business and coordinate with the client’s accountant on the tax structuring that drives most of the choice. A default to LLC without thinking through the alternative is its own kind of mistake.

What’s actually in formation

Entity formation is more than the Secretary of State filing. The work includes:

• Articles or Certificate of Organization filed with the Iowa Secretary of State (or the corresponding state for non-Iowa entities)
• Operating Agreement, Partnership Agreement, or Bylaws governing how the entity will operate, who has authority to do what, and what happens when something changes
• Initial governance documents: organizational consents, manager or director resolutions, member or shareholder consents
• EIN application with the IRS
• Initial state and local registrations depending on the business
• Foreign qualification in any other state where the business will do business
• Beneficial ownership reporting under FinCEN’s Corporate Transparency Act, where applicable

We handle the full scope so the entity is properly stood up, not just filed.

What the operating agreement actually decides

The operating agreement is the document that determines what happens when things change: when an owner wants out, when an additional capital contribution is needed, when a deadlock arises, when the business is sold, or when an owner dies. Most operating agreements we see drafted by others are silent on these issues or address them in ways that don’t actually work when the time comes. The provisions that get tested in practice are usually the same handful:

• Voting and decision-making thresholds. What requires a majority, what requires a supermajority, and what requires unanimous consent
• Capital contribution mechanics. Initial contributions, capital calls, dilution for non-contributing members, and the consequences of defaulting on a capital call
• Distribution provisions. Ordinary distributions, tax distributions, preferred returns where applicable, and the waterfall on liquidation
• Transfer restrictions. Who can transfer interests to whom, and what consents and rights of first refusal apply
• Buy-sell and exit mechanics. Voluntary exits, involuntary exits (death, disability, divorce, bankruptcy), valuation methodology, and funding
• Deadlock-breaking. For member-managed and 50/50-owned LLCs in particular, how to resolve a stalemate without dissolving the company
• Manager and officer authority. What management can do without member approval, and what requires going back to the members

We draft these provisions to fit the specific business, not pulled from a generic template that may or may not address how the company will actually operate.

Different entities, different agreements

A two-person operating business needs different language than a real estate holding entity with a manager and several passive investors. An LLC formed to hold a single development project, with construction lender requirements, possibly tax credit investor consent rights, and a defined exit timeline, needs different drafting than an operating company with an indefinite life.

A master tenant LLC for a historic tax credit project, or a project partnership with a LIHTC investor as the limited partner, needs drafting that fits the credit structure and the investor’s expected rights. The substance of these differences is large. Pulling the wrong template into the wrong situation is one of the more common ways governing documents fail in practice.

Amendments and restatements

Governing documents need to change as the business changes. Bringing in a new member, restructuring management, modifying distribution provisions, accommodating a tax credit investor or a lender requirement; each calls for an amendment or, where the changes are substantial, a complete amendment and restatement. We draft these to fit the new facts while preserving what’s working in the existing document.