How to Start an S Corp in Iowa
Iowa is known for its beautiful landscape, low cost of living, and growing economy. This favorable environment continues to attract both new and experienced business owners. Starting an S corporation (S corp) in Iowa is simple and may help your business save money on its taxes.
This guide will walk you through the ins and outs of starting your Iowa S corp and provide tips on maintaining and growing your business.
If you’re not in Iowa, check out our other How to Start an S Corp guides to learn more.
Recommended: If you have at least $60,000 in net earnings, an S corp may offer tax advantages. Let Northwest start your S corp today.
Factors to Consider Before Starting an S Corp in Iowa
Before forming an S corp, you have to consider the following factors:
- Is an S corporation the best strategy for your business?
- S corporation restrictions
- Are S corp tax advantages right for you?
Is an S Corporation the Best Strategy for Your Business?
For help with choosing the right structure for your business, visit our Choosing a Business Structure guide.
S Corporation Restrictions
S corps have several restrictions, such as being limited to one class of stock and 100 shareholders. Read our What Is an S Corporation guide for full details.
Are S Corp Tax Advantages Right for You?
An S corporation is a tax designation that can be elected by an LLC or corporation. With an S corp, business owners are considered employees of the company and must receive a reasonable salary. Since all S corps technically have employees, the s corp must run payroll.
In order to benefit from an Iowa S corp tax designation, your business needs to make enough money to offset payroll expenses. Furthermore, S corps are beneficial for business owners who take large distributions in addition to their salary.
To learn more about the tax advantages of an S corp, read our LLC vs. S corp guide and take a look at our S corp tax calculator.
For a Free Consultation With a Tax Professional
How to Form an Iowa S Corp
There are two main ways to start an S corp:
- By forming an LLC and electing S corp tax status from the IRS when you request your employee identification number (EIN)
- By forming a corporation and electing S corp status from the IRS
We recommend forming an LLC because it’s simpler and more cost-effective.
Recommended: If you have an existing LLC, visit our How to Convert an LLC to S Corp guide.
Steps for Forming an LLC and Electing S Corp Status in Iowa
Starting an Iowa LLC and electing S corp tax status is easy. You can use our guides to start an LLC with the S corp status yourself, or you can hire a service provider like Northwest to guide you through this process.
There are five basic steps to start an LLC and elect S corp status:
Step 1: Name Your LLC
Step 2: Choose a Registered Agent
Step 3: File the Certificate of Organization
Step 4: Create an Operating Agreement
Step 5: Get an EIN and File Form 2553 to Elect S Corp Tax Status
Step 1: Name Your LLC
Choosing a company name is the first and most important step in starting your LLC in Iowa.
Be sure to choose a name that complies with Iowa naming requirements and is easily searchable by potential clients.
1. Follow the naming guidelines for an Iowa LLC:
-
Your name must contain one of the following terms or abbreviations: limited liability company, limited company, L. L. C., LLC, L. C., or LC. “Limited” may be abbreviated as “Ltd.,” and “company” may be abbreviated as “Co.”
-
Your name cannot include words that could confuse your LLC with a government agency (FBI, Treasury, State Department, etc.).
-
Certain restricted words (e.g. Bank, Attorney, University) may require additional paperwork and a licensed individual to be part of your LLC.
-
Your name must be distinguishable from any existing business in the state. This includes Iowa reserved names.
You can also read the Iowa state statute about LLC naming guidelines for more information.
2. Is the name available in Iowa? You can use the business entities search on the Iowa Secretary of State website to see if your desired LLC name is available.
3. Is the URL available? We recommend checking to see if your business name is available as a web domain. Even if you don't plan to create a business website today, you may want to buy the URL in order to prevent others from acquiring it.
Step 2: Choose Your Iowa Registered Agent
You must elect a registered agent for your Iowa LLC.
An LLC registered agent will accept legal documents and tax notices on your LLC's behalf. You will list your registered agent when you file your LLC's Certificate of Organization.
Many business owners choose to hire a registered agent service. Many of these services will form your LLC for a small fee and include the first year of registered agent services for free.
Step 3: File the Iowa LLC Certificate of Organization
The Iowa Certificate of Organization is used to officially register an LLC.
File Your Iowa Certificate of Organization
OPTION 1: File Online With Iowa Fast Track Filing
File Online- OR -
OPTION 2: File by Mail or by Fax
Read InstructionsState Filing Cost: $50 (Nonrefundable)
Mailing Address:
Lucas State Office Building
321 E. 12th St.
Des Moines, IA 50319
Fax: (515) 242-5953
Step 4: Create an LLC Operating Agreement
An LLC operating agreement is a legal document that outlines the ownership and member duties of your LLC.
For more information, read our Iowa LLC Operating Agreement guide.
Our operating agreement tool is a free resource for business owners.
Step 5: Get an EIN and Complete Form 2553 on the IRS Website
An EIN is a number that is used by the US Internal Revenue Service (IRS) to identify and tax businesses. It is essentially a Social Security number for a business.
EINs are free when you apply directly with the IRS.
Elect S Corp Tax Status
During the online EIN application, the IRS will provide a link to Form 2553, the Election By a Small Business form.
Visit our Form 2553 Instructions guide for detailed help with completing the form.
This is the form to elect S corp tax status for your LLC:
Ready to start saving on your taxes?
We recommend using a formation service to start your Iowa S corp for you, so you can focus on the things that matter most - growing you business.
Keep Your Iowa S Corp Compliant
After you elect the S corp tax designation for your Iowa business, you must register for Iowa state business taxes and file a biennial report every two years. It’s important to follow state laws in order to keep your business in good standing.
Iowa S Corp Biennial Report
Your Iowa S corp must file a biennial report with the Iowa Secretary of State. This report informs the state about any changes to your business. Your biennial report is due by April 1 every other year. If you formed your business in an even-numbered year, for example, you must file this report in every even-numbered year.
There’s a fee to file this report and, even if your business isn’t profitable, the state still requires you to file it with the Iowa Secretary of State. Failure to file may result in the state dissolving your business.
Visit our step-by-step Iowa Biennial Report guide for more information.
Iowa S Corp Taxes
S corporations benefit from pass-through taxation, meaning the business’s profits pass-through to S corp owners’ individual tax returns. S corp owners make money from their reasonable salary and distributions, and Iowa S corp owners can expect to pay the following taxes:
Federal Self-Employment Taxes
Self-employment taxes cover social security and medicare. The self-employment tax rate is 15.3%, and money you take as salary will be subjected to the self-employment tax. However, distributions are not subjected to this tax.
Federal Income Taxes
Your federal income taxes will depend on your tax bracket, and the cutoffs for individual tax brackets as well as the percent owed will change each year. Both your salary and distributions are subjected to federal income tax.
Iowa Income Taxes
Iowa’s state income tax ranges from 0.3% to 8.53%, depending on your annual income. In addition, some local jurisdictions impose their own income tax.
While Iowa’s graduated tax rate isn’t excessive, it’s not low when compared to other states. Some states have no income tax while others have an income tax rate that exceeds 10%.
Register for Iowa Business Taxes
In order to pay Iowa business taxes, you must register with the Iowa Department of Revenue.
Register for Iowa Sales Tax
You’ll also need to register with the Iowa Department of Revenue to receive a sales tax permit and tax ID number. Visit the Iowa Department of Revenue website to learn more.
Iowa Sales and Use Tax
Iowa has a statewide 6% sales tax. Many local jurisdictions also impose an additional sales tax, but the state caps local sales taxes at 1%.
Additional State Taxes
Depending on your business’s industry, number of employees, and location, you may owe additional state taxes to the Iowa Department of Revenue. Iowa business owners may have to pay some of the following taxes and fees:
- Contractor Registration Fee
- Fuel Tax
- Hotel and Motel Tax
- Estate Tax
- Unemployment Tax
Visit the Iowa Department of Revenue website for more information.
Iowa Local Taxes
Local jurisdictions may have their own local laws and permits that can impact your business. Whether you live in Des Moines, Iowa City, or a smaller town, make sure to research how your local jurisdiction’s laws impact your business operations.
Start an Iowa S Corp FAQ
An S corporation (S corp) is a tax designation that an LLC or a corporation can elect.
No. The default taxes for an LLC and taxes for an S corp are not the same.
With an S corp, owners pay personal income tax and self-employment tax on a predetermined salary. They may then withdraw any remaining profits from the business as a “distribution,” which isn’t subject to self-employment tax.
With an LLC, all company profits pass through to the owners’ personal tax returns, and then the owners must pay personal income tax and self-employment tax on the entire amount.
Both LLCs and S corps benefit from a provision in the Tax Cuts and Jobs Act of 2017 that allows qualifying owners of pass-through entities to deduct 20% of qualified business income (QBI) from their tax returns. However, for S corps, the deduction doesn’t apply to profits paid out as wages.
S corp owners are required to earn a “reasonable” salary, which basically means a fair market rate based on the individual’s qualifications as well as their duties and responsibilities at the company. The purpose of this requirement is to prevent S corp owners from paying themselves an artificially low salary in order to pay less self-employment tax.
A distribution is a dividend that a shareholder/owner can take from the business profits that remain after a company pays all of its employee salaries. Shareholders must pay personal income tax on distributions, but distributions aren’t subject to self-employment tax.
LLCs and corporations that operate under a “doing business as” (DBA) name can choose the S corp election.
No. Unlike most other states, Iowa requires businesses to file a biennial report. This means you must file a report once every two years. Your biennial report will contain the same information as any other state’s annual report. It serves a similar purpose, but is just filed less frequently.
In general, it’s often best to form your business in the state where you plan to operate. If you live and operate your business in the state of Iowa, then it’s likely the best place for you to elect S corp status. Just like with any other state, you’ll need to register your business for state taxes.