Advantages and Disadvantages of Sole Proprietorships in Iowa

A frequent issue that entrepreneurs face – and one they should seriously consider – is whether to create a formal legal entity, such as a limited liability company (L.L.C.), or remain a “sole proprietor.”  This post briefly identifies some of the common advantages and disadvantages of operating a business in Iowa as a sole proprietor.

Sole Proprietorship

A sole proprietorship is often referred to as one of the easiest and simplest business structures to create and operate.  Sole proprietorships are run by one person and generally there is no “legal distinction” between the business and the individual owner.  As depicted in the infograph to the right, some of the advantages include:

1.  Sole proprietorships are very easy and inexpensive to create.  Indeed, unlike a limited liability company (L.L.C.) or a corporation (Inc.), a sole proprietor is not required to pay fees to the State of Iowa for filing articles of incorporation, certificates of organization, or biannual reports;

2.  A sole proprietor exercises complete control over the business and does not answer to other owners, such as shareholders in a corporation or partners in a partnership; and

3.  A sole proprietorship generally has one of the lowest tax rates of all business forms.

While carrying on business as a sole proprietor certainly has advantages, many drawbacks exist that, for some, far outweigh the advantages.  Some disadvantages include:

1.  Sole proprietors are personally liable for business debts and obligations, including any liabilities arising from a lawsuit involving the business.  As a result, if the “business” is assessed a fine or has a judgment entered against it, that fine, judgement, or other monetary obligation is, in reality, an obligation the sole proprietor may be required to pay out of personal funds; Continue reading

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Can I Force My Iowa Corporation to Buy My Stock?

Minority Shareholder Force Sale of Stock

Minority shareholders seeking to exit an Iowa corporation frequently ask, “can I force my closely-held Iowa corporation to purchase my stock.”  A great question, but one that is frequently met with a variety of answers.  On January 21, 2014, the Delaware Supreme Court published an opinion on this very topic.  And while the case applies Delaware law (not Iowa law) and each case is factually unique, the opinion illustrates how other courts, including Iowa courts, may decide a similar case involving a shareholder seeking to force their corporation to purchase stock.  The FULL OPINION can be read here.

In short, the Delaware Supreme Court applied Delaware law and held that “[u]nder common law, the directors of a closely held corporation have no general fiduciary duty to repurchase the stock of a minority stockholder.”  The court went on to find, Continue reading

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Iowa Legislation Signed into Law in 2014 (so far…)

New Iowa Corporate Laws Signed in 2014

Our readers frequently inquire about what new legislation Iowa’s legislature is passing and Iowa’s Governor, Terry E. Branstad, is signing into law.  While the 2014 legislative session has not yet adjourned for the year, a list of all legislation signed into law in 2014 is provided below along with links to the legislation.  Notably, for our readers here at CorporateDispute.com, on March 26, 2014 and as referenced below, Governor Branstad signed Senate File (“SF”) 2200 into law.  As we will more fully address in future posts, SF2200 revises an Iowa corporation’s duties to provide shareholders with important financial information as well as amends Iowa’s existing law governing voting trusts and shareholder agreements.

As of April 13, 2014, Iowa Governor, Terry E. Branstad, has signed the following bills into law:

Signed on March 7, 2014

House File 2131: an Act modifying applicable to the recording of a mortgage or deed of trust executed by a transmitting utility.

House File 2172: an Act providing for the use of an electronic filing and notice system by the Public Employment Relations Board.

House File 2216: an Act concerning the definition of off-road utility vehicle for purposes of regulation by the Department of Natural Resources. Continue reading

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Showing Shareholders the Money in Iowa Corporations

Iowa Corporate Law

Are Iowa corporations required to disclose financial information to shareholders?

Iowa law requires Iowa corporations to provide certain financial information to their shareholders.  In particular, Iowa Code Section 490.1620 mandates Iowa corporations provide their shareholders with “annual financial statements.”  As you may suspect, “annual financial statements” should include a balance sheet, an income statement, and a statement of changes in shareholder equity, if any.  Further, if financial statements are prepared for the corporation on the basis of generally accepted accounting principles (GAAP), the annual financial statements provided to shareholders must also be prepared on that basis.

When must an Iowa corporation’s financial statements be provided to shareholders?  

Iowa law clearly states the corporation must send the annual financial statements to each shareholder within 120 days after the close of each fiscal year.  See Iowa Code Section 490.1620 (2014).  If the corporation, however, is a public corporation, additional requirements may apply under the United States Securities and Exchange Commission.

What if an Iowa corporation fails to provide annual financial statements to shareholders as required by Iowa law?

If an Iowa corporation fails to provide annual financial statements as required by Iowa law, the aggrieved shareholder(s) may choose to request relief from an Iowa court, including seeking a court order compelling the corporation to produce the required statements, and perhaps, damages if they can be established.

Annual financial statements are just a few of the corporate records a shareholder may access and review.  To learn more about the records a shareholder may review, you may want to review these posts: here and here.  Finally, Continue reading

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7 Corporate Records an Iowa Corporation Must Keep

Maintain Iowa Corporate Records

Iowa shareholders who are either seeking to learn more about their corporation or who are investigating potential corporate wrongdoing, often inquire as to what corporate records (i.e. documents) their corporation must keep.  Not surprisingly, reviewing a corporation’s records often provides shareholders with a better understanding of how the corporation is running, or perhaps, isn’t running.  Pursuant to Iowa law, a corporation is required to keep at least the following five (5) categories of records:

1.  All minutes from shareholder and board of director meetings;

2.  Records of all actions taken by shareholders or the board of directors without a meeting;

3.  “Appropriate”* accounting records;

4.  A record (i.e. list) of its shareholders;

5.  Articles or restated articles of incorporation and any amendments thereto;

6.  Bylaws or restated bylaws and all amendments to them currently in effect; and

7.  All written communications to shareholders.

Iowa Code Section 490.1601 (2014).

*The phrase “appropriate” accounting records is commonly understood to mean those records that generally permit financial statements to be prepared which fairly present the financial position and transactions of the corporation.  Also, according to one very influential authority, “in some very small businesses operating on a cash basis, ‘appropriate’ accounting records may consist only of a check register, vouchers, and receipts.”  Model Business Corporation Act, 16-2 Official Comment at 2 (2012).

Keeping these and other corporate records on hand for a specified period of time is not only required by Iowa law, but access to such records helps shareholders understand important information about their corporation.  

To learn more about inspecting your Iowa corporation’s records, see these posts HERE, HERE, and HERE or contact an attorney in your jurisdiction.

LEGAL DISCLAIMER AND TERMS OF USE

Innovative Litigation, L.L.C., as owner and host of this site, and Matthew McKinney as the author (acting on behalf of and through Innovative Litigation, L.L.C.) cannot and does not warrant the accuracy or reliability of the information presented on or through this site.  The law can and does change over time and the information contained herein may not reflect the most recent laws – whether statutory law, administrative law, case law, constitutional law, or otherwise.  The information on this website does not constitute legal advice and readers should not rely on it to solve problems or other matters.  Further, you should seek licensed counsel in the appropriate legal jurisdiction before taking any action.  Any information provided on this site is presented “As Is” for your personal curiosity and enjoyment.  It is not meant to be relied upon for legal advice, counsel, or for any other purposes.  Such information does not take the place of a lawyer.  Rules and laws differ by jurisdiction and the information contained within this website may not apply in your jurisdiction.  The appearance of articles, listings, or ads, by or for professionals, on this site, does not constitute an endorsement.  In all cases, you are responsible for determining the quality of services, information, and/or advice provided by professionals through, or as a consequence of, your use of this site.  Neither liability nor responsibility shall arise to any person or entity with respect to loss or damage caused (or alleged to be caused), directly or indirectly, by information posted on this website, or by reason of contact with a professional listed on, or posting information to, this site.  No attorney-client relationship is formed by viewing this website and practice is limited to jurisdiction where lawyers are admitted.  The information furnished on the website is only general and not a substitute for personalized legal advice.   Legal advice cannot be given without full consideration of all relevant information relating to the individual(s) situation.  Laws can change daily and new laws may, and likely will, affect the accuracy of the information herein.  The information herein may be outdated and replaced by new law.

If you are seeking representation, please read the following notice before sending an e-mail:

Sending an e-mail will not make you a client.  Until an agreement regarding representation is reached with you, anything you send will not be confidential or privileged.  Before representation can occur, a lawyer will first take you through the conflict of interest procedure and see that you are put in touch with the lawyer best suited to handle your matter.

If you proceed with an e-mail, you confirm that you have read and understood this notice.

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Pre-Incorporation Liability for Iowa Entrepreneurs and Startups

Iowa Preincorporation LiabilitySo you’ve come up with the next “big thing,” and you’re excited, anxious, and busting at the seams to get started.  All natural feelings, but before getting too far down that exciting path, be careful not to put your cart before the legal horse.

You have probably heard about some of the many legal protections that Iowa business owners receive by forming a corporation (e.g. limited liability), but you may not have heard that before the corporation is legally formed you are likely “on the hook” for any liabilities that arise (debt claims, infringement claims, personal injury claims, etc).  Specifically, Iowa law provides that if you act or purport to act on behalf of a corporation that has not yet been incorporated (i.e. legally recognized by the state), you are personally liable for all liabilities created while so acting.  See Iowa Code Section 490.204.  In other words, just because you intend to create a corporation or because you have filled out the paperwork to do so, if the corporation has not been legally recognized by the state, you could be held personally liable for any claims that arise. These claims include trademark infringement, copyright infringement, and patent infringement to name a few.  Consequently, before you go out and act or purport to act on behalf of a corporation you intend to create, saddle up that horse and get your legal affairs in order.  After all, in Iowa, incorporating is relatively inexpensive, easy, and quick.  To get started and learn more, you should consider contacting a licensed attorney.

LEGAL DISCLAIMER AND TERMS OF USE

Innovative Litigation, L.L.C., as owner and host of this site, and Matthew McKinney as the author (acting on behalf of and through Innovative Litigation, L.L.C.) cannot and does not warrant the accuracy or reliability of the information presented on or through this site.  The law can and does change over time and the information contained herein may not reflect the most recent laws – whether statutory law, administrative law, case law, constitutional law, or otherwise.  The information on this website does not constitute legal advice and readers should not rely on it to solve problems or other matters.  Further, you should seek licensed counsel in the appropriate legal jurisdiction before taking any action.  Any information provided on this site is presented “As Is” for your personal curiosity and enjoyment.  It is not meant to be relied upon for legal advice, counsel, or for any other purposes.  Such information does not take the place of a lawyer.  Rules and laws differ by jurisdiction and the information contained within this website may not apply in your jurisdiction.  The appearance of articles, listings, or ads, by or for professionals, on this site, does not constitute an endorsement.  In all cases, you are responsible for determining the quality of services, information, and/or advice provided by professionals through, or as a consequence of, your use of this site.  Neither liability nor responsibility shall arise to any person or entity with respect to loss or damage caused (or alleged to be caused), directly or indirectly, by information posted on this website, or by reason of contact with a professional listed on, or posting information to, this site.  No attorney-client relationship is formed by viewing this website and practice is limited to jurisdiction where lawyers are admitted.  The information furnished on the website is only general and not a substitute for personalized legal advice.   Legal advice cannot be given without full consideration of all relevant information relating to the individual(s) situation.  Laws can change daily and new laws may, and likely will, affect the accuracy of the information herein.  The information herein may be outdated and replaced by new law.

If you are seeking representation, please read the following notice before sending an e-mail:

Sending an e-mail will not make you a client.  Until an agreement regarding representation is reached with you, anything you send will not be confidential or privileged.  Before representation can occur, a lawyer will first take you through the conflict of interest procedure and see that you are put in touch with the lawyer best suited to handle your matter.

If you proceed with an e-mail, you confirm that you have read and understood this notice.

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A Deeper Dive into a Director’s Duty to Become Informed

Iowa Fiduciary Duty to Become Informed

As described in a prior post (here), Iowa’s fiduciary duty law requires directors to become informed with respect to their decision-making obligations.  Thankfully, a director’s duty to become informed is fairly straightforward.  As you may suspect, the duty to become informed requires a director to become sufficiently familiar with background facts and circumstances relating to a particular issue before taking action.  Not surprisingly, the process typically involves directors reviewing written materials provided before or at a board meeting and paying attention to or participating in the deliberation leading up to a vote on a particular matter.

Further, there is not a specific “legal method” that courts require directors to follow in order to become sufficiently informed; rather, both the method and measure – “how to become informed” and “how much work is required” – are matters of reasonable judgment for the director to exercise and a court to evaluate on a case-by-case basis.  In short, when discharging your duty of care by becoming properly informed on a matter, you may ask yourself, would a judge or jury of my peers reviewing my actions believe I’ve become sufficiently informed by (1) reviewing the materials presented; (2) obtaining answers to questions that may arise; and (3) otherwise doing the work necessary to thoroughly understand a matter before taking action?  While these items are fairly basic, many directors overlook these responsibilities and find themselves on the wrong end of a costly lawsuit. Continue reading

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Care, or Beware! Iowa’s Fiduciary Duty of Care

Iowa's Fiduciary Duty of Care

With Valentine’s Day just around the corner, we think it’s high time to further explore “caring” in the corporate context.  And while we’ve frequently addressed the broad concept of fiduciary duties that Iowa law and Iowa courts impose upon corporate directors (here, here, and here), we have yet to dive further under the fiduciary duty umbrella and explore the fiduciary duty of care.

Duty of Care Characteristics – What is the Duty?

The duty of care is a somewhat abstract legal concept.  Consequently, rather than a clear  and simple explanation, courts and legal commentators use several characteristics to explain a director’s “duty of care.”  A director’s duty of care is frequently broken-down and explained in reference to a director’s obligation to manage the corporation in good faith and requiring a director to: (1) become informed (read more here); (2) devote attention to; (3) and to form a “reasonable belief” about certain matters.  Considering that a director’s role includes providing direction and oversight to officers, employees, and other agents of the corporation who carry out day-to-day management functions, it is easy to see why directors must abide by these important characteristics.

A Standard or “Baseline” From Which a Director’s Level of Care is Measured

The question frequently arises as to how much “care” a director must exercise to satisfy this duty.  In other words, how informed must a director become on a matter, or how much attention must a director devote to an issue in order to satisfy the duty?  Thankfully, just as Iowa law creates the duty of care, it also provides a “baseline” or “standard” from which to evaluate whether a director exercised sufficient care.  The baseline is described as: “the [level of] care that a person in a like position would reasonably believe appropriate under similar circumstance.”  Iowa Code Section 490.830.  An admittedly vague standard, but one that allows Iowa’s courts to apply the standard to all cases after taking into consideration the unique facts and circumstances of each case.  It must be noted that in certain circumstances a director’s duties are more specifically defined.  For example, with respect to the issuance of shares (Iowa Code 490.621), distributions (Iowa Code 490.640), dismissal of derivative proceedings (Iowa Code 490.744), indemnification (Iowa Code 490.855), and interested-transaction authorization (Iowa Code 490.862), among others, Iowa law provides further clarification as to how a director must carry out his/her duties. Continue reading

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Resources for Small Businesses in Iowa

Image Credit: The Greater Des Moines Partnership

The entrepreneurial experience of starting a new business is thrilling, exciting, scary, and often nerve racking, to name just a few emotions.  And whether you’re thinking about starting a new business in the Des Moines area – ranked Best Place for Business and Careers in 2013 – or you just launched your new endeavor, central Iowa is filled with countless, valuable resources to help you start off on the right foot and avoid future problems, including avoidable corporate disputes.

Check out this list of valuable resources and don’t be afraid to reach out and contact someone.  No matter what stage you’re in, they’re there for a reason:

  1. West Des Moines Incubator;
  2. StartupCity Des Moines;
  3. One Million Cups of Coffee Des Moines;
  4. Startup Iowa;
  5. CarpeDM;
  6. Iowa Small Business Development Center;
  7. The Greater Des Moines Partnership; and
  8. BrownWinick Startup Group.

We hope this list will help you in many aspects, and perhaps provide you with a few great people to surround yourself with in your business ventures.  Finally, we welcome our readers to send in additional resources that they’ve used or learned about in Iowa’s rich startup environment.

See related postHow to Start an Iowa Limited Liability Company in Iowa.

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Understand Your Burden of Proof Before Exercising the Nuclear Option

Breach of Fiduciary Duty Claims in Iowa

Duty of Care v. Duty of Loyalty and the Shifting Burden of Proof

Intra-corporate dispute cases frequently involve litigants asserting breach of fiduciary duty claims.  More specifically, they involve plaintiffs alleging the defendant(s) breached his/her duty of care and duty of loyalty.  Before a plaintiff exercises the nuclear option and launches such highly contentious claims against a defendant(s) in court, the plaintiff and his/her counsel should consider who (plaintiff or defendant) will bear the burden of proof to prove such claims.

On January 9, 2014, the Iowa Court of Appeals published its opinion in Virgil Moore and Marilyn I. Moore vs. Pioneer Estates, LC, et. al, No. 3-1000/ 12-2105 (Full Opinion Here).     In Pioneer Estates, the plaintiff launched a legal attack against defendants, alleging the defendants breached their duty of care and duty of loyalty in several ways (failing to disburse available funds; charging unauthorized and excessive management fees; making improper and unauthorized charges for business expenses of other entities; borrowing funds for other business entities owned by defendants; paying personal living expenses for defendants; and entering into transactions which were unfair).  For its duty of loyalty claims, the plaintiff recognized that while the burden of proof is traditionally placed squarely upon plaintiffs, a duty of loyalty case is unique and the burden of proof shifts to the defendants.  To address the plaintiff’s argument and this important proof question, the court relied upon a 1988 Iowa Supreme Court case.  See Cookies Food Products, Inc., by Rowedder v. Lakes Warehouse Distrib., Inc., 430 N.W.2d 447, 453 (Iowa 1988). Continue reading

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