Carbonyl iron (CI) has been widely used as a suspended particle in magnetorheological (MR) fluids. However, pristine Cl-based MR fluids have several drawbacks, including severe sedimentation of the CI particles due to the large density difference with the carrier liquid, difficulties in redispersion after caking, abrasion of device surfaces during long-term operation, and rust of iron by oxidation. To overcome these shortcomings, we coated the CI particles with a poly(vinyl butyral) (PVB) shell. CI and CI-PVB particles were suspended in mineral oil and their MR characteristics were examined via a rotational rheometer in a parallel plate geometry equipped with a magnetic field supplier. Yield stress and flow response (shear stress and shear viscosity) were investigated at magnetic field strengths ranging from 0 to 343 kA/m. Although the MR properties, such as yield stress and shear viscosity of CI-PVB based MR fluids, changed slightly compared with those of the pristine CI based MR fluid, the dispersion qualities (e.g., sedimentation stability) were noticeably improved.