Agricultural News
The Noble Research Institute Offers Tips on How to Select the Best Business Structure for Your Farm
Fri, 02 Jun 2017 10:11:49 CDT
The following is an article entitled Selecting the Best Business Structure for Your Farm, authored by Jason Bradley, Agricultural Economics Consultant at the Noble Research Institute.
When it comes to your farm or ranch, nobody knows the operation like you. You know how many acres you're operating, and you have inventories on all your commodities. Hopefully, you even know what assets and liabilities you have by taking a quick look at your net worth statement. But what steps have you taken when it comes to managing for taxes or assessing legal risks? By reviewing your operation's business structure, you may find creating a business entity could provide your operation with added benefits.
According to the U.S. Department of Agriculture National Agricultural Statistics Service's 2012 Census of Agriculture, agriculture operations could be categorized as: individual and family ownership (sole proprietorship), partnership, corporation, or limited liability company (LLC). Of all the operations reported, 84 percent were listed as sole ownerships, 6.3 percent as partnerships, 5 percent as corporations, and 4.7 percent as LLCs. But what are each of these, and should you consider moving your operation into one? Each of these structures has pros and cons that should be weighed out before investing in the process of becoming one.
Sole Proprietorship
Sole proprietorship is about as simple as it gets. You are the owner and the operator. You get all the profits, and handling the taxes is pretty straight forward. Any income made through the business is your income and is handled as such. Another advantage is there isn't much to being in business. You have a product or service, you sell that product or service, and you're in business. Now, while you get to enjoy all the profits, you are also responsible for any losses or debts. A major downside to a sole proprietorship is that there is no legal separation between you and the business. The business can be held liable for any debts or liabilities you took on personally, and you may be liable for any of the business's debts or liabilities. These liabilities include loans and lines of credit as well as the actions of you and your employees.
Partnership
This is where the water can start to become muddy. Partnerships can vary in size and structure. It includes two or more people who contribute to the business in a variety of ways. While a partnership is not required to have an agreement written out (although I would highly recommend it), you will need to register your partnership. Partnerships are typically easy to set up, and they are usually inexpensive. Partnerships also provide the opportunity to have skillsets on the team that differ than from yours. This structure allows for financial obligations to be shared, lessening the financial strain placed on an individual. While there are advantages of having more than one person involved, this can also be a downside. Everybody has an opinion and an idea that they feel is the right one, and sometimes the other person(s) in the business might not agree. It's not "if" but "when" a disagreement in a partnership will occur. Partners need to understand this and be ready to discuss, compromise and resolve any issue that may present itself along the way. Also, no matter how the partnership agreement is set up, there's a chance that one of the partners is going to feel they are being shorted on their share of the profits because of how much time, money or effort they've put into the business. Again, this is something partners should be aware of and ready to deal with. Unjust feeling about compensation and disagreements about business decisions are important things to consider when looking at partnerships, but, in my opinion, they are not the biggest issue. Depending on how the partnership is established, liabilities are shared among all the partners. This shared liability doesn't necessarily stop at the partnership's assets being used to settle the partnership's debts. A partner's share of the assets may be used to satisfy a partner's personal debts, and a partner's assets may be used to satisfy the partnership debts. Partnerships can be designed in ways that minimize these risks, but they are much more complex as limitations are put in place.
Corporations
Here's where the water can get really muddy. Corporations become their own entities. They receive their own profits and are accountable for their own liabilities. Company investors and owners own shares of the corporation. There are two corporation types: S corps and C corps. Without going into the details of each of these, they both have advantages when it comes to liabilities and taxation. On the other hand, there is a lot of work that goes into a corporation. The amount of time and paperwork that go into running a corporation may be more than what you need.
Limited Liability Company (LLC)
An LLC is a combination of the first three structures. One of the greatest advantages of an LLC is the liability protection of a corporation on a limited basis, while keeping some of the operating benefits of sole proprietorship or partnership. There are many different ways to structure an LLC that allow for it to best fit your operation's needs.
While an LLC may seem like a win-win business structure, it's important to discuss all the options with a lawyer. Knowing the correct paperwork to file for each business structure and understanding the tax obligations are critical when establishing a business entity. If you feel like one of these business structures might provide some long-term benefits to your operation, speak to someone who can give you legal and tax advice. Just make sure they know the rules that will apply to you. Not all areas have the same requirements for businesses.
Source - The Noble Research Institute
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