Farm business structure is an important aspect of farming, though it can often be overlooked. Properly structuring your farm operation can lead to management, financial, and legal advantages. It is important to consider your own financial goals before choosing a structure for your farming operation.
Sole proprietorships are businesses owned by one individual. They are the least complex business structure to start; if you have done nothing to start a business for your farm, then you are operating as a sole proprietorship by default. While sole proprietorships are low maintenance, there are some disadvantages. Since the business and individual are legally one entity, the individual is responsible for all obligations of the business, which puts personal assets at risk. Sole proprietorships are best suited for small farms without many assets at risk and are also best if one wants full decision-making authority for the operation. To legally add another decision-maker to the operation, while still operating similarly to a sole proprietorship, one should consider starting a partnership.
Partnerships are like sole proprietorships but allow for multiple owners. Partnerships combine the resources of multiple people, which can make operating or obtaining credit easier. Certain partnerships allow for silent partners, who contribute resources but do not make operational decisions. Partnerships have no legal separation between the farm and owners, meaning each partner’s personal assets are at risk. Additionally, there is risk in working with others; if one partner does not uphold their end of the business, the remaining partners will be responsible. Partnerships are best for farmers that currently do or want to do business with others, perhaps a spouse or family member. Partnerships also help with farm transition and estate planning. If one wishes to pass their share of the partnership to their child after death, they should detail this in the partnership agreement to avoid a dispute that could cause the partnership to dissolve. They are best for small or beginning farmers, or farms with minimal assets at risk.
Limited Liability Companies (LLCs) limit the personal liability of members while offering an easier establishment than corporations; LLCs have a structure similar to partnerships and sole proprietorships. The main benefit of establishing an LLC is protecting personal assets if the farm experiences financial or legal issues. LLCs have one or multiple owners. LLCs are more appropriate for farmers interested in limiting their personal liability while maintaining a simple farm business structure. An LLC structure could be beneficial if the farm is high-risk and the members want to protect their personal assets.
Corporations are legal entities that are legally separated from their owners. A disadvantage of corporations is complex establishment and management. Corporations are typically more regulated than other structures, creating additional reporting. Corporations are good for large, high-risk businesses. Since the individual and the business are separate legal entities, there is no risk of losing personal assets if the corporation fails. This could be beneficial for a large-scale farm or one with a high chance of becoming delinquent on financing. Businesses low on capital that need to raise funds could benefit from a corporation because it allows for capital to be generated from either debt or a variety of owner investment.
While this article is not an exhaustive guide to business structures; it serves as a brief overview of each structure to help producers make informed decisions on the best business structure for their farming enterprise. It is important to consult with legal and tax professionals to evaluate the detailed advantages and disadvantages of business structure options.
References
Backman, Carrie. (2015). Business Structure for Small Farms: A Quick Guide. Retrieved on March 11, 2024, fromhttps://s3.wp.wsu.edu/uploads/sites/2073/2019/01/Business-Structure-For-Small-Farms_A-Quick-Guide.pdf
Childs, Milton. (2004). Using Family Limited Partnerships for Estate Planning. Marquette Elder’s Advisor: Vol. 5: Iss. 2, Article 5. https://scholarship.law.marquette.edu/cgi/viewcontent.cgi?article=1104&context=elders
Internal Revenue Service. (2024). Forms, Instructions & Publications. Retrieved on March 15, 2024, from https://www.irs.gov/forms-instructions
Tax Policy Center. (n.d.). What are pass-through businesses? Retrieved on March 13, 2024, from https://www.taxpolicycenter.org/briefing-book/what-are-pass-through-businesses
U.S. Small Business Administration. (n.d.). Choose your business structure. Retrieved on March 13, 2024, from https://www.sba.gov/business-guide/launch-your-business/choose-business-structure#id-compare-business-structure s
Myer, IvaNelle, and Ryan Loy. “Business Structure Basics.” Southern Ag Today 4(52.1). December 23, 2024. Permalink
