By Rachel Armstrong, Erin Hannum, Laura Fisher and Lisa Schlessinger of Farm Commons.
Below is a short excerpt from the guide. View the full guide.
This Guide will help farm owners choose a smart business entity for their unique
operation. A wise and thoughtful decision at the outset will help farmers build a
strong and resilient farm business that can withstand the test of time. Selecting
the right entity is like building the foundation of a house. Without the right
foundation, the house will eventually falter. Fortunately, a strong foundation isn’t
difficult to build. Thought and attention are all that is required, and sustainable
farmers have these qualities in spades. As when farmers turn thoughtful attention
to their land and resources, thoughtful attention to legal issues will inspire the best
solution for each unique sustainable farm.
A business entity is the legal structure or form that outlines the legal parameters
of a business operation. Many business entity options exist, including the C
corporation, the LLC, the B corporation, the cooperative and the nonprofit. There’s
also an entity known as the S corporation, which actually is a federal tax status
that can be applied to a C corporation, the LLC or the B corporation. We’ll call all of
these the “formal entities.”
In comparison, we have “default entities.” These include the sole proprietorship,
the general partnership and the unincorporated nonprofit association. Default
entities are still subject to laws that define business operations that have not
formally created an entity. For example, if a farmer is selling crops or livestock,
they’ll be considered a sole proprietorship if they haven’t taken any other steps to
define the business. If two friends come together to sell a product or service, they
will be recognized by the law as a general partnership–even if they don’t file any
paperwork.
Every business entity, including the default sole proprietorship and general
partnership, carries legal implications. These implications help define tax treatment
and answer the questions of who has which rights and privileges, who has the
authority to make decisions, when and how owners take a draw on profits, and who’s
liable for which decisions and actions. Taxation, rights and privileges, and liability
are three driving forces for many farmers in choosing an entity. The purpose or
objective of the farm operation may also come into play. Is the farm driven primarily
by making profits, or do social or environmental causes play just as much of a
guiding role?