What Kind of Business Entity is Your Family Farm?
By Joseph M. Harris, JD, DPT, PT, ATC
There are a number a factors to consider when choosing a business entity for your family farm. There are a number of entities that farm owners use in organizing the family farm: sole proprietorship, partnership, limited liability company, S-corporation, and C-corporation. Key considerations include liability, estate planning, and taxes. When working with your attorney and accountant, you should consider the size and type of operation your farm is in addition to the long term goals of the farm. You should also consider who is part of the farming operation and what role they will have in the farm organization as well as the assets that will be considered to be part of the farm versus assets that are personal in nature. Your attorney will discuss with you your goals for your farm and help you decide which entity works best for you.
This article will briefly discuss the differences and similarities between the different types of business structures used in organizing your farm or any business. Most family farms are operated as a sole proprietorship. This means the farm and all of the assets are operated directly under the legal and financial liability of the farm owner. The sole proprietorship requires very little paperwork. The farm is not registered with the state as a business. Taxes on the farm are paid through the individual farm owners personal tax returns. Liability, both legal and financial, are imputed directly to the farm owner, placing all of the farm owner’s assets at risk.
Partnerships are formed when the farm is owned by two or more individuals. This structure is very similar to a sole proprietorship. However, in a partnership, the liability of one partner is imputed to the other partner through joint liability, therefore, a partner in the farm can be held liable for the other partners debts. Additionally, this form of business structure can leave the partners more open to disagreement about management or distribution of profits.
Limited liability companies, or LLCs, are becoming more and more popular. They can help to protect personal assets of the farmer(s) from debts and liabilities of other members and of the farm itself. LLCs require some paperwork and registration with the state. Each state has it’s own rules on the organization of an LLC. Although LLCs require a sound operating agreement to direct the business of the LLC, they allow a lot of flexibility in management and offer more liability protection to the farm owner. Additionally, an LLC calls for flow through taxation, avoiding double taxation. The net income from the LLC is likely to be subject to self-employment tax. Additionally, an LLC is its own entity and can continue to exist after the owner dies, allowing for easier estate planning.
Like an LLC, a corporation is its own entity. The owners are shareholders in the corporation. Corporations have a more strict operating structure and typically require more paperwork and bookkeeping. Corporations do limit liability for the shareholders. Additionally, because the corporation has a life of its own, the business continues even after a shareholder dies or leaves. Employment tax is only paid on the wages of the shareholder and profits can be distributed to shareholders as dividends, avoiding employment tax. Double taxation can be avoided by forming an s-corporation, whereby profits and losses are passed through to the shareholders based on percentage of ownership. Most family farmers who choose to organize as a corporation, elect s-corp status rather than c-corp.
As you can see, there are a number of considerations for the farm owner in organizing their farm business. However, farming is a business and, as such, the farmer should treat it as such, taking full advantage of this business asset while protecting their personal assets.
Before organizing your farm as a business entity, speak with a qualified attorney about the best business structure for your situation. If you have more questions or would like to schedule a consultation feel free to contact my office at 270-222-3773 or email me at [email protected].