5 Business Entities An Agri-Business Can Choose

Sep 26, 2023 | Uncategorized

You’ve most likely heard that you should create a business entity once you start a business. Generally, that’s good advice. But there’s no one-size-fits-all approach.

Let’s look at the 5 business entity types that agri-businesses could fall into:

  1. Sole Proprietorship

This is where one person owns the entirety of the business, personally. It’s a common beginner structure and more than a quarter of farming operations are sole proprietorships. The benefits are that it costs nothing to set up and you are in control of all decisions, profits, and expenses.

The drawbacks are that you are personally responsible for any debts and liabilities the business incurs.

  1. Limited Liability Company (LLC)

An LLC can be created with one or more people (called members) and is incorporated with the state. LLCs are very popular due to their ease of setting up and their flexibility. The benefits are that they generally protect the members from personal liability on debts and lawsuits, and they offer “pass-through” taxation which means net income is not “double taxed.”

Some drawbacks are creating the Operating Agreement (documents that govern how the LLC & the members function) and less structure and court guidance than corporations for dispute resolutions.

  1. Partnerships

Often two farmers want to share resources and they form a partnership. For example, one farmer may contribute labor and the other contribute equipment. The role of each partner and their contributions should be spelled out in a legally enforceable partnership agreement. Profits and losses are shared according to their agreed upon percentages.

A drawback to partnerships is that each individual is personally responsible for business debts and liabilities.

Typically, farming partnerships will be formed by two LLCs. Example: Farmer A, LLC owns land and Farmer B, LLC owns planting equipment. The two LLCs form a partnership to farm the land. This way, there are two taxable entities for federal payments and the LLCs should shield the individual farmers from personal liability.

  1. Corporations

One or more owners (shareholders) can form a corporation. These provide protection to the shareholders from personal liability, and offer the most flexibility if raising money from investors is the goal. Shares are easily sold to raise capital and, unlike an LLC, the company remains in business if major shareholders leave.

Drawbacks to corporations include the expense of setting it up, the strict corporate governance, and the “double taxation” of profits. That means that profit is taxed both at the corporation level, and then again when the shareholder receives the income.

  1. Cooperatives

Two or more individuals or companies can form a cooperative. They’re owned and controlled by the members of the co-op and typically used to serve the members needs, first.

Co-ops are not frequently created for single business entities like farms and ranches, and one of the reasons is every member of a co-op has an equal vote, regardless of their contribution to the business.

In summary, there are varying entity structures to be considered, and each has unique benefits and drawbacks. We’ll explore some examples of each type in the coming weeks and dive deeper into what structure might be best for your operation.

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