Starting and running a farming business provides opportunity and the freedom to forge your own professional path. There’s hard work involved, of course—farming is a 24/7 commitment. And an agricultural business comes with many of the same risks that other types of companies do—and some that other types of businesses do not. A farming business faces many uncontrollable threats such as economic downturns, droughts, floods, accidents related to the use of large equipment, unseasonable freezing weather, and even food trends that may put certain ingredients on the outs. Farming, while it can be fulfilling and financially sustaining, comes with risks that need to be realized and mitigated as much as possible.
That’s why it’s critical to consider what business entity type will be best for your farming company. Going the default route of operating as a sole proprietorship (or as a partnership if you have multiple owners) could put you at a tremendous disadvantage. For that reason, I encourage you to talk with an attorney and tax professional to explore other business structure options. One that you might consider is a farm LLC (limited liability company).
The Benefits of a Farm LLC
The LLC business structure requires far fewer compliance responsibilities than do other legal business entity types. It offers many of the same advantages as corporations but with far less formation and ongoing filing requirements. The owner of an LLC is called a “member,” and an LLC may be a single-member or multiple-member (which is common with family farms).
Personal Liability Protection
Unlike a sole proprietorship or partnership, an LLC is considered a separate legal entity from you personally. That means your business’s financial and legal responsibilities are it’s own. So if someone sues your farming company or your business cannot pay its debts, under most circumstances, you and other members cannot be sued or have to use your personal assets to pay your business’s debts.
Forming an LLC is an attractive alternative for sole proprietors who want to protect their personal assets but don’t want the hassle of dealing with the complicated compliance formalities of other business entity types. So if you would like to protect yourself from lawsuits and debt against your business and still maintain operational simplicity, then forming a farm LLC may be a good move for you
Tax Advantages and Flexibility
LLC Federal Income Tax
A farm LLC can elect to be taxed at the federal level as either a sole proprietor (or partnership if multiple members) or a corporation.
If you opt to be classified as a sole proprietorship or partnership for tax purposes, your LLC’s business income and losses get reported on your personal income tax return forms. This pass-through taxation means that your LLC doesn’t pay federal income tax on its own. You and other members pay at your individual tax rates—based on the distribution of your farm LLC’s taxable income. Note that you and other members will also need to pay the full Social Security and Medicare taxes on your taxable income.
LLC State Tax
Most states apply the same income tax treatment as the LLC is receiving at the federal level. So, if you elect to have your LLC taxed as a sole proprietorship, your state income tax obligations will flow through to your individual state income tax return.
In some states, LLCs must pay other taxes, as well. For example, depending on where your LLC is registered, it might need to pay a franchise tax. A franchise tax is a fee charged to LLCs, partnerships, and corporations for the privilege of forming and conducting business in a state. If you’re not sure about what fees will apply to your LLC, contact your state’s Secretary of State office.
As an LLC, you can choose to be either member-managed or manager-managed. The distinction is with who controls the day-to-day management of your business. Unless you specify which management structure you want in your formation paperwork, most states will regard your LLC as member-managed. The specifics regarding the authority and responsibilities of members and managers should be established in your LLC’s formation documentation and operating agreement.
Member-Managed Farm LLC
With this option, the members of your LLC manage your farming business and make the day-to-day business decisions.
Manager-Managed Farm LLC
In a manager-managed LLC, your members appoint one or more managers to manage your company. Many LLCs select a member as the manager, but in most states, an LLC can hire a professional manager if the members decide to do so. The manager(s) of your LLC will have the authority to make certain decisions and run the day-to-day operations of your company.
Overview of the Steps to Form a Farm LLC
1. Choose a Business Name
As you consider a name for your LLC, check to make sure another LLC or corporation isn’t already using (or has filed to use) your name. You can do this via your state’s Secretary of State database or do a free name search via CorpNet. I also encourage you to use CorpNet’s free trademark search tool to determine if any other businesses have filed for a trademark on the name.
States usually have some mandatory requirements for the names of limited liability companies. For instance, the term “company,” “limited” or “limited liability company,” or an abbreviation like “LLC” must be used after the name. After you form your farm LLC, you should use the complete company name on all documents that you send or sign.
2. Apply for an Employer Identification Number
An Employer Identification Number (EIN) is a unique identification number for your business. It is often necessary for opening a bank account, filing for permits and licenses, hiring employees, and conducting other business activities. You can get an EIN for free from the Internal Revenue Service.
3. File Articles of Organization
In the state where you wish to operate your LLC, you must file articles of organization. The information required in this document varies from state to state.
Common details requested by most states include:
- Name and address of your LLC
- Members’ and managers’ names
- Type of business you’ll be operating
- Name and address of your registered agent
4. Create an Operating Agreement
Although not usually required by the state, having an operating agreement is extremely important for ensuring your business is run the way you want it to be. It serves to define the roles and responsibilities of your farm LLC’s owners and managers. Also, it documents your LLC members’ ownership interests, profit distribution rules, rules for handling disputes between members, and other important details. In the case of a family-owned farm LLC, you’ll want to consider including rules for handling certain life-impacting events, such as births, deaths, marriages, and divorces. For example, you might want to have your operating agreement establish that the birth of a child automatically provides member status to that newborn or identify a future class of membership for grandchildren born into the family.
A thorough operating agreement will help prevent misunderstandings and ensure everyone follows the same protocols. In fact, your operating agreement might even call for penalties on members who do not follow the rules.
5. Apply for Business Licenses and Permits
As an agricultural business, an agricultural business license and an industry-specific permit may apply to you. You’ll want to research the requirements at the federal, state, and local level.
The licenses and permits your LLC needs will depend upon:
- Where you operate your farm.
- Whether your method of farming is conventional or organic.
- What your farm produces (e.g., eggs, meat, milk, fruits, and vegetables, etc.).
- Where you want to sell your products (e.g., direct to consumers at a farmers market or through a CSA, wholesale basis to grocery stores or restaurants, etc.)
6. Open a Bank Account for Your Farm LLC
To maintain the personal liability protection that your LLC offers, you need to make sure you don’t blur the lines of separation between your business and your personal finances. Set up a bank account specifically for your LLC, and don’t commingle personal funds with those of your business.
7. Don’t Ignore Your Ongoing Compliance Obligations
After you’ve tackled all that’s needed to start your LLC, you’ll need to keep it compliant every year. Make sure you stay on top of the various filings and renewals that the federal, state, and local governments require—and don’t miss the deadlines. If you fail to comply with the rules, you might pay some lofty fines, face lawsuits, or even experience a suspension of your business.
Common compliance requirements that apply to LLCs include:
- Filing annual reports with the state
- Renewing licenses and permits
- Holding member meetings
- Documenting meeting minutes
- Updating the state about major changes to your LLC (e.g., new members or members leaving)
- Filing taxes
Ask your attorney about what compliance formalities your LLC must complete, so you don’t jeopardize your company’s status of good standing with the state.
Limitations of a Farm LLC
As with any business entity type, the LLC structure has its positives and some downsides.
Although members of an LLC are generally not liable for the debts or legal liability of the LLC (or for the acts or omissions of other members or employees of the LLC), exceptions occur. For example, if you are personally responsible for harm to someone due to your actions or omissions, you could personally be held liable. Or if you personally guarantee a loan for the LLC, you will be on the hook to pay the debt if your LLC cannot make its payments. This can pose a risk, because some banks may not issue a loan unless one or all LLC members agree to personally guarantee the debt.
Is a Farm LLC Right For You?
The limited liability company structure offers personal liability protection without sacrificing operational simplicity. But there’s a lot to consider when selecting the legal structure that will be right for your business. Talk with an attorney and tax advisor for guidance as you weigh all the pros and cons of our options.
And after you’ve decided on how you want to move forward, contact CorpNet to assist you in forming your LLC or incorporating. We help farm and other agricultural companies in all 50 states submit their filings accurately and on-time.
We’ll also make sure you never fall behind on your business compliance requirements. With our cloud-based, secure corporate compliance tool, B.I.Z. (Business Information Zone), you’ll receive notifications of critical filings, tax due dates, and more.
Whether you’re starting your farm business or switching from a sole proprietorship or partnership to an LLC or corporation, we have all the bases covered. Contact us today!