When setting up a business, whether it's a farm, a restaurant, or even a doctor’s office, the entity structure you choose is very important. While there are only a few types of entities (partnerships, corporations, limited liability companies, etc.), there are dozens of ways these entities can be utilized to set up a business. As a result, it’s important that you, as the business owner, define the goals of your entity structure and seek professional assistance from your attorney, accountant, and other advisors to ensure you select a structure meets your goals.
When it comes to the structure of a farming operation, I typically recommend the farm start with the premise that operations should be separate from assets. Whatever structure you choose, consider the following benefits of establishing the right one.
1. Equitably Distribute Profits.
In any type of business, it is important that all parties involved receive their equitable share of profits. For farms, this includes growing crops as well as investment in capital assets like land and equipment. Parties who own land and equipment should be getting paid for use of that land and equipment in some way, especially if there are other parties involved in their farming operation. Partnerships are a common entity structure for operations because it can make it easier to take advantage of grants and other government programs, but if you utilize this structure, it is likely you will need other entities to help equitably distribute profits.
2. Maximize Government Programs and Grants.
Who wouldn’t want to take advantage of governmental incentives in your business industry? Think about energy, real estate, and tax incentives that are utilized across many different industries. Farming has its own version of these incentives through crop insurance, REAP and other grants, EQUIP, CSP and CRP programs, and ARC and PLC programs. Businesses with different structures are able to utilize these programs differently. For example, ARC and PLC programs are limited to one payment in all business types except a general partnership. Knowing these entity rules and limitations can help you qualify for different amounts of money under different programs, making your farm more profitable.
3. Accommodate Transition.
If legacy is important to your farm, then your business should be structured to accommodate transition. This usually involves the use of entities. Entities can help more efficiently transfer assets over time and provide avenues to retain control over assets without retaining complete ownership. The right entity structure can help with a seamless transition from one generation to the next. For more information, see our article on tips for a successful transition of your farming operation.
4. Accommodate Growth
Farms are becoming smaller in number and larger in size. The right entity structure can help you accommodate growth by attracting professional employees and outside capital and positioning you to partner with others or even acquire the farm of a retiring neighbor. In these instances, you must think about not only your goals but also the goals of your soon-to-be partner or retiring neighbor. The right entity structure can allow you to accommodate their needs, which makes you a more attractive partner for them. It can also allow you to bring back family members and expand your family business.
5. Protect Your Assets From Liability.
As a farm grows, so does its risk exposure. Without the proper entity structure, the assets you have worked so hard to acquire could be gone, and your children could be affected. Most entities provide a layer of protection so that only the assets in that particular entity are available to creditors. It is important to think about farm assets being held differently from personal assets. For example, your personal residence should not be exposed by accidents that take place on the farm. The proper entity structure can help provide liability protection, but adequate insurance should also be maintained.
6. Reap Tax Advantages.
Different entities have different tax consequences. Depending on your goals, one entity might be preferable to another in this respect. To make it even more complicated, some entities can have different tax treatments. For example, a limited liability company can be taxed as a partnership or a corporation. It is important that you think about the long-term goals of your farm because if you don’t get the entity right the first time, you might have to pay taxes to change it.
Selecting the entity structure for your business is no easy task, but your choices can have long-term effects. When determining the best entity structure for your farm, a team approach is best. Outline your goals, and employ a team of professionals to identify a structure that will help you achieve them.
FamilyFarms Group is dedicated to helping family farms survive and grow—today and into the future. Click the link below to request a free needs assessment, and learn how we can help you make your family farm a success and meet your business goals.