PAGE 77 / 87

Unit 3: Managing the Farm/Ranch Business for Long-Term Success

Business Organization

A farm or ranch business can be structured in different ways, each with its own legal requirements and financial and tax implications. Farmers and ranchers need to understand all the issues before deciding how to legally establish their own business. And these decisions should be revisited as business and organizational needs evolve. Click on each of the alternatives below and think about how the advantages and disadvantages might apply to the farm businesses you work with.

• Sole Proprietorship

• Move
• Close
Sole Proprietorship: The sole proprietorship business is owned and controlled by one person. This means that if a husband, wife and son plan to operate the business together, only one of them can hold legal title to the business. The business owner is free to make all business decisions without obligation to partners or shareholders. The owner is, therefore, personally liable for any debt, taxes, or other financial and regulatory charges.

• Partnership and LLP

• Move
• Close
Partnership and Limited Liability Partnership: Partnerships may be formed between two or more family members or third parties. Each partner is liable for all partnership obligations, but taxes are paid individually based on each partner’s share of income, capital gains and losses. Along with shared liability, another benefit is increasing potential sources of business capital and other assets. There are two types of partnerships: general and limited. In a general partnership, all partners are jointly responsible or liable for the debts of the partnership. This means that personal assets are at risk if the partnership cannot pay its debts. In a limited partnership, there must be at least one “general” partner who assumes unlimited liability (i.e. personal assets are at risk). All other “limited” partners are liable only for those investments in the partnership itself.

• Corporation

• Move
• Close
Corporation: Corporations are owned by one or more shareholders (investors) and are managed by elected directors. A corporation must be established in compliance with statutory requirements of the state in which it is incorporated. The corporation, not its shareholders, is responsible for corporate debts and other obligations. Owners and family members are considered employees of the business and therefore subject to labor laws and taxes.

• Limited Liability Company (LLC)

• Move
• Close
Limited Liability Company (LLC): The LLC offers limited liability to two or more partners. Like a corporation, an LLC has investors, who are liable only for their investment in the business. The LLC can be classified as a partnership for tax purposes.

• Land Trust

• Move
• Close
Land Trust: A land trust is a legal entity that allows a land owner to transfer property to a trustee. While the trustee is the legal owner of the property, the beneficiaries are given possession and management of the land. This type of legal organization is helpful for estate planning as it allows the beneficiaries to avoid probate upon death of the owner.

• Cooperative

• Move
• Close
Cooperative: A cooperative is a legally incorporated business entity capitalized by its member patrons or owners to whom dividends are paid. A cooperative is taxed on income at corporate rates, but patronage refunds are often tax-deductible to the cooperative. Many farmers are now using cooperative organization to acquire and provide machinery, livestock breeding and equipment maintenance, as well as marketing and advisory services.

In working with farmers and ranchers on how to structure their business, it is best to direct them to advisors and consultants with expertise in this area: those knowledgeable about current laws and regulations and who can answer specific questions about legal, financial and tax considerations. You should not try to answer these questions on your own.