research to formulate a structure for your microfarm and a business plan."/>
Conduct your research to formulate a structure for your microfarm and a business plan.
Formation: You don’t have to take any action to form a sole proprietorship, but of course you are subject to all the laws, regulations, licenses, and permits that would apply to any other business structure.
Taxes: In a sole proprietorship, the business income is part of your personal income. Along with your regular personal income tax, you would file a Schedule C (Profit or Loss from Business—Sole Proprietorship) and transfer the bottom line of that form to your personal income tax form.
Advantages: This structure is inexpensive and easy to form, you have total control of the business, and taxes are simple to file.
Disadvantages: You will be held responsible for all obligations, debts, and other liabilities of the business, including those related to any employees you may have. Since you can’t sell any interest in the business, including stock, it may be more difficult to raise or borrow money. Banks are often reluctant to loan money to sole proprietors because of perceived repayment difficulties if the business fails.
Partnership
Definition: A partnership is a company where two or more people share ownership, all contributing money, labor, and skills and sharing the profits of the business. There are three types of partnerships. A general partnership assumes that management, liability, and profits are split equally among the partners. Often used for short-term projects, limited partnerships permit partners to have limited liability as well as limited input with management decisions. These limits vary according to the extent of each partner’s investment percentage. Joint ventures are general partnerships, but for only a limited period of time or for a single project. Partners in a joint venture can become an ongoing partnership if they continue the venture, but they must change their agreement and file as a partnership. The terms of any of these partnerships are formulated in a partnership agreement. For a microfarm, a partnership might be one person handling the growing and the other managing value-added products, which are usually processed food products from produce grown in the microfarm.
Formation: Partnerships must register the business with their state, a process usually done through their Secretary of State’s office. A business name must be established, usually an assumed name, trade name or a DBA (“doing business as”) name. Once the business is registered, the usual licenses and permits must be obtained.
Taxes: Businesses will need to register with the IRS, state and local revenue agencies, and obtain a tax ID number or permit. A partnership must file an “annual information return” to report the income, deductions, gains and losses from the business’s operations. Profits or losses are passed through to its partners. Partners include their respective share of the partnership’s income or loss on their personal tax returns. Partnership taxes generally include employment taxes. In addition to income tax, partners in the partnership are responsible for self-employment and estimated taxes.
Advantages: Partnerships are usually an inexpensive and easily formed business structure. The most time is spent on developing the partnership agreement. Partnerships have the advantage of pooling resources to obtain capital. This helps with securing credit, or by simply doubling your start-up money. Partnerships also utilize the strengths, resources, and expertise of each partner. Partnerships can have an employment advantage over other entities if they offer employees the opportunity to become a partner.
Disadvantages: In a partnership, partners are not only liable for their own actions, but also for the business debts and decisions made by other partners. With multiple partners, there are bound to be disagreements, so partners should be prepared to consult each other on all decisions, make compromises, and resolve disputes as amicably as possible. Since each partner must share the successes and profits of their business with the other partners, an unequal contribution of time, effort, or resources can cause discord among partners.
Limited Liability Company
Definition: This structure provides some of the limited liability features of a corporation combined with the tax efficiencies and operational advantages of a partnership. The owners of an LLC are referred to as “members,” who, depending on state law, might be a single individual (one owner) or two or more individuals, corporations, or other LLCs.
Formation: There are variations state to state, but basically you must choose a name that’s different from any other LLC in your state, that name must have “LLC” tagged on to the end, and it must not have words prohibited by your state, such as “bank” or “insurance,” which cannot have this structure. Then, you must file “articles of organization” for your state: a short, simple document that has the business name and address, the names of the members, and the business type and purpose. States vary on the necessity of the members having an operating agreement; this is quite important for any group of people working together. Then you must obtain all necessary permits, and some states require that you publish a statement in the media that announces the creation of your business.
Taxes: Like in a sole proprietorship, profits are passed through to the members in the percentage indicated in the operating agreement, and members add this income onto their personal income taxes. Single member LLCs file a Schedule C, while partners in an LLC file a Form 1065, a partnership tax return, like owners in a typical partnership. An LLC member that is a corporation adds the LLC income when it files Form 1120, the corporation income tax return.
Advantages: Members have limited liability, which means that they don’t have personal liability for the company’s decisions and debts, but they are not protected from wrongful acts. Compared to an S Corporation, there is less registration paperwork and the start-up costs are less. There are also fewer restrictions on profit sharing within an LLC, as members distribute profits as they like.
Disadvantages: Many states have regulations that result in the dissolution of an LLC if a member leaves it, so the company could have a limited life. And some states allow provisions in the operating agreement to extend the life of an LLC if a member leaves. Also, all individual members of an LLC are considered to be self-employed and must file and pay the self-employment tax contributions towards Medicare and Social Security; the entire net income of the LLC is subject to this tax.
C Corporation
Definition: A C corporation is an independent legal entity owned by shareholders. The corporation itself, not the shareholders that own it, is held legally liable for the actions and debts of the business. Corporations are more complex than other business structures because they have more tax and legal requirements. This structure is usually suggested for established, larger companies with multiple employees. A C corporation offers the ability to sell ownership shares in the business through stock offerings. “Going public” through an initial public offering (IPO) can attract investment capital and high-quality employees.
Formation: A C corporation is formed under the laws of the state in which it is registered. State laws vary, but generally corporations must include a corporate designation (“Corporation,” “Incorporated,” or “Limited”) at the end of the business name. To register your business as a C corporation, you need to file articles of incorporation with your state’s Secretary of State office. Some states require corporations to establish directors and issue stock certificates to initial shareholders during the registration process. Contact your state business entity registration office for precise details about forming a C corporation. Once your business is registered, you must obtain the usual business licenses and permits.
Pets cannot be legal partners in a corporation, sorry.
Photo by Dwight Sipler.
Taxes: C corporations are required to pay federal, state,