I am oftentimes asked about the best choice of business entity for a farm/ranch, agri-business or food entrepreneur. There is no one-size fits all answer to that question as each type of business entity offers different strengths and weaknesses. It is important to pick the right business entity for your specific type of enterprise – the answer to that question may change over time. I would like to encourage all of my readers, no matter the size of your business, to have a relationship with a food and agriculture lawyer licensed in your jurisdiction and have an ongoing conversation on this topic. This blog series will work through the major types of business entities. You can also view my Powerpoint presentation on the choice of business entities here.
Under NY Business Corporation Law (“BCL”), a corporation is formed in New York by filing a Certificate of Incorporation with the NYS Department of State. Individual shareholders will not be held personally liable for the debt of the corporation unless the “corporate shield” can be pierced. The corporate shield can be pierced in New York if a court finds that the corporation was an alter ego of the shareholders, it was grossly undercapitalized, if personal and corporate funds were intermingled, or if there was a disregard of corporate formalities (e.g., shareholder minutes, setting forth Bylaws, annual Board of Directors meetings).
It is not uncommon for lenders to require shareholders to make personal guarantees for the repayment of corporation loans. Among all of the different types of business entities, corporations are the most expensive to start-up and maintain. Please note that unless provided otherwise, corporations have perpetual existence surviving the death or withdrawal of a shareholder.
Who’s Who in a Corporation
The owners of a corporation are called “shareholders, who own “stock”. The corporation should memorialize Bylaws setting forth the procedure for shareholder to elect the Board of Directors. The Board of Directors will then elect officers (e.g., President, Vice-President, Secretary, and Treasurer). The Board of Directors is charged with management responsibilities of the business.
C-Corp, S-Corp, and B-Corp – Picking the Right One
There are three main types of corporations for tax purposes: C-corporations (“C-corp”), S-corporations (“S-corp”) and B-corporations. C-corps and S-corps are the most common types of corporation for New York farms and agri-businesses. Each have its own inherent advantages and disadvantages.
C-corps are taxed twice: (1) the corporation will be taxed on its earnings for the tax year and (2) the corporation’s shareholders will be taxed on their distributions from the corporation. Reasonable employee salaries can be paid to help reduce corporation taxes. A company must be a C-corp to be a publicly traded company.
C-Corporations (“C-Corps”) were once favored by the estate and business-planning community. The advantages to C-Corps include limited liability to share-owners, tax deductions not available for other types of entities, and a low tax rate on the first $75,000 of income made. However, the C-Corp has some built-in disadvantages, particularly if it has highly-appreciated land in it.
S-Corporations (“S-Corps”) are a meld of partnership principles and the limited liability of corporations. Like partnerships, the S-Corp passes through the losses and gains to the shareholders, so it is not subject to the double tax problem that C-Corps face. So what exactly is a “pass through” tax? If the S-Corp makes $100K in profit, then the shareholders will pay taxes on that $100K even if the monies are kept in the business.
S-Corps are limited to a certain number of shareholders, and they do not offer all the tax advantages available with a traditional C-Corp. This election is only available to small business corporations.
B-corps (“Benefit Corporations”) must have an underlying purpose of a general public benefit as defined in Article 17 of the NY Business Corporation Law. This is a fairly new type of business structure and has been available in New York since February 2012. Under Section 1708, a B-corp must give its shareholders an Annual Benefit Report.
This is an excerpt from my book that I co-authored with Pat Dillon, an Iowa food and agriculture lawyer. You can purchase a copy of the book “Field Guide: Legal Guide for New York Farmers and Food Entrepreneurs” on Amazon.com.