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.
Pursuant to NY Partnership Law, a limited partnership or a family limited partnership (“FLP”) includes at least one general partner and at least one limited partner. The general partners are really the ones “running the show” by controlling most business operations including day-to-day responsibilities; however, that control comes at a price. General partners have unlimited personal liability for all debts, liabilities and obligations of the limited partnership. Please note that a general partner need not have the largest ownership share — even with a small share (e.g., 1-2%), a general partner has most of the control.
Conversely, limited partners have a liability shield for the debts, liabilities and obligations of the limited partnership. Here again, this comes at a price. When receiving this liability shield, the limited partners give up their control in the business operations and receive limited voting rights on certain activities such as the admission of new partners or on the dissolution and liquidation of the limited partnership. If any of the limited partners become involved with the day-to-day operations then they may lose their liability shield.
Leaving the general partner at risk for debts and liabilities of the limited partnership isn’t a perfect scenario; however, it’s a solid improvement from a general partnership in which all partners are liable for the debts of the partnership. This choice of entity may be appropriate for an agri-business participating in activities with lower risk. Limited partnerships also work well with family farms and agri-businesses where the elder generation wants most of the management control while the heirs enjoy limited liability before the farm transfers to their control.
Additionally, keep in mind that start-up expenses for forming a limited partnership are cheaper than a limited liability company or a corporation. This should be a factor when determining the choice of entity to best meet your needs. The publication requirement for limited liability companies, depending on county it is situated in, can be expensive.
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.