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.
At one point or another, most food and agriculture operations form a partnership with another person or entity. Perhaps it is a partnership on a single head of livestock (e.g., stallion, bull, boar, show heifer) or perhaps it is a more long-term partnership where profits and losses will be shared among family members or multiple people and entities.
Partnerships can happen when two or more people conduct business and share profits. Traditionally, the partnership’s profits or losses pass through to the partners on either a predetermined percentage or in accordance with their contributions to the partnership. There is no taxation on gain at the partnership level; instead, each individual pays tax on the amount of gain that passes through to him or her individually, avoiding the double taxation of the C-Corp. However, each partner is personally liable for the partnership’s debts and each one is fully responsible for the actions of the other partners.
There are two types of partnerships: general partnerships and limited partnerships. This section will breakdown the major differences in these two types of business partnerships. If your business only has one owner then a partnership is not for you – partnerships require two or more owners.
A general partnership is formed when two or more people go into business to share profits – not necessarily losses, but to share profits. If you are currently sharing profits with another person or entity then you might be in a general partnership. You don’t have to intend to form the partnership- if you are sharing profits and you did not create a formal business entity then the law forms it for you.
As the name infers, there must be at least two members of a general partnership. Please note that the “partners” do not have to be individuals– they could be other business entities such as corporations, limited liability companies, trusts, partnerships, or DBA’s.
An advanced estate planning strategy might be to create multiple layers of business entities to help with succession planning and tie up the land for estate tax purposes. For example, the real property might be owned by one LLC while the operating farm might be owned by another LLC. Next, the two LLC’s form a family limited partnership. These layers of business entities create more bookkeeping and more administrative overhead; however, it might be the right ticket for certain operations. Trusts can also be useful in many cases.
Among every type of business organization, the general partnership also offers agriculture producers the greatest flexibility. As a caveat, the general partners are jointly and severally liable for the debts of the partnership whereas other types of formal business entities may shield owners from personal liability (i.e., the “corporate shield”). Furthermore, each partner has the ability to bind the partnership without the express written consent of all partners.
Another drawback of a general partnership is the lack of flexibility with ownership transfers. By default, general partnerships require unanimous consent before that interest is transferred.
Section 130 of NY General Business Law requires partnerships to file a certificate with their county clerk in each county in which they are doing business. This step is oftentimes overlooked by general partnerships
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.
"This blog is for informational purposes only and is not intended to create an attorney-client relationship. It is recommended that you speak to an attorney licensed in your jurisdiction before relying on the information in this blog."