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.
Sole proprietorships are the simplest and most informal business structure as they do not require a separate business structure or filing documents with the NYS Department of State. You are the alter ego of your business (think Clark Kent and Superman). You reap all of the rewards but you also pay all of the taxes and expose yourself to 100% of the risk. Stated differently, sole proprietors have less administrative overhead than other business types but they also have unlimited personal liability for business debt.
This “unlimited personal liability” is a big deal for certain types of enterprises. To illustrate, if you are a farm or food business selling food products directly to consumers via farmers’ markets, roadside stands or Community Supported Agriculture (“CSA’s”), it is highly recommended to form a business entity that will shield personal assets in case there is a food safety issue. Furthermore, if you are participating in agri-tourism (e.g., corn mazes, hay rides, petting zoos, pick-your-own berries) and inviting members of the public to your farm, you should strongly consider another entity in case there is an accident on your property (e.g., slip-and-fall).
As far as taxes are concerned, a sole proprietor will be subject to self-employment tax. Sole proprietors do not need to transfer assets to the business name; however, it is advisable to have a separate bank account for your business.
A sole proprietorship is not a perpetual business entity; to the contrary, when you die your business dies with you. If you have a business you wish to smoothly pass on to your heirs, you are strongly suggested to form another business entity.
Even though it is not required to do so, sole proprietorships should obtain a Federal Employer Identification Number (“FEIN”) from the Internal Revenue Service (“IRS”). Obtaining a FEIN helps protect your personal information – i.e., you won’t have to use your personal social security number (“SSN”) on tax documents relating to the business (e.g., W-9’s), vendor applications, or payroll documentation. Your accountant or banker can help you obtain one or you can apply online. As noted above, sole proprietorships should open a business account and keep personal finances separate to help ease business accounting. Your bank will likely require a FEIN to open up a business account.
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.