Over the weekend I stumbled across the materials from the First Annual Meeting of New York Agri-Women and reviewed this excellent article titled “Doing Business in New York State: Structures and Strategies” by Bruce L. Anderson, Brian M. Henehan, and Charles J. Sullivan, Esq. Mr. Sullivan spoke on business organizations at the New York Agri-Women’s annual meeting. If you have not already done so I recommend reviewing this excellent guide.
Exploring business organizations is not just for the young zealous entrepreneur — long-existing food and agriculture businesses should periodically revisit this issue to decide whether their current business structure is appropriate. Please note, however, that on page 2 of the guide it recommended that readers consult with the legal and/or financial advisors when selecting a business organization.
Starting on page 8 of the guide, the authors give a general overview to various business structures in New York:
1. Sole Proprietorship. This is the most informal of all the business entities because there is no separate business structure under state or federal law. This business structure also has the least overhead– i.e., there is no cost to form or maintain this business entity. The guide properly noted that many sole proprietors may choose to designate an assumed name for their business (e.g., “Lazy Acres Farm,” “Blackacre Graphics Design,” “Rocking R Cattle Co.”). In New York, a Certificate of Assumed Name would need to be filed with the clerk of each county where he/she conducts business. The biggest disadvantage with sole proprietorships is unlimited personal liability for business debt.
2. Corporation. A corporation is formed in New York by filing a Certificate of Incorporation with the NYS Department of State. There are two types of corporations for tax purposes: C corporations and S corporations. I highly suggest speaking to your accounting before making the determination on whether you want to be taxed under Subchapter C or Subchapter S of the Internal Revenue Code (“IRC”). Individual shareholders will not be held personally liable for the debt of the corporation unless the “corporate shield” can be pierced. (More on that issue in another post). In order to retain this shield from personal liability, corporations must adhere to corporate formalities (e.g., minutes of shareholder and Board of Director meetings).
3. General Partnership. 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 a corporations. Put simply, a partnership can be formed when there is an oral or written agreement to share profits. I have written articles on General Partnership Agreements. If there is not a written partnership agreement then the default rules of New York will apply. Like a sole proprietorship, individual partners may be liable for the debts of the general partnership. As the authors from this article noted on page 11, Section 130 of General Business Law requires partners who are carrying on business as a partnership to file a Business Certificate for Partners (see this example for Westchester County).
4. Limited Partnership. Pursuant to New York Partnership Law, a limited partnership includes at least one general partner and at least one limited parter. Limited partners do not have unlimited personal liability for debts. I recommend memorializing a Limited Partnership Agreement.
5. Cooperatives. As noted in the guide on page 12, “[a] cooperative is an association of multiple people organized to carry on business on a cooperative basis.” Pursuant to New York Cooperative Corporations Law (“CCL”), there needs to be five or more organizers in order to form a cooperative. Under Section 15 of the CCL, agriculture cooperatives may be formed for the purposes of “marketing, processing, manufacture, sale or other dispositions of agricultural products, agricultural waste product, or agricultural compost, … or the purchase of supplies for producers of agricultural products.” This business structure is more akin to a corporation except the “member” owners (instead of “shareholders) are typically only allowed one-vote and the business is more democratically controlled.
6. Limited Liability Company. A limited liability company (“LLC”) is the newest business structure in New York. Pursuant to NY Limited Liability Company Law, there must be one or more members as its stakeholders and Articles of Organization must be filed with the NYS Department of State. Not only do LLC’s shield stakeholders from personal liability but it also offers “pass-through tax treatment.” There should be an operating agreement put in place. I would like to note there that there is a publication requirement in New York for the formation of the LLC and the fees vary from county to county. For example, it cost Rincker Law, PLLC approximately $1350 in New York County to adhere with the publication requirement in the New York Law Journal and another newspaper selected by the County Clerk. This is high, however, when compared to rural counties in Upstate New York. Nonetheless, I encourage you to read this post arguing that New York’s publication requirement is financially burdensome on small businesses.
On page 15 of the guide, the authors listed seven basic factors to consider when picking the right business entity: (1) personal liability, (2) means of formation, (3) duration of business structure, (4) system of governance, (5) taxation, (6) securities registration, and (7) antitrust limitations. I encourage you to review the complete article for an explanation of these factors and consult with a licensed professional in your jurisdiction. Towards the end of the article there is an excellent chart to illustrate these factors.
The guide listed a few helpful online resources including, but not limited to: Cornell Agricultural Innovation Center, Cornell Cooperative Enterprise Program, Cornell Entrepreneurship and Personal Enterprise Program, Empire State Development, Governor’s Office of Regulatory Reform, NYS Attorney General’s Office, NYS Department of State, NY Small Businesses, New York State Bar Association, NYS Business Development Corporation, NYS Department of Taxation and Finance, NYS Regional Small Business Development Centers, NYS Small Business Development Center, U.S. Department Agriculture’s Rural Business-Cooperative Service, U.S. Department of Commerce’s International Trade Administration, U.S. Securities and Exchange Commission, and U.S. Small Business Administration.
The guide did not mention not-for-profit corporations but I thought I would note that it is another choice of business structure. A Certificate of Incorporation must also be filed with the NYS Department of State. Not all not-for-profit organizations are eligible for 501(c)(3) status. I hope to delve into not-for profit corporations in a future post.
Starting a food or agriculture business? Please get your attorney and accounting involved in your planning process to help guide you through the choice of business structures. Once you are formed, you may have to adhere to specific corporate formalities. The law in this area can be fairly technical and varies somewhat from state-to-state. Therefore, please speak to a professional licensed in your jurisdiction to counsel you on these issues.