Choosing The Right Business Form For Your Farm

By: Kristin M. Gunsolus

Farmers, as well as other business owners, have various options when it comes to choosing a form of business organization.

Choosing the correct form depends on many considerations, including income tax implications, flexibility, ease and expense of recordkeeping, exit strategy and liability protection. I will focus on using an entity for liability protection in this column.

Speaking broadly, farmers can choose to organize their business by using an organizational structure without built-in liability protection or by using an entity that does provides a liability shield.

Non-limited liability organization

The two most common ways to organize a business without pursuing an additional level of liability protection are as a sole proprietorship and as a partnership. A sole proprietorship is owned and managed by one individual, whereas a partnership has two or more individuals associated as owners and controllers. In both a sole proprietorship and a partnership, the sole proprietor and partners are responsible for all the obligations and debts of the entire business, even if the debts exceed the sole proprietor’s or partner’s investment. Thus, a sole proprietor’s and a partner’s individual assets are at risk for all liabilities incurred by the business. There is no ceiling and the liability of the owner sole proprietor or partner is unlimited. This is a significant cause for concern in a partnership, because the farmer with more personal assets risks losing far more than the farmer with limited personal assets. For both sole proprietorships and partnerships, having adequate insurance coverage is imperative to protecting assets, as insurance provides the sole means of liability protection.