By Laura Vaught
This article was first published in the official magazine of the Tennessee Cattlemen’s Association, Tennessee Cattle Business.
You may or may not have ever considered what type of entity you have for your farm business. In Tennessee, you have four main business entities to choose from. I’ll briefly cover each type and the benefits associated with each one. Carefully choosing a business entity can help you in tax planning, risk management, and farm transition planning.
Forming a sole proprietorship is simple – you simply start doing business. There is no formal registration requirement with the State of Tennessee, and you own property and file taxes in your own name. A sole proprietorship does have risks, however. If you were to be sued, your personal assets (i.e. your home) would be at risk just like your business assets (i.e. your equipment, crops, or livestock). If you own your land and equipment in your own name and farm alone, you are most likely a sole proprietorship.
A partnership also does not require a formal filing with the State of Tennessee, or any official documents to be signed by the parties. You can enter into a partnership agreement that outlines the duties and responsibilities of each partner; however, a court could find a partnership by looking at evidence of the way the partners do business. You could have a partnership if you own cows with someone, share equipment, or otherwise do business together. It’s also possible for you to be in a partnership with someone for one specific business venture, rather than your entire farming operation.
A corporation requires formal business filings with the Tennessee Secretary of State, including annual reports. You must draft articles of incorporation that enumerate things like the name and address of the business, the registered agent, description of the business, authorized shares of stock, and directors. A corporation is taxed separate from an individual. Furthermore, doing business as a corporation would allow you to shield personal assets (like your home) from judgments or lawsuits against the corporation, as long as you keep corporate and personal assets separate.
Limited Liability Company (LLC)
LLCs are a common business entity option. Like corporations, LLCs require a formal business filing with the Tennessee Secretary of State. All members must sign an operating agreement that outlines the structure of the organization and the duties of each member. An LLC allows you to shield your personal assets from judgments or lawsuits against the company, and it also allows you to opt for pass-through taxation as if you were being taxed individually.
Each business entity option has its own characteristics and potential benefits for your operation. You can work with an attorney and CPA to determine which option is best for you. Choosing a business entity can also be an important part of your transition plan. If you wish to bring on a second generation, you might consider creating a corporation or LLC to make the process of farming together, and later passing on the farm to your children, a more seamless one.
About the author: Laura grew up on a farm in Lascassas, Tennessee, and is passionate about serving farmers and other agribusiness owners through her legal practice.