According to reports, the American agriculture and rural life underwent tremendous transformation in the 20th century. Early 20th century agriculture was labour intensive, and it took place on many small, diversified farms in rural areas where more than half the U.S. population lived. Agricultural production in the 21st century, on the other hand, is more concentrated on a smaller number of large, specialized farms in rural areas where less than a fourth of the U.S. population lives.
A vast majority of farms and ranches in the United States are family owned and operated. USDA classifies family farms as “any farm organized as a sole proprietorship, partnership, or family corporation. Family farms exclude farms organized as non-family corporations or cooperatives, as well as farms with hired managers”. Under this definition, the National Agricultural Statistics Service’s Census of Agriculture estimates that family farms account for almost 96 percent of the 2,204,792 farms in the United States.
While there are several ways to structure the ownership of these farms, the most common are a sole proprietorship, a Corporation or a partnership. Starting a farm as a sole Proprietor is the easiest solution and also in terms of cost point of view. In fact, according to the Census of Agriculture, over 55% of farms operate as sole proprietorships.
However, incorporation may provide certain benefits. Incorporating the farm can also be important in terms of tax savings, liability, and many other issues. Beginning farmers often face the tough decision of whether and how to incorporate their farm.
The issue of incorporation is an individual one, and that the best option is going to depend on your own particular situation. In the United States, there are basically 3 or 4 options for the incorporation of a farm:
Table of Content
- How to Incorporate a Family Farm in USA
- How much does it Cost to Incorporate a Family Farm in USA
Partnership or LLC – (both seem to have similar benefits and drawbacks for farmers)
Just like any other LLC or Partnership—the business is just farming. The LLC especially offers a flexible business entity that limits its owners’ personal liability for business financial liabilities. Since these businesses involve heavy equipment, animals and livestock, strenuous activity for employees and independent contractors, they are inherently risky. This risk increases the likelihood of litigation and that someone may try to collect money from the farmer’s personal assets.
This sets the farmer up as an employee of the corporation as well as a shareholder. Earnings from the corporation are returned to the shareholders in the form of dividends. Also note that the S-Corp has the same benefit as an LLC or Partnership. Plus the farmer is freed from paying SE tax on crop earnings. The farmer pays into social security and Medicare through withholding like any other employee if they pay themselves a ‘reasonable’ wage.
However, “there are downfalls to an S-corp. There are limitations on employee benefits to shareholders that own more than 2% of shares in the corp. Note that this may or may not be a concern depending on the situation. Another issue with S-corps is that they really need to be profitable to make sense. If there is a farm loss every year, you could eventually be limited on the amount of that loss that flows to your personal return. This can be significant in some situations.”
This structure is not just for large companies and offers some significant tax benefits but unlike LLC’s or S-corp’s, a C-corp pays taxes. You have the benefit of two 15% tax brackets but the earnings stay within the corp unless dividends are issued. A C-corp has more flexibility in providing benefits for shareholders. Record keeping is more complicated with this option because of shareholder meetings and such.
How to Incorporate a Family Farm in USA
Separating real-estate from the farm corporation often makes sense as well. It is also often possible to incorporate in a different state, and some states are cheaper to incorporate in than others.
Name Your Corporation
Note that before incorporating a farm, it is pertinent to find out if the corporate name you want is available. You can do this by searching your Secretary of State’s records online. Also note that you can reserve a name for your corporation for 12 months by submitting an application to the Secretary of State. Name reservations are renewable for additional 12-month periods. However, when choosing a name for your corporation, keep in mind the following requirements:
- A corporation’s name is expected to contain the words “corporation,” “incorporated,” “company” or “limited,” or an abbreviation for one of those words.
- A corporation’s name is expected not be the same as or deceptively similar to another business entity name registered with the Secretary of State, unless the entity using the name consents in writing.
An incorporator is mandated to sign the articles of incorporation and file them with the Secretary of State. The incorporators’ duties normally end when the articles are filed or a board of directors is chosen. However, the following requirements apply when naming incorporators:
- The article of incorporation is expected to include the incorporators’ names and addresses.
- A corporation is expected to have at least one incorporator.
- An incorporator is expected to be an individual who is at least 18 years old.
- Also note that if the articles of incorporation do not name initial directors, the incorporators are expected to elect directors and complete the organization of the company. The incorporators may act as directors until directors are chosen or shares are issued, whichever occurs first.
Corporate directors are tasked with developing a corporation’s business goals and strategies and managing the company’s affairs. Directors normally delegate the day-to-day running of the business to the corporate officers. However, your farm corporation is expected to meet the following requirements when specifying directors:
- A corporation is expected to have at least one director.
- There is no maximum number of directors, but the number of directors is expected to be specified in either the articles of incorporation or bylaws.
- The articles of incorporation or bylaws may establish other limits on who can serve as a director.
Specifying a Registered Agent
The job of a registered agent is to receive legal documents for a corporation and then forwards them to the corporation. The registered agent’s address is a physical address where the registered agent is available during normal business hours to receive legal documents. Nonetheless, the following requirements apply when specifying a registered agent for your corporation:
- The article of incorporation is expected to list the name of a commercial registered agent or the name and street address of a non-commercial registered agent.
- A registered agent may be an individual who resides in the state or a corporation or limited liability company that is registered with the Secretary of State and has a business office in the state. You may also use a commercial registered agent who is registered as a commercial agent with the Secretary of State.
- A corporation cannot serve as its own registered agent.
Stating a Corporate Purpose
Note that you do not have to specify a purpose for your corporation in the articles of incorporation. All corporations are formed for a general business purpose, unless the articles provide otherwise.
Determining Incorporation Bylaws
Once your Articles of Incorporation are approved, you’ll have some important decisions to make to finish organizing your farm corporation—and these decisions make up your bylaws. In your bylaws, note that you will have to consider your board of directors: who they are, how they’re replaced and how many members are needed to pass a resolution.
You’ll have to plan out details for your officers, including how they’re elected and what duties they have. Also note that you will need to spell out any important information about your authorized stock, such as classes of shares and voting rights. Essentially, your bylaws determine how corporate decisions and changes will be made—and who gets to make them.
Get an EIN
Have it in mind that the IRS requires corporations to obtain an EIN for their federal tax filings. You may also need your EIN to complete other initial business paperwork, from applying for licenses to opening a corporate bank account. However, you can get an EIN at no cost if you file an application directly with the IRS. If you’d rather save some time and skip the extra application, you can hire a document service firm to get your EIN for you.
File Corporation Reports
Your farm Annual Report is a form you file in order to update your corporation’s ownership and contact information with the state. The report and $25 fee are due August 1st each year. Forget to file? The fee goes up to $45 if filed in the next three months and then shoots up to $85 thereafter. After a year, the state will revoke your corporation’s charter.
How much does it Cost to Incorporate a Family Farm in USA
A US Corporation costs $7,500 per year just to operate. An active US-Corporation has a number of associated costs you may or may not be familiar with.
- Incorporation: $500, One Time
- EIN Number: $0-$200, One Time
- Accounting and Tax Filing: $1000 – $5,000+ per year
- Start-up Insurance: $1500 and up per year
It is highly advisable that new farmers take the time to sit down with a lawyer and a CPA who know farming, as well as the local laws in the area where the farm is going to be established. Often a short meeting can provide invaluable information saving a great degree of uncertainty and often money in the long run.
Some Extension offices, Universities, State-run agriculture or small business organizations, and non-profits also provide advice, though these opportunities differ in different states. But there is another important issue that is often overlooked, and that is that incorporation does not necessarily offer complete protection from liability. For this reason liability insurance is almost always a good idea for farmers no matter what their corporate status.