Farming is a tough business, and beginning farmers need hands-on experience and mentoring before they can successfully take on a commercial operation. Finding that experience and mentoring can be a significant challenge, and it’s at the heart of why Rogue Farm Corps (RFC) was created. The Oregon-based nonprofit was founded in 2003 by first generation organic farmers in their twenties and thirties who themselves had been mentored and considered it critical to their success. They noticed that many older farmers were retiring without anyone to take over their businesses, while young, inexperienced farmers didn’t know how to get started in commercial farming. RFC’s Executive Director Stu O’Neill says the organization was born from the desire to give beginning farmers access to mentors and in-field training. (more…)
The Conservation Law Foundation (CLF), a non-profit environmental advocacy group based in New England, is piloting a new resource project for farmers: the New England Legal Services Food Hub.
The problem that CLF hopes to solve with the Legal Services Food Hub is an important and widespread issue; many farmers and food entrepreneurs are forced to sacrifice economic viability or even their businesses due to the costly fees associated with legal aid. In order to combat these fees, CLF is creating the Legal Services Food Hub, which will support farmers and food entrepreneurs via a network of attorneys willing to provide pro bono legal assistance. (more…)
Independent meat producers and farmers everywhere need your help right now to defeat some terrible language that was included in the Senate’s Continuing Resolution.
As Wes reported earlier today, the Senate’s bill to fund government programs through the rest of 2013 (known as a Continuing Resolution) includes two provisions that support large meat industries and biotech giants, while disregarding the voices of family farmers, independent growers, and sustainable agriculture.
The first provision overrides the protections that ranchers have under the GIPSA rules (which help balance power between small ranches and farms and the giant purchasing companies that dictate prices,) and the second undercuts judicial review for biotechnology by allowing the USDA to permit continued planting of a genetically engineered crop even after a court has ruled that further studies need to be done on it. (How scary is that?!)
Luckily, we can do something to stop this. Senator Jon Tester of Montana is introducing two amendments – one for each of the awful provisions – that removes them from the Continuing Resolution, and he needs all of us to help him move the Senate in support.
Ask your Senator to support the Tester amendments to overturn these bad riders today!
With the defeat of Prop 37 in last week’s election, a long campaign battle in California has drawn to a close—for now.
According to Ballotpedia, the proposition’s outline is as follows:
“If Proposition 37 has been approved, it would have:
- Required labeling on raw or processed food offered for sale to consumers if the food is made from plants or animals with genetic material changed in specified ways.
- Prohibited labeling or advertising such food as “natural.”
- Exempted from this requirement foods that are “certified organic; unintentionally produced with genetically engineered material; made from animals fed or injected with genetically engineered material but not genetically engineered themselves; processed with or containing only small amounts of genetically engineered ingredients; administered for treatment of medical conditions; sold for immediate consumption such as in a restaurant; or alcoholic beverages.” (Ballotpedia, Prop 37)
According to the same source, the proposition was voted down 53.1 percent against, to 46.9 percent in favor.
In addition to official platforms for the “Yes on Prop 37” campaign and “No on Prop 37” campaign (with Facebook and Twitter accompaniments) this proposition sparked a nationwide dialogue about whether or not a label for genetically modified foods is a basic consumer right. Proponents of the bill ranged from health food giant Whole Foods to the Center for Food Safety to the Organic Consumers Association. Opponents included the California Grain and Feed Association as well as agri-business giants Syngenta and Monsanto (www.carighttoknow.org). According to a campaign donation tracking site, donations aimed to defeat the proposition were 46 million, 8.1 million of which was from Monsanto. Donations in favor of the bill totaled 9.2 million (MapLight Voter’s Guide, Voter’s Edge).
Editorials about the value of such a bill were the subject of national debate in weeks leading up to the election. A few weeks before Election Day, sustainable food activist, environmental leader, and writer Michael Pollan weighed in on the implications of bill with his New York Times article “Vote for the Dinner Party”. In it, Pollan assigned the proposition the weighty task of proving the food movement’s political legitimacy. Dave Murphy, founder of Food Democracy Now, told Time magazine that despite its defeat, “[p]rop 37 is a really important and historic opportunity for an emerging food movement. It will fundamentally change the conversation about food and agriculture here in the U.S.”
If we as young farmers are to make his statement true, it is crucial that we continue the conversation that prop 37 has begun. The issues that prop 37 sought to address are the same that influence all aspiring farmers. A national engagement with food issues; a consumer demand for transparency and concern for health; public inquiry into the science of genetically modified food—all of these are gains that we as young farmers must seek to hold onto in the wake of what seems, to some, like a bitter defeat. Hopefully, this proposition is but the harbinger of politics to come—politics that engage deeply with our farms, farmers, eaters, and food. Politics that will shape our livelihoods for generations to come.
So fight, vote, and eat on.
LLCs are easy to form and very flexible. Because of this, writing an operating agreement can help a farmer think through all the details of how to address investments, profits, and losses. Good bookkeeping is also important to optimize a farm’s tax situation.
What’s the situation?
Farmer Espen formed his business as an LLC so he can protect his personal assets from liability. The filing process was pretty easy, and Espen is headed into the farming season with the hope that he won’t have to mess with business entity stuff much longer. He’s hoping to get on with his real business: growing great food.
Where does the law come in?
Filing as an LLC isn’t necessarily the end of the line when it comes to a farm’s business entity. Like we discussed earlier in this blog, a farmer does need to maintain the separation between business and personal in real life, and not just on paper. In addition, Farmer Espen should write and follow an operating agreement and keep good records to optimize his income tax situation.
So what’s this operating agreement and why would Espen need one? An operating agreement is a document that governs how an LLC is run. It can take several pages to lay out how the business makes decisions, who gets how much profit, when the profit is distributed to the members, and when the members will be required to invest in the business. Although some states do not require LLCs to have an operating agreement, the document is highly recommended, particularly for LLCs with more than one member.
It’s easier to understand an operating agreement if you see one. Check out the two sample operating agreements here. Please note that I can’t assure you these forms meet your state’s legal requirements. Also, the forms are long and complex and I’d hate for that to intimidate blog readers: Please take these forms with a grain of salt.
If you do take a look at the operating agreement above, you might notice that some clauses appear to state the obvious while others are incomprehensible. Why? Is the form all some silly formality? Why go through the process of writing this thing? Why not just make these decisions as you go, depending on how the farming season shakes out? We all know farming is unpredictable and flexibility is key, after all.
There are some good legal reasons why Espen should take the time to write out an operating agreement. First, a farmer’s state law may require the LLC to have one. Second, taking the time to figure out how your farm will run and then sticking to that plan will help you prove to a court that your farm and your personal assets are truly separate. Yes, some of the phrases are formalities. But when you think about it, the separation between farm and business (which Espen is depending on) is itself a mere formality. Formalities can be important.
An operating agreement is wise because an LLC is a flexible business entity. Although we’ll get into corporations in later blog posts, right now I’ll just say that a corporation needs to follow certain laws that define who can receive what kind of profit from the business. With an LLC, the members have to decide. While it’s great that Espen can set up his farm to meet his precise situation, Espen and his partners have to talk each of these issues through and make a lot of decisions. Because of the variability, writing things down is really important if you want those agreements to have any force.
So, Farmer Espen slogs his way through an operating agreement, hammers out a process with his mother, who is investing in the company, and his friend Sally, who is helping him with the farmers’ market side of the business. All the decisions are made and everyone knows what to expect. Great! Is Espen done? Well… no. Soon enough, Espen is going to have to file income taxes for his farm. An LLC can choose to file taxes either as a sole proprietor/partnership (depending on whether Espen is the sole member of the LLC or not) or as an S corporation.
Many farmers struggle with the decision of how to file their taxes. The first and best thing I can say to this topic is that there isn’t a right answer. Neither option is necessarily the best option. Neither is certain to save Espen money compared to the other. The right choice will depend on whether Espen makes a profit, how much profit, what he’d like to do with that profit, how much income he wants to pay himself or other members, and what his ownership and investment situation is on the farm. The best way for Espen to make this decision is probably to sit down with an accountant who can take a close look at Espen’s financial situation. Even if Espen happily keeps his own books and files his own taxes, a few hours with an accountant might be money well spent. If Espen finds can bring neatly organized spreadsheets or workbooks to the meeting, Espen will walk away with a clear understanding of his tax filing options without having to spend much money. It’s more likely the quality of a farmer’s bookkeeping than their choice of tax filing status that will help him or her save money.
Farmers have the option to form their business as a limited liability company, an entity that offers liability protection to the farmer’s personal assets. Filing is fairly easy after you learn a few key words in the Articles of Organization.
What’s the situation?
We have a friend named Espen. Espen has years of intern experience on all the local farms, plus enough savings to make it through the first season, so he’s starting his own farm. Since he’s been reading these blog posts and recognizes the risks of a sole proprietorship, Espen is looking at an LLC (Limited Liability Company) to protect his personal assets. So how does he set up one of those?
Where does the law come in?
Espen forms an LLC by filing “articles of organization” with the state agency responsible for such documents. Usually that duty is assigned to the Secretary of State’s office. The specific requirements of an LLC are described in each state’s laws. Although forms are generally self-explanatory, they do have a few key words you should know.
First, I’ve got an opinion to express: I think the name “articles of organization” is one good example of those elaborate, sometimes useless, formalities that many people associate with lawyers and legal stuff. “Articles of organization” sound like a far more elaborate document than it actually is. In my humble opinion, articles of organization should really be called an “LLC Registration Form.” Then we’d all know what it is! But, until then, please bear with me.
Filing articles of organization is a pretty simple process. Many states have form articles of organization available on their websites. Lets go back to Espen: First, he should check his state’s Secretary of State office for a form. If he comes up empty handed, he should go down to the local library ask the librarians. If they don’t have a form on file, they certainly know where to download one. Espen’s form should be specific to his state, because the articles should follow the requirements of his state’s laws.
After checking out the form, the first thing Espen is probably going to do is write in his business name. Sounds easy, right? Well, there are a few things to think about. First, most states will require that the business name describe it’s LLC status. So Espen will need to write in “Puddle Duck Farm, LLC”. He should also be careful about using names that are commonly reserved for other businesses. Generally, if you aren’t a bank, you can’t have any words in your name that suggest a bank, such as “deposit” or “trust.” The same goes for words like “architecture” or “engineer.” This isn’t a problem for Espen, fortunately, but it can dampen the creative spirit of some farmers. Espen will also include himself as a member of the LLC, along with his business partners or investors who wish to be members. All states will allow LLCs with only one member, so Espen may fly solo as well.
Next the form will probably ask Espen if Puddle Duck Farm is “member managed” or “manager managed.” What’s that? Well, first lets start with what “managed” is. (Here we go again with the unintuitive legalese!) Contrary to what the name sounds like, this question does not ask if a manager “manages” the farm. It asks: “Who has the authority to enter into commitments on behalf of the farm?” There’s a big difference. Espen might own the farm and hire a manager. That doesn’t make the business manager-managed. Espen still maintains the authority to commit the farm, legally. For example, Espen’s manager couldn’t sign lease papers or take out a mortgage on the property because he can’t commit the farm, legally.
Let’s say Espen is going into business with his mother. She has a great head for business and she’s willing to invest in Espen’s farm. Mom can be included as a member of the LLC to establish her involvement and share of the profits. If Mom is made a member and Espen chooses “member management,” then both Espen and Mom can make commitments for Puddle Duck Farm. Of course, Mom might not want that responsibility. Then, Espen would choose “manager managed” and write in himself as the manager. Mom might still receive some of the profits, but she wouldn’t be making commitments for the farm.
Many people like the LLC because it allows the owners more flexibility than a corporation provides (more on that later). The example of Mom and Espen illustrates how you can arrange an LLC to meet different goals. On the downside, it’s not so simple to explain all of these options when the law offers such annoying titles as “manager-managed”!
There’s always a few more things to fill out like mailing addresses and agents, but the articles of organization are generally pretty short. Don’t hesitate to ask at your public library or state law school library for help understanding the different options. Next time, we’ll talk about the more appropriately named “operating agreement.” This document outlines how Espen’s LLC will be operated, and it’s an important document for any farmer with an LLC.
Today, the Farm Service Agency (FSA) notified the National Young Farmers’ Coalition of changes in their loan handbook that will make it easier for the nation’s young farmers to qualify for farm loans. This is a major win for the coalition, as we’ve been advocating for more leniency in farm loan rules to accomodate the range of new training opportunities for today’s young farmers. According to NYFC’s 2011 survey, Access to capital is the number one challenge facing beginning farmers.
The new handbook language gives new flexibility to loan officers when deciding if a farmer has sufficient managerial ability to repay a loan, and adds specificity about the types of educational and on-the-job experiences that qualify. Managerial ability is a determining factor in operating loan applications. The handbook also adds a new example under the farm experience requirement for farm ownership loans, that may help young farmers who were previously denied financing.
Here’s the breakdown:
The handbook now says that the managerial requirement for all loans can be met through (1) Education, (2) On-the-job Training or (3) Experience — or one of the three:
“The applicant may satisfy the managerial ability requirement with any combination of education, on-the-job training and farm experience, or by meeting just 1 of these criteria.”
New education requirements:
The handbook now specifies examples of university and non-accredited programs that qualify as farm education.
- Successful completion of farm management curriculum offered by the Cooperative Extension Service, a community college, adult vocational agri program culture, or land grant university
- The Small Farm Program, University of Arkansas-Pine Bluff.
- Specialty Crops Program, University of Colorado.
- Cultivating Success, University of Idaho Extension, Washington State
- University Small Farms and Rural Roots.
- successful completion of a community-based, nationally based, non-profit, or similar farm workshop programs
- Annie’s Project.
- Alcorn State University Small Farm Outreach Training and Technical Assistance Program.
- Michigan State University Organic Farmer Program
New “On-the-job training” requirements:
The handbook is now exceptionally clear that apprenticeships ( holla! ) qualify as farm experience and it outlines example programs. The previous handbook had very little detail on what “on-the-job” training meant. Here’s the new language:
(2) On-the-job training. For example, the applicant is currently working on a farm as part of an apprenticeship program.
To meet the managerial ability requirement through on-the-job training alone, the applicant is currently:
- *–working, or has recently worked, as hired farm labor with management responsibilities
- Example: A hired hand or farm labor team leader who makes independent day-to-day farm management decisions.
- completing, or recently completed, a farm mentorship or internship program with an emphasis on management requirements and day-to-day farm decisions, such as those offerings found through:
- Rogue Farm Corps
- Cultivating Success
- Many Hands Farm Corps
- The Samuel Roberts Noble Foundation
- Midwest Organic and Sustainable Education Service Farmer-to-Farmer Mentoring Program
- Georgia Organics Mentoring Program–*
- *–participating, or recently participated, in urban or community-supported agriculture programs which incorporate basic agricultural training, such as:
- Agriculture Training Institute
- Refugee Agriculture Partnership Programs
- Columbia Center for Urban Agriculture
- Growing Power, Inc.
- Center for Urban Agriculture at Fairview Gardens
- Mary Queen of Vietnam Community Development Corporation, Inc., and the Viet Village Aquaponic Park Project.
FSA added new language to the Farm Experience language that’s inclusive of farm workers and young farmers who have previously received youth loans (new language in boldface):
To meet the managerial ability requirement through farming experience alone, the applicant *–may have:
- been an owner of a farm business with management and operator responsibilities for at least 1 entire production and marketing cycle
- been employed as a migrant farm worker and has been elevated to a leadership or foreperson position for at least 1 entire production and marketing cycle and whose responsibilities include crop and field management, livestock health, breeding supervision, labor management or hiring, or general farm management
- been employed as a farm manager or farm management consultant for at least 1 entire production and marketing cycle
- raised on a farm and held significant responsibility for day-to-day management decisions for at least 1 entire production and marketing cycle
- obtained and successfully repaid one FSA Youth-OL.
Experience Requirement for farm ownership loans
Unlike operating loans, farm ownership loans require that the applicant has managed a farm for 3 years. In the past, this requirement has been interpreted very narrowly and only farmers who had filed a Schedule-F could qualify. Although the rules were made more flexible before the recent change, the new handbook language is very clear that farm workers can meet the experience requirement for a farm ownership loan.
FSA added a new example of successful applicant “John Smith”, who’s been managing a farm, but was not the principal operator:
The applicant may document this experience through FSA farm records or similar
The real test of the new rules will be their application at local FSA offices, but we are very encouraged by FSA’s changes. NYFC is still advocating for new small loans and a reduced farm experience requirement (from 3 years to 2 years), as included in the Beginning Farmer and Rancher Opportunity Act of 2011.
If you have experiences with FSA that you’d like to share, please consider signing up for NYFC’s new speaker’s bureau.
Farming is a business and a way of life. But, if a farmer is expecting liability protection for her personal assets, she might want to keep the distinction between personal and business matters clear, at least when it comes to accounting.
What’s the situation?
After pondering how risky a farming career can be, and the debt she’ll take on to get it started, Farmer Jamie decides she wants to protect her personal stuff–like her car and her savings account–from the liabilities her CSA farm might incur. So she steers clear of a sole proprietorship and decides to form an LLC or a corporation.
Where does the law come in?
Forming a farm business as an LLC or a corporation isn’t the end of the day when it comes to liability protection. To be sure a Jamie gets the liability benefits of an LLC or corporation, she needs to operate the farm as if it is distinct from Jamie personally. Since a farm is often an extension of the farmer, this can be tricky.
Many young people (and older people) are getting into farming these days. For reasons that vary from enjoying outdoor work to taking pleasure in good food, it’s a very personal lifestyle choice that attracts all kinds of folks. The intense seasonality and physical demands of the work make it especially intimate. And it’s food! That’s a very personal thing.
For a lot of farmers, there’s no distinction between personal life and work life. The home is the farm. The food in the field is the food on the dinner table. When market ends and you’ve got a pile of beets, you trade it for your neighbor’s leftover cheese. If you want a quarter of beef, you might do a little custom field work for it. It’s this lifestyle of companionship with neighbors and earth that makes farming so attractive.
In a way, state lawmakers have given business owners a choice. We can choose to merge business and personal, and be personally liable for our businesses, or we can choose to make them separate and protect our personal assets. It’s a bargain, more or less. The laws that grant an individual the right to protect their personal assets from business liabilities also require that the person recognize that distinction in how they run their business.
What does this mean? What behavior shows a distinction between a person and her business? Well, in Jamie’s example, she shows a distinction between herself and her business by never mixing personal and business accounts. When Jamie takes in CSA sales, that money gets posted to her farm business account, not to her personal checking account. When Jamie wants to buy some personal groceries or new clothes, she pays from her personal account. Jamie pays herself or gives herself a distribution of the farm’s profits in a distinct transaction so she knows what’s hers and what’s the farm’s.
For a farmer used to paying with whatever credit card is handy, the obligation to distinguish between farm and personal assets can be a hassle. It might dissuade some farmers from choosing an LLC or a corporation. But there is a plus side for the farmer that chooses the extra time and attention that an LLC or corporation might require: An accounting system that distinguishes between person and farm is also very helpful in analyzing your revenues and expenses or in considering a new crop or food venture. It also might make it easier for the farmer’s accountant to help optimize the taxes.
In legal-speak, this distinction between a person and his business is called the “corporate veil.” If a court chooses to go around the corporate veil and take personal assets anyways, the veil is said to be “pierced.” Exactly what kind of behavior will motivate a court to pass your business entity and go after your personal stuff? Well, that depends on your state’s case law. Good accounting is a big part of it. Fortunately, good accounting has a lot of other benefits as well.
So that’s a bird’s eye view of the major benefits–and obligations–of getting liability protection from an LLC or corporation. There’s plenty of other distinctions between an LLC or a corporation, but we’ll get to those in the future.
What do you think?
These days, most businesses are deciding to form as an LLC because of the liability protection it offers to their personal assets. But I haven’t seen any numbers on farm businesses specifically. Is the liability protection a motivating factor in your entity choice?
Farmers who want to work together to make a profit might risk their personal assets if they form a general partnership. General partners are jointly and severally liable for the business debt. The problem is that a group of farmers can form a partnership without ever realizing they’ve just taken on that liability.
What’s the situation?
Farmer Chad is starting up a little vegetable operation this spring. Since he’s not yet confident in his growing skill, he’s growing veggies for his friend Nell. Nell wants to take it easy this season, so Chad is responsible for half the veggie production for Nell’s Ruddy Duck Farm CSA. Chad thinks his risk is low–nobody will visit his farm and hurt themselves, he won’t go into debt, and so forth–so he decides to form his business as a quick, easy sole proprietorship. But is that all Farmer Chad needs to think about?
Where does the law come in?
Although Farmer Chad might have made a reasonable decision for himself alone, if he is forming a partnership with Nell he could be liable for all of her business obligations as well.
My post a couple of weeks ago introduced how a “business entity” is the legal structure under which a business forms. The sole proprietorship is the easiest business entity to form, but it’s also the riskiest because the owner is personally liable for all the debts of the business. This post delves into a very similar entity: partnerships.
A “general partnership” is similar to a sole proprietorship owned by two or more people. It’s easy to form a partnership: The owners file their trade name with the state so people can determine who owns the business. It also makes it relatively easy (or, I should say, less difficult) to handle income taxes since the business’s income passes straight through to the owners. The business itself doesn’t file to pay income taxes on its profit; only the owners file income taxes for the business’s profit.
It might be easy to start a general partnership, but, like the sole proprietorship, the general partnership has a dark side. Each partner is jointly and severally liable for the debts of the business. I explained before that if a school group tours a farm and a kiddo slips on a knife that was negligently left in the field, the farm might end up paying a judgment. As another example, a farmer might take out a loan to get going in the spring. The bank can go after the farmer’s personal assets to recover the loan.
Let’s say Nell and Chad agree to start a farm together. They file as a general partnership and the farm is off and running. Then Nell decides not to make Ruddy Duck Farm’s payments anymore. Both Nell and Chad are liable for that debt, and the bank can choose whose assets they want to go after. Or it could go after both partners. If Nell only has $100 of a $500 loan, Chad might have to make up the difference. It doesn’t matter if Chad receives a smaller proportion of the profits from Ruddy Duck Farm; he is also liable. That’s the meaning of “joint and several” liability. Clearly, if a couple of farmers are considering a general partnership, they both need to think long and hard about whether they really want this kind of liability.
The tricky thing is that a couple of farmers might be jointly and severally liable even though they didn’t formally agree to do business together. It’s possible to enter into a partnership without signing an agreement or even realizing a partnership has been formed. I led with the story of Farmer Chad growing half the veggies for Farmer Nell’s Ruddy Duck CSA. Is that a partnership? Are Farmer Chad’s personal assets potentially on the line for Farmer Nell’s business debts? The answer lies in the details of their operation: Are Chad and Nell acting like they co-own a business for profit? Who makes what decisions, and where does income go? Their actions, not necessarily a formal agreement, will determine if they have a partnership. Say Chad has more money and property than Nell. If someone is trying to collect on a debt, they will try to convince the court that Chad and Nell are in a partnership so they can reach Chad’s assets.
This all sounds risky. Who wants to try and evaluate a partner’s risk exposure along with their own? Who wants to worry about whether they’ve formed a partnership and if they might be liable? Farmers have better things to do. Fortunately, forming a business entity that offers a lot more protection than sole proprietorships or general partnerships is easy. We’ll get to those soon.
What’s the situation?
Nell has just decided to become Farmer Nell. She’s looking at land, she’s circling things in her chicken catalog, and she’s filling out farmers’ market applications. That’s exciting. Then there’s the not-exciting stuff: Nell has to choose how she wants to organize her farm, legally speaking. She has to choose a business entity.
Where does the law come in?
Nell can choose from a few different legal structures for her business. Each of the options has benefits and limitations. Choosing the right business entity isn’t necessarily going to be difficult for Nell, but she will have to consider closely what she wants to prioritize, both now and in the future. The easiest business entity Nell could launch–the sole proprietorship–comes with some very important trade-offs.
First, let me apologize: I tried really hard to write a thrilling opener that would make every farmer say, “Wow, I totally want to know more about business entities!” I tried scare tactics, I tried humor, I tried puns. I failed. This stuff just isn’t very scary, and “sole proprietorship” puns are lame. That’s often the way it goes for us lawyer-types, so all I can offer is the facts: Choosing the right business entity can help a farm hum along smoothly, protect the farmer’s assets, and contribute to the farm’s overall profitability. We all got into this farming thing to make a difference, and the right business entity can help a farmer do just that.
Lets get back to Nell. For a busy new farmer like herself, sole proprietorship offers a very important benefit. It’s simple to establish. Unlike a limited liability company or corporation (more on those later), one measly piece of paperwork is required for the sole proprietorship. Nell needs only to register her trade name, which is whatever title she’s going to use to do business. The point of registering the name is so that the general public can figure out that “Muddy Bird Farm” is owned by Nell. For now, note that the trade name is not the same as a trademark. We’ll get into that later, too. Filing a trade name is a cinch. This task is generally handled by the state’s Secretary of State office, and most offices now allow (or require) business owners to fill out an online form. There isn’t actually any paperwork!
A distinguishing feature of a sole proprietorship is this: There isn’t any difference between the business owner and the business. That’s why Nell might fill out her farmers’ market application as “Nell Smith, dba Muddy Bird Farm.” DBA stands for “doing business as.” In essence, the phrase means that the business is Nell herself, but she calls it “Muddy Bird Farm.” This lack of distinction carries through to tax time. Since there’s no distinction between Nell (as a person) and Nell’s business, the income of the business is passed through to Nell. When Nell completes her annual Form 1040, she’ll attach a Schedule C to account for her income from Muddy Bird. That is why sole proprietorship arrangements are referred to as “pass-through entities.”
But this lack of distinction between Nell and her farm comes with problems. If someone has a legal claim against Nell, there’s no distinction between the farm’s assets and Nell’s personal assets. Let’s say Nell takes out a loan in her first season. In the second season, things get pretty rough and she can’t pay the loan back. If the bank goes to court and gets a judgment against Nell, the bank could get a lien on whatever Nell owns personally, right down to a non-farm vehicle or vacation cabin in the woods. It’s not only debt that can work against Nell. If she hosts a school tour on her farm and one of the kiddos breaks a leg, she could end up with a liability judgment that’s good against the farm and everything Nell owns personally.
Back in the day I started a little catering business making box lunches out of local foods. I chose a sole proprietorship because I figured, hey, all I own is a bicycle, a bunch of student loan debt, two pans, and a couch–let ’em have it! Now, of course, I understand that I can still be liable even if I have no ability to pay. If my lunches made someone sick, it’s pretty unlikely they’d pursue poor little me, but they’d have the right to do so. A sole proprietorship comes with risk. Of course, all that isn’t to say sole proprietorship is bad: That risk is acceptable in some circumstances and unacceptable in others. Nell needs to look closely at her exposure to–and her tolerance for–risk. If those are low, and the value of convenience is high, then sole proprietorship might be a great choice to get Nell off and running.
What do you think?
- Did you choose a sole proprietorship even with its risks? What motivated that decision? Have you looked to insurance to cover accidents instead?
- If you started as a sole proprietorship and then you switched to another entity, what motivated that switch? Was it the risk or something else?