Are you in business with another person?
Most farms start up with one person. In the eyes of the law, this is a ‘sole proprietor.’ When 2 spouses work together, this is also a ‘sole proprietor,’ and since it is spouses, there would be an unstated partnership. Spouses have to choose whose Social Security Number goes onto the business tax forms. Sometimes, the couple has a formal partnership agreement, but not usually. In Vermont, the same would be true for civil unions.
When 2 people are in business together and there is no agreement, they have an informal partnership or a joint venture. This may be fine for many years. But quite often disagreements occur- who is putting in more time? More money? Are both parties taking equal amounts out of the business? And, when the time comes that the owners want to end the business, disagreements can come up about how to divvy things up. Especially if the owners have put in different amounts of cash, time, or assets. How to fairly share the proceeds from the business? This is where a business agreement becomes important.
Partnerships are a legal arrangement for two or more people to conduct business together. They contribute assets, time, and money into the business. A problem with partnerships is that one partner is liable for debts incurred by the other partner. A second problem is that partners are personally liable for partnership debts. A partnership must have more than one partner. Usually profits from a partnership are distributed to partners in proportion to their ownership. A partnership cannot continue ‘forever’ like a corporation. Partnerships are pretty easy to start and to finish. Partnership profits move right to the owners and the owners pay the income tax. Accounting gets more interesting when the partnership begins owning assets.
It is Very Important to have a good agreement that describes who the partners are, how much they have contributed, what happens if a partner dies, how a partner can leave, who does what, and how the partnership will end. Michigan State University Extension has a good ‘worksheet’ for people to use to think about a partnership before they go to see a lawyer to create a good partnership agreement. http://web2.msue.msu.edu/bulletins/Bulletin/PDF/E2119A.pdf
The Limited Liability Company is similar to a partnership, but can provide protection to the owners against some liabilities- from both debts and injuries from products. The LLC is pretty new, is very flexible, and is the popular business entity now. LLCs still need to have good insurance, however. An LLC can have just one share holder. The MSU worksheet’s questions are also excellent for people considering an LLC. The Vermont Secretary of State has lots of good information about forming an LLC or a partnership. http://www.sec.state.vt.us/corps/
Then there are corporations. This is what big companies, like GM or General Electric are. They are owned by shareholders who may have little or no say in how the company is operated. Corporations can outlive the owners. There a few farm corporations in VT. Corporations pay tax on profits, then the profits are sent out to share holders as dividends, and share holders pay tax on the dividends. The VT Secretary of State’s website also has info on corporations.
Sole proprietors, partnerships and now LLCs are the most common forms of business arrangements for farms in Vermont.
When you get to the point of working with someone else, thinking about how you will be doing business together is important. Knowing what your obligations are and will be is important. Understanding how you can leave may become important.
This website is a book, “A Legal Guide to the Business of Farming in Vermont.” http://www.uvm.edu/farmtransfer/?Page=legalguide.html Chapter I is ‘Legal Structure of the Farm Business.’ Each chapter is a pdf file.
Beth Kennett, Liberty Hill Farm, Rochester, VT, has this checklist for creating a farm LLC, http://www.farmtransfernewengland.net/Resources/Creating%20an%20Limited%20Liability%20Company%20%28LLC%29%20-%20The%20Nitty%20Gritty%20Details.pdf
Prof Jesse Richardson, Virginia Tech, has a check list that is similar to the MSU publication. The checklist is on pages 63-65 of this publication. http://www.rollinghillsrcd.org/Section%203%20Planning%20the%20Future%20of%20Your%20Farm.pdf
If you have the above publication open, on page 62 there is a simple table that compares the various forms of business organization.
This is a 3 page document with a simple table that also compares the various forms of business organization. http://www.aaec.ttu.edu/faculty/jefjohns/farm%20mngt/public%20farm%20mngt/Links/TCE%20Bus.%20Plan.pdf
I found this interesting website with a good discussion about the forms of business ownership. http://www.residual-rewards.com/business-types.html I suggest that you hire a lawyer to prepare your business documents, instead of ‘doing it yourself.’