Whether you have inherited a family farm, are starting a new business, or are simply trying to protect what you have already built, you may not have considered what type of entity your agricultural enterprise is or could be. Making the right choice can have long-lasting effects on your farm’s management strategy and tax obligation.
Arkansas Business Entity Options
Arkansas farmers can typically choose to form any one of four separate entity classifications for their farm. They are:
- Sole proprietorship. Forming a sole proprietorship is easy. You simply must choose a business name, file a certificate, and ensure you have the right licenses. Once you have operations underway, your business will be recognized as a sole proprietorship. However, while sole proprietorships are easy to set up, they can carry big risks. If you are ever sued, for instance, then you could lose not just your business assets, like farming equipment, but your personal properties and effects, too.
- Partnership. When you start a partnership, you agree to go into business with someone else. A general partnership may not require much paperwork beyond business registration and the submission of tax returns. However, partnerships—like sole proprietorships—offer limited liability protection and can expose farmers to a lot of liability.
- Corporation. Along with registering your business name, you will need to file articles of incorporation with the Arkansas Secretary of State. You must also name a “registered agent” to accept tax documents and service processes on your behalf. This can be you, a family member, or a trained professional. Corporations require a board of directors, too. Your corporation will be taxed as an individual entity and offers a layer of protection from lawsuits. If, for instance, your corporation is sued, you should still be able to protect your home and other personal holdings.
- Limited liability corporation. Often referred to by its acronym, forming an LLC is similar to forming a corporation. However, LLCs have their own set of liability protections and tax advantages. They can help you save big money in self-employment tax while building an inter-generational nest egg for your children or other loved ones.
Choosing the Right Type of Business Entity
Farmers may not always have options when it comes to the weather and growing season, but they do have options when it comes to structuring their business the way they want. However, everyone’s farm is as unique as they are. A small, family-owned operation may prosper as a sole proprietorship, whereas a bigger farm with regular employees may need the tax and liability advantages offered by a letter corporation or LLC.
Deciding which business entity best suits your farm can be difficult. A wealth management and tax planning firm like Quraishi Law can help look over your documents and records to determine what plan will save you the most money, both now and in the future. Contact us today to schedule your initial consultation to learn more.