Business Structures

You’ve started writing your business plan and you’re ready to formalize your business structure. This factsheet will walk through options in business structures that are legally recognized in New York.

Registering Your Business Name

It’s strongly recommended, but not required, to register your business name with the state of New York. If a farm is operating as a sole proprietorship and is using a farm name that does not include the business owner’s real name, then registration of the business name is required. This is intended to help the public identify who owns a particular business. “Assumed Name”  certificates—more often called “Doing Business As” (DBA) Certificates are filed with the county in which the business is located. If a farm (sole proprietorship, LLC, or any other structure) also does business under a name other than the official name, then a separate name filing is required. For example, if Perfectly Picked Produce, LLC launches a brand named Perfectly Picked Popcorn, the latter name must be registered so the public knows that Perfectly Picked Produce, LLC is responsible for Perfectly Picked Popcorn. An employer identification number (SS-4 form) from the IRS is quick to obtain and will help protect your business. Finally, it is strongly recommended to open a business checking account to manage your cash flow.

Business Structures – Legal Organization

While most businesses start out as sole proprietorships or general partnerships, they may eventually find that the legal liability and tax consequences are more beneficial if operating under a different structure. New York State recognizes eight different business structures (excluding organizations such as churches and nonprofits):

Sole Proprietorship

The simplest form of organization wherein an individual simply declares himself or herself a business operator. No paperwork is needed to file with government agencies to establish the existence of the business. The proprietor has personal liability for the actions and debts of the business.

General Partnership

When two or more people work together to generate a profit from their collective efforts, they have formed a general partnership. No paperwork is needed to form this business and partners have personal liability for the acts of each partner.

Limited Partnership

Also known as a silent partnership wherein individuals combine resources with the intent of generating a profit together, but where one or more partners give up any management of the business. For remaining silent in the operation, that partner generally avoids personal liability for the acts of the business. Active partners are personally liable for the acts of the partnership as a whole.

Limited Liability Company (LLC)

One or more people can form a Limited Liability Company, which protects the owners’ (or members’, as they are called) personal property from business liabilities, in many circumstances. An LLC is formed by filing paperwork with the state. This business structure must be maintained by filing annual tax statements and fulfilling reporting obligations. The liability protection offered by an LLC is the most secure when the business owner takes steps to separate his or her personal activities from the business activities by, for example, maintaining a separate bank account for the business.

Limited Liability Partnership (LLP)

Like an LLC, an LLP allows for business owners to feel limited liability while accessing tax benefits of a business partnership. LLPs are similar to limited partnerships (LPs) but without general partners. This business structure is often used by professionals like lawyers and accountants because one partner is not responsible for another partner’s misconduct. Limited liability, in this case, means that the partners’ financial liability is limited to a fixed sum (usually totaling the value of the partners’ investments).

Business C Corporation

One or more people can form a Corporation, which protects the owners’ (or shareholders’, as they are called) personal property from business liabilities, in many circumstances. A Corporation is formed by filing paperwork with the state. This business structure must be maintained by filing annual tax statements and fulfilling reporting obligations. The liability protection offered by a Corporation is the most secure when the business owner takes steps to separate his or her personal activities from the business activities by, for example, maintaining a separate bank account for the business. Corporations must adopt bylaws, appoint officers, and hold an annual meeting. One person may hold all officer positions.

Business S Corporation

An S Corporation is simply a business that files under the S subsection of the corporate tax code, which is named the “S” subsection for “small business.” An S Corporation is not a separate business structure at the state level, and both corporations and LLCs can choose this tax status. To be eligible to file under the S section, the entity must fulfill specific IRS qualifications. The main advantage of this tax classification is the ability to avoid “double” taxation and to re-classify income as dividends, if the owner is making more than the average owner in his or her field.

Cooperative

An organization owned by members who contribute equity toward the business and share in profits generated, formed by filing with the state and has similar governance as a C corporation. Voting is either one vote per member or in proportion to patronage of the cooperative. Members have limited liability.

Nonprofit Organizations:

Nonprofit organizations are commonly misunderstood to be organizations that do not turn a profit. While nonprofits are classified and taxed differently than the structures listed above, nonprofits can technically make a profit. The differentiating factor is in the ownership of the organization and the tax classification (a 501(c)(3)). Nonprofit organizations are held accountable by members of the board of directors and may be accountable to donors, founders, volunteers, and members of the public that interact with the organization. A nonprofit cannot be owned by any one individual, sold for a profit, sell shares of a stock, or have its assets used to benefit one person or group.

This business structure may be a good fit for a farm if the farm has a charitable or educational purpose, or works to support a group of farmers and producers. However, it is difficult to classify a farm as a 501(c)(3) as the organization must have an eligible charitable, religious, or educational purpose.

For more information on deciding whether or not this may be an appropriate choice, visit the Farm Commons “I want to form a non-profit farm. What’s next?” guide.

For more information:

• Forming a Business in NY: An Overview
  This brochure by the NY Dept. of State has information on six types of business structures including what forms need to be filed, the business’s lifespan under that structure, personal liability and tax information.
• Doing Business in New York State: Structures and Strategies
  Access this publication from the Dept. of Applied Economics and Management at Cornell for help on navigating the legal maze of business structures.
• Farmers Guide to Business Structures
  Farm Commons has an exhaustive resource on choosing a business structure for farmers. The guide contains a flowchart to assist farmers in quickly identifying the most suitable options. It also contains detailed operating agreements, bylaws, meeting minutes and more. The guide is available as a free pdf download at Farm Commons or for purchase in print from the Sustainable Agriculture Resource and Education.