Small Farm Legal Structure

[MODiesel]

OK Guys:

I'm curious as to your advice/experiences in how you set up the legal structure of your farm or small farm. My wife and I are interested in setting up the farm "operations" as something separate from our own checkbooks. Something from which we can sell a little hay, purchase the tractor/tools/supplies, as well as take advantages of the various tax breaks. This would be more as a "hobby" for us, vs. any kind of full-time farming operation.

The states all have different requirements & fees for the varying legal structures, ie. Sole Proprirtership, LLC, Corporation, etc. I'm not worried so much about those as I am in picking a structure that maximizes the farmer's advantages. For example, are the tax reporting requirements of a corporation too complicated for just a "hobby farm" operation? Does an LLC offer decent legal protections if "something happen." Things like that. Basically, I'm just trying to plan ahead so that we don't end up with a structure that causes more headaches than it's worth, or requires a change somewhere down the road.

My next step will be to talk with our family lawyer about these issues, but I also thought I'd draw upon the broad experiences from the group here, if anyone had anything to share.

Best Regards,
Jay

 

[Hakim]

Jay,

No doubt you will get some good advices here. Also, do a TBN search on "taxes" and you'll find some great previous threads.

One thing though, you want to ELIMINATE, once and for ALL time, using the words "tax advantages" and "hobby" in the same sentence; in fact, in the same lifetime. The one thing that will annul any deductions for whatever you do, is if you operate as a "hobby" instead of a for-profit venture.

No doubt, some for-profit ventures have limited incomes, and do incur losses. Generally though, the IRS wants to see any kind of business (if it is legitimate) earn a profit in two years out of any five year period. In any event, if you start out form the premise that it is going to be a "hobby," you better forget about filing as a business. It will prove to be a painful and costly misjudgment. Now, upon reflection, I am confident that you are going to work AS HARD AS YOU CAN to make a profit? /forums/images/graemlins/blush.gif /forums/images/graemlins/grin.gif /forums/images/graemlins/cool.gif

That said, either a S Chapter Corp, or an LLC will suit your needs. I personally like the LLC, since it has the least organizational and record keeping requirements. Search online for the term "entity selection" or "choice of entity" which is how the accountants form that question.

 

[JerryG]

IMHO the best thing that you could do is speak with a good farm accountant. They will be able to guide you through what you need to know, both State and Federal.

 

[cowboydoc]

If it's just a hobby I wouldn't even mess with it. At some point if you incorporate or even just go sole prop. then you are going to have to show a profit or face an audit. If you aren't full-time and have established the business to make a profit you will have irs problems at an audit. Until you get where it would be considered a legitimate business I would just keep it simple. There are literally books written that contain case after case of people who have tryed to claim horses, cattle, farming, ranching, as a business and when audited they were classified as hobby and had to repay thousands and even millions in back taxes.

If you have a legitimate business and a business plan that shows how you are going to be profitable then you need to incorporate. That is really the only way to shield yourself from liability. Tax wise you have to be careful and that is where you need an accountant to look at your books and tell you which corporation or if incorporating would be an option.

When I was first getting going I just filed a schedule C with my regular tax return for the farming. Unless you are putting some good income away that may be your best bet if you want to chance it with the IRS.

 

[BillyP]

As Jerry stated, get advice from a trusted CPA knowledgeable in farm operations.

You may get good advice here but it could (and probably will) come back and bite you in the butt.

 

[SPIKER]

so far I agree with the others, I file a sch C as well, which is what most FARMERS do who are only working a small hunk of land. I'm under a DNR PLAN for Tree/TIMBER use. this keeps my property in CAUV (farm tax bracket) which is by far more important than attempting to show profit or loss for fed taxes...

by all means find a local accountant and get some advice, if you plan on doing OUTSIDE work, as in mowing and farming someone elses property, then you should form at least an LLC (limited Liability Corp) this will HELP protect you're personal property form the buisness property in case someone was to be hurt or sue you... It still can not save you if you are blatently neglegent or commit fraud, but that is somethign only you could be judge of...

I've been thinking of opening up the property for bramble picking (black berries rasberys ect) but so far have not as I'm affraid of the personal liability aspect of having someone fall in a gopher hole and send some dirt bag lawer after me! that being said, I think that YOU will be the one who will ultimatly have to meet with the accountants auditors and IRS agents if somethign was to not be as planned.

mark M /forums/images/graemlins/crazy.gif