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Nonprofit or LLC? Need help organizing ourselves.

 
Posts: 29
Location: Wisconsin
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What models have people found successful when starting up a small family farm/permaculture-driven organization? Are there other good options besides a nonprofit or an LLC?

Backstory: We are a small 15-acre family farm located in Wisconsin. Our over-arching goal is to create a perennial food forest, offer educational opportunities, and build community throughout this process. We both work regular jobs and pursue farming in our spare time as a hobby and a passion. Working the farm full-time is not an option at this time or in the foreseeable future.

We don't have much cash to invest into the farm/permaculture venture, but as we all know, farming and caring for animals gets pricey quickly. We have a few ideas of ways to generate a cash flow to help build this and fund projects (i.e. AirBnB space, farm tours, pastured pork, etc), but are not sure the best way to go about organizing ourselves. For example, wondering if it is worth it to file for 501c3 status (which we are aware that first we would have to file as a corporation), OR, would it be better to just file an LLC? I don't anticipate that we will ever make much of a profit, if anything at all, as any money we make will just go right back into the farm. So we'd definitely be under the $40 to $50,000 threshold of filing as a small nonprofit with the EZ form IF we filed as a 501c3. If we organize as an LLC, what would the implications be at tax time?...that's my big question.

As I understand it, if we do go the nonprofit route but there isn't an ongoing active pursuit of funding, the nonprofit will eventually be dissolved by the IRS. We don't really have time to fundraise nor the interest or the money to hire someone to do that. We are mainly interested in permaculture practices and opening up our space to others who want to learn and/or be part of a permaculture-based community.
 
pollinator
Posts: 633
Location: SW Missouri, Zone 7a
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We have been working on figuring out a system like this for ourselves on our 75 acres, and because neither of us is particularly business-minded it has been a real challenge. My advice to you is to educate yourselves about the possible community configurations out there and then pick the one you like best and work on tweaking it to conform to your specific needs. I have researched many of the local communities most because if they are in the same state, they will be most likely to share similar hurdles and resources with you and be the best models, but don't overlook the value of community models in other states or even other countries. While you may not find that you have all the same resources or laws to deal with, you might get some ideas from them for ways to generally structure a community and then you can find similar resources or research pertinent legal questions in your area. Here are some communities with a wide range of models you may want to study ...

O.U.R. Ecovillage Cooperative

Dancing Rabbit Ecovillage Land Trust

East Wind Community - Self-Governance

And, finally, this is a general community resource site for people, like us, who are looking for a community or for good ideas. Fellowship For Intentional Community

If you come up with something ideal, please let us know what you did -- we're still struggling to work out the perfect community.
 
steward
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Location: Northern WI (zone 4)
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Hi Tamara, are you intending to set this up as an "intentional community" with people living there full time?  As I read your post it sounds a bit more like you're after a personal farm business and homestead.  I think the organizing structure would be very different depending on which way you're going.
 
Tamara Koz
Posts: 29
Location: Wisconsin
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Good question Mike Jay. For now, while we are raising our children it will be a farmstead where we will also host workshops and offer educational opportunities. Possibly have a WOOFER or 2 in the summer months. Once our kids have moved on it will be a wonderful place for an intentional community. However that is quite a bit down the road.
 
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LLCs are flow-through tax entities. So basically all distributed profits flow through to the personal income tax sheets of the members, and are taxed at their normal income tax rates. You can also retain money within the entity and use it to do business and make repairs/improvements etc. without distributing it as profits, essentially meaning that you can use before-tax inome instead of after-tax income, which saves money. Also you may be able to take losses to offset your tax burden. Also if you need financing, the LLC can shield you from personal liability from those debts, as well as from potential lawsuits that may threaten your assets. You must follow business formalities in order to prevent piercing of the corporate veil and maintain these protections. You probably also want general premises liability or similar insurance. Talk to CPA, lawyer, insurance agent until you understand your options. Small fee to pay in the long run.

 
Posts: 60
Location: North Texas
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Everything I'm about to say must be preceded by this: I am not a CPA; I am not a tax attorney; Any use of my opinions expressed below is 100% your choice and your responsibility... and you probably should ask a CPA or tax attorney these questions.

That said, I'll share my opinions, which you should regard as coming from an unqualified source.

Q: Nonprofit or not?
A: If it were me, in the circumstances you described, definitely not.
Why:
#1. You stated that your profits would be very low or non-existent. Thus, having tax exempt status seems to have low or no importance.
#2. Being a nonprofit automatically creates additional requirements for paperwork, qualification, and maintaining qualification. This additional burden triggers my allergies, and seems to have no benefit for you.
A reason to the contrary: Some people assume wonderful benevolent qualities go with any entity which is a non-profit and thus are more willing to support such entities. Although this phenomenon has no basis from either a legal perspective or the the real world behavior of nonprofits (there are good and bad nonprofits, corporations, LLCs, alike)... it does actually persist in some circles. If marketing to such circles is important to you (despite their persistent ignorance of the facts) then you may want to consider assuming the additional burdens of a nonprofit.

As your question was stated, my rejection of a nonprofit reduces your options to an LLC.
However, I'll expand a bit and acknowledge a few other options that exist - LLC, S-Corp, C-Corp, Sole Proprietorship, General Partnership, and Limited Partnership.

And of those other options, I suspect that an LLC will be the best option by far.
Again, refer to a CPA and tax attorney for qualified advise - cause that's not me.

But I'll share a few details on these options that explain why a LLC is probably your best bet.

(This will get really long, so you should probably stop reading now and talk to that CPA or tax attorney.)

What is a Sole Proprietorship?

A sole proprietorship is what you are if you're doing business without establishing another legal entity, using your own SSN (vs an EIN for another legal entity), using bank accounts which were opened using your SSN, etc.
This means that for legal purposes, you and the business are the same entity.
This has the advantage that you didn't have to file anything special to set it up... and that's where the advantages end.
Because you and the business are the same legal entity, any liability incurred by either one is attached to the other.
If someone attends a workshop at your event, steps in a gopher hole and trips, twists their ankle in the fall, lands face down in cow patties, and is swarmed by fire ants... if they try to sue you, that liability can affect both your business and personal property. Even after waivers and disclaimers, I regard this as unacceptable risk, and thus I almost always recommend against sole proprietorships.

What is a General Partnership?

A general partnership is what you are if you're doing business without establishing another legal entity and there's more than one of you involved.
It has almost exactly the benefits (limits filing and setup) and the problems (mixed personal and business liability) of a sole proprietorship, but with one more huge problem added...
If you're in a general partnership, not only are your business and personal assets and liabilities considered one... your partners' personal assets and liabilities are thrown into the same pot. So, if they do something stupid in their personal life and get sued, you and your business may directly pay the price of their personal error. Not a good idea. I can't imagine a situation where I'd think a general partnership was a good idea.

All the remaining options we're discussing (C-Corporation, S-Corporation, LLC, Limited Partnership) improve your liability situation by creating a different entity (ie legally it's like a separate person) which is your business. It will have it's own EIN (employer identification number aka tax ID number) which you'll use instead of your SSN. It will have it's own bank accounts. It will be an entirely separate entity that can have it's own liability independent of yours (or your partners').
The difference between these others is in the amount of overhead you must comply with to maintain this legal separation, who makes decisions in the company, and the terminology around it.

C-Corporations...
A C-corporation might be the appropriate entity if you were sure your business was going to grow extremely large, become a public corporation, etc.
In a C-corporation, the decisions are made by officers of the company (President, VP, Treasurer, etc) who are chosen by the board of directors, who are elected by the shareholders.
You and whoever else is involved in funding this company would be the initial shareholders, and you'd have to hold a shareholders meeting to choose members of the board of directors, who would then hold a board meeting and select officers, who would then be able to start doing the relevant things like setting up a bank account.
Also, because a C-corporation is a different entity than you, it pays taxes separate from you. Really. If you make $50,000 in the corporation after expenses, the corporation will pay tax on that money. Let's make the math easy and say it pays $10k leaving you with $40k (not accurate numbers). Then you decide you want to move some of that money back to your personal pockets, so you pay a dividend to all the shareholders, and they get taxed on that dividend income again. So you get to run a big charade of being multiple different people/roles and get taxed twice for all that effort. If that all sounds like an awful lot of work for a simple family farm, that's because it is.
Maintaining the liability protection of the entity requires that you make all important decisions in your role as an officer of the company (never as an individual), and those decisions be documented. The big decisions may need to be approved by the board of directors (which might also be you and/or family members), and again documented.
If you have multiple personalities, this might be fun, but if you're really in it to farm and help people with useful workshops then it may get very confusing remembering when you're acting as yourself vs. your officer of the company role vs your board of directors role. So let's not do this. Let's put that energy into farming.

S-Corporations...
S-corporations were created to simplify all the C-corporation stuff for business that don't need all that overhead... and before LLCs came along this would have been your answer.
You get to reduce a lot of the multiple personality thing and some of the records, and you still get the benefit of separating business liability from personal - as long as you do all the S-corporation things that are required.
Also, an S-corporation is what's called a "pass-through" entity meaning that it is not taxed as a separate entity, but it's income is "passed through" to the shareholder's taxes. So, if the S-corporation makes $50,000 net profit, and you own 60% of that S-corp, then $30k of that profit (ie 60% of $50k) shows up on your taxes as your personal tax liability. This occurs regardless of whether you choose to distribute any of that profit from the company to the shareholders... so I'm guessing you'll decide to distribute enough to cover the taxes.

Limited Partnerships...
This is like a general partnership in that it involves a group of you investing in the business together, but it's called a "Limited" partnership because it limits the liability of some partners.
Specifically, a limited partnership has one (or more) general partner(s), and one (or more) limited partner(s).
The general partner(s) have the legal authority to act on behalf of the business - meaning make decisions for it, open bank accounts, etc. Because they have the legal authority to act for it, they also get the liability associated with those actions.
The limited partner(s) do not have the legal authority to act on behalf of the business, but are shielded from liability.
Limited partnerships are pass-through entities like S-corps, so they don't acrue and pay taxes as an entity... instead all partners are liable for taxes on their share of the company's profits (again, whether those profits are actually distributed or not).
Also, limited partnerships have a little different terminology... where a corporation has shares that are owned by shareholders, a limited partnership has "units" that are owned by the partners.

LLCs... aka Limited Liability Companies...
These are generally the newest creation of the bunch.
Like an S-corp, they're really tailor made for people who want less hassle, less formality, less stuff that must be perfectly recorded, etc. But since they came later, they improve on S-corps by simplifying further. (Note that the details of this are state specific. Again, see a CPA or tax attorney.
LLCs are also more flexible. One example is taxes. By default, a LLC is considered a pass-through entity like an S-corp or an LP. However, an LLC can elect (by filing specific forms with the IRS) to be treated as an S-corp or a C-corp for tax purposes. Choosing to be treated as a C-corp would result in the LLC paying taxes as an entity rather than passing the liability through to it's shareholders. Choosing to be treated as an S-corp would still result in the LLC being a pass-through, but could have tax implications related to payments for FICA taxes. These are decisions that must involve your CPA.

I think you'll find an LLC is the best option for what you're doing... but I'm not qualified to assess that as I'm not a CPA, not an attorney, and don't know anything about the laws in Wisconsin.

If my brother asked me this question, I'd tell him that I think he wants an LLC but he should discuss it with a tax attorney or CPA. (Getting repetitive, huh?)

If you go with an LLC, or any other entity which can limit your liability, you'll need to do two major things differently...
#1. Keep records. Your CPA/attorney will help you learn what to keep records of depending on the entity, but it's not just financial. It's also decisions.
#2. Learn to think like an entity. Separate your (personal) decisions from the decisions of your business entity. Never conflate the two. When you make a decision for your LLC, it's not you (personally) making that decision, it's you in your role in managing the LLC. That distinction can become very important. Learning to separate that thinking will help understand all the nuances much faster and learn to work with the system in ways that will save you money and liability.

And just in case it wasn't clear yet... talk to a CPA and tax attorney. None of the information above can substitute for expert advise. (Maybe Jocelyn Campbell will tell you if she thinks I overstated that.)

I hope that was helpful in some way.
 
Tamara Koz
Posts: 29
Location: Wisconsin
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All helpful information. Also wonderfully fun and humorous to read. Thank you! LLC for the win!

My favorite bit of information so far:

Ashley Reyson wrote: If you have multiple personalities, this might be fun, but if you're really in it to farm and help people with useful workshops then it may get very confusing remembering when you're acting as yourself vs. your officer of the company role vs your board of directors role. So let's not do this. Let's put that energy into farming.


 
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