Should I Start my Business as an LLC or DBA?

Hi Elizabeth & Eric:

I just learned that I earned my PDC from the Geoff Lawton online PDC. My next step is to set up my business. I plan to have a farm stand selling herbs, eggs, fruits, vegetables and value added products like jams & jellies. I also plan to sell plant starts. I'm trying to decide if I want to do an LLC, which can be complicated and expensive in CA where I live, or a DBA. My husband suggests I start as a DBA and convert to LLC as the business grows.

What do you think?

Julie

Hi Julie, most new farmers at your scale here in Massachusetts start as sole proprietors (DBA). Eric

Hi Eric,

Are there advantages to being a DBA as opposed to an LLC or an S Corp from an agribusiness perspective?

Hi Neil, the advantage of sole proprietorship (sometimes called DBA) is that it is very easy to set up. Corporations and LLCs are a lot more work to establish and run, but they protect your assets better in case you are sued. Not much specific to ag as opposed to general business structure issues to my knowledge. Eric

the advantage of sole proprietorship (sometimes called DBA) is that it is very easy to set up.

I'd add to this by saying that if you haven't given any thought to what entity structure you want to set up, or filled out any paperwork and paid fees... then you're automatically operating as a sole proprietor. Which means that you and your business are the same entity. If you're calling the business anything other than Your Name (ie, Cherry Hill Farms), then legally you are supposed to go through the process of establishing your "DBA" name.

Let's dig a bit deeper into the liability issue that Eric mentioned. Let's imagine that someone you've paid to staff your farmers market booth drops a case of zucchini on a shopper's toe, causing a serious injury, and they sue you for negligence or incompetence or whatever it is... if you're a sole proprietor, the person can come after all your PERSONAL assets, such as your house, not just the assets of the business. Same thing for a partnership; the person can come after your personal assets, and the assets of any formal partners of the business.

If you're organized as an LLC or a corporation, then they can only come after the assets of the LLC or corporation. Your personal assets, and the personal assets of any other investors or partners in the business, are protected by the law.

The other major consideration in choosing an entity type is taxation. How do you -- and/or your investors, current or future -- want to be taxed? In sole proprietorships and partnership and S corps, all revenues are considered personal income (for you, you and your partner(s), or all shareholders, respectively) for tax purposes. LLC and C corp taxes are handled differently, and there are taxes for both shareholders and the LLC or the corporation itself.

Note that this info is only relevant in the US, and that I am neither an attorney nor an accountant, so please check in with your professionals before making any decisions

AND in many states, there are new entity options that are some versions of the above, including Flexible Purpose Corporations, Benefit Corporations, and L3Cs... that are specifically for values-based businesses (specifics vary depending on the structure). There is also B Corporation certification, which isn't actually an entity structure, but a certification for entities. If people are interested in this topic I can say more.

-Elizabeth

Also keep in mind there can be different reporting and safety requirements (FDA, USDA, OSHA, local business license, etc.) depending on the structure of the business.

Hi All,

I was just on the CA Farmlink website and found these great resources with regard to choosing business entities in the USA, which led to my discovering even more of the same:

The IRS's business structures overview
(Note: this site does not cover the newfangled entity structures at all, despite their being legal and happening in many states)

Farm Business Structures Fact Sheet from NCAT
(Note: their conflation of B Corp and Benefit Corporations is inaccurate, and this doc doesn't cover L3Cs or Flexible Purpose Corporations)

Within the document above is this list of additional resources (I didn't click through to see if I had any opinions about these):
• Agricultural Marketing Resource Center
www.agmrc.org/business_development/starting_a_business/creating_a_business/legal-organizational-structure
• Information about B-Corp: www.bcorporation.net/what-are-b-corps
• Information about cooperatives on the ATTRA website: https://attra.ncat.org/marketing.html#cooperatives
• IRS Website for Employer Identification Number
www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Employer-ID-Numbers-(EINs)-
• New England Small Farm Institute
www.smallfarm.org/main/for_new_farmers/resources_by_topic/business_planning
• Small Business Information, Business Structure Essentials
http://sbinformation.about.com/od/ownership1/a/llcincorporated.htm

This should give the Americans reading this thread lots to go on in terms of further entity structure research!

Elizabeth

Thank you Elizabeth. I'll check out those resources. That was very helpful.

Julie

In the general sense for most bootstrapped "start-ups" it makes economic sense and keeps things simple at tax time to start as a sole proprietor and then transition to an LLC later.

Some things that make sense to consider LLC entity:

Increased liability risk
Partnerships in the business
Adding W2 employees
Significant increases in cashflow