Are you incorporated? (non-backyard farmers)

I am reading a book called "How to be a Dirt Smart buyer of rural property" that is giving me a lot of insights in valuing and negotiating the purchase of rural land free-and-clear, no surprises. The author also provides a hard dose of reality for city boys who hope to become farmers. Good book, I highly recommend it.

He strongly advises that the buyer of rural land consider operating it as a farm business, for IRS and personaly liability reasons. I will need to go over that chapter a couple more times, but I'm wondering who here is unincorporated and working full time as a farmer/gardener?

Why do you incorporate or not incorporate? Do you wish you had made a different decision?

Just to clarify, are you referring to starting a corporation or purchasing land in an unincorporated area?

I mean starting an LLC or other type of corporation, for tax and liability purposes, and running your garden as though it were a business even though it might not be a profitable operation anytime soon.

I would probably own the land myself, or have it in a family/charitable trust. Then lease the land to the company for $1 or some such. I would not have the company own the land.

There is a very good reason to run the land as a farm and incorporate (in some form): Taxes and Liability. The corporation shields you from some liability and limits how much a person could sue you for if they, say, got sick. Being a farm and operating as such gets you some quite decent tax breaks last I heard, and may open up other possibilities like getting more help from the local extension or regular college.

I would not start any enterprise without considering the org structure and consulting with a local lawyer. If I were not going to sell or barter goods to someone else, I probably wouldn't go through the hassle, thought I would definitely look into it.

Curious to see what others have to say on this.

I would not get a business license, would have no insurance and deal only with private persons.

What's wrong with being liable? It's honest and fair and ethical. Insurance is gambling.

Licenses are unnecessary for two private individuals dealing with one another. It's a constitutional right.

Of course, if you want to sell to the permies, at farmers markets, to distributors, etc... then you should do exactly as TheLight advises.

It's not for me, though. I like people.

I've owned many parcels of land and have run different types of businesses.  I would never again incorporate, LLC, S corp,  C corp etc.... if you're not out to legally protect your assets (and most lawyers can crack right through any corporate veil) and you're not going to do something illegal... then why bother with accountants/lawyers/ paperwork/fees, etc.??  taxes?

Most books espouse some transfer shinanigans to protect and hide assets... not worth it, if you ask me.  you could probably make more money writing a book on how not to do it.

If you want to protect land, I would put it into a trust or conservancy. 

Finding land is easy, finding good land is hard.

gordwelch wrote:
I would not get a business license, would have no insurance and deal only with private persons.

What's wrong with being liable? It's honest and fair and ethical. Insurance is gambling.

Licenses are unnecessary for two private individuals dealing with one another. It's a constitutional right.

Of course, if you want to sell to the permies, at farmers markets, to distributors, etc... then you should do exactly as TheLight advises.

It's not for me, though. I like people.

I'm sorry, I disagree. I live in NYC right now and have seen how little it takes for one person to sue another (including in private-party transactions). If I were sued, I would be cleaned out just defending the suit. And yes, I've been on the periphery of situations where one person sued another for helping them. Our society is quite litigious.

People are not always nice, and assuming they are will get you in trouble. I will be nice, ethical, fair, and even go out of my way to help others, especially if they are a client/customer of mine. But I will be insured if I'm selling or bartering anything to anyone. Note: it could be a liability rider on your homeowners insurance. Nothing says it has to be business insurance.

As for the farm for tax purposes, take advantage of any break you can get. Nothing says the farm has to be owned by a corp to get the tax benefits. As for the higher tax rates for corps, you don't pay taxes if you're not making a profit.

Again, talk to a lawyer. It's highly dependent on where you are, and what you want.

gordwelch wrote:
Insurance is gambling.

The word 'gambling' implies foolish risk taking. A reasonable insurance policy is the opposite - it is rational risk management. The average person will pay somewhat more into insurance than they get back (the insurance company has costs) but insurance can prevent a business or family from getting financially wiped out. Not getting insurance is gambling, it is 'self-insuring' where a person generally understands that they do not have the deep pockets to pay for low-probability/high cost events like fire, flood, or a liability lawsuit. 

Amish barn-building parties can be seen as one form of insurance - people agree to rebuild each other's barns if it gets destroyed. Again, a rational form of risk management. An Amish farmer might spend a weekend or two each year working to put up other people's barns, but he knows that in return, others will help him if his barn is destroyed. It doesn't matter if the average Amish person puts somewhat more labor into the social insurance system than they get out ... the system protects the community, the goal is not to use that insurance to maximize yield/income, but to minimize loss and stabilize each member.

Not insuring/self-insuring is a common strategy for people just starting out, and it might make sense in such cases  ("when you've got nothing, you've got nothing to lose") but when a person builds a successful business, formal insurance usually becomes a good idea.  If I developed a fantastic permaculture property that was generating food, fuel, fiber, and income for a group of people, I would be looking for economic resiliency, and insurance is one way to do so.

A true 'mutual' insurance company is run like a cooperative or credit union - it exists to meet the needs of its customers, it does seek to extract a profit and export it somewhere across the country or world.

To operate a farm as a business for IRS purposes, you will eventually need t show a profit.  I have been told that 3 consecutive years showing a loss is enough for 'them' to cut you off.

A family of 4 can turn a fairly sizable profit before the income becomes taxable.  Food, shelter, and much more are free, so how much do you want to earn?  Do the math, and figure at what point Uncle Sugar starts dipping into your pockets.

Get a good accountant.  An accountant that specializes in farms, not a city/corporate accountant.  A good one can save you a lot more than what he charges.

winsol3 wrote:
I've owned many parcels of land and have run different types of businesses.  I would never again incorporate, LLC, S corp,  C corp etc.... if you're not out to legally protect your assets (and most lawyers can crack right through any corporate veil) and you're not going to do something illegal... then why bother with accountants/lawyers/ paperwork/fees, etc.??  taxes?

Most books espouse some transfer shinanigans to protect and hide assets... not worth it, if you ask me.  you could probably make more money writing a book on how not to do it.

If you want to protect land, I would put it into a trust or conservancy. 

Finding land is easy, finding good land is hard.

All it takes is one lawsuit...

"All it takes is one lawsuit..." for me to walk into court and show that I can read, write and speak English.

I'm not going to address other items, but this talk of lawsuits...

ANYONE can sue anyone at any time for any reason.

Anyone can sue ANYONE at any time for any reason.

Anyone can sue anyone at ANY time for any reason.

Anyone can sue anyone at any time for ANY reason.

It all comes down to being able to defend yourself.

Insurance, LLC status, or whatever trick one succumbs to... it all ends up being a question of liability.... and by that I mean "Did I do something wrong to someone else?" It's basic playground rules. When I don't say sorry cause I threw sand on the other kid's head, he runs and tells the teacher. Teacher comes to me and says "Did you throw sand?" And I say... talk to my insurance company and my lawyer...

My point of view.

gordwelch wrote:
"All it takes is one lawsuit..." for me to walk into court and show that I can read, write and speak English.

I'm not going to address other items, but this talk of lawsuits...

ANYONE can sue anyone at any time for any reason.

Anyone can sue ANYONE at any time for any reason.

Anyone can sue anyone at ANY time for any reason.

Anyone can sue anyone at any time for ANY reason.

It all comes down to being able to defend yourself.

Insurance, LLC status, or whatever trick one succumbs to... it all ends up being a question of liability.... and by that I mean "Did I do something wrong to someone else?" It's basic playground rules. When I don't say sorry cause I threw sand on the other kid's head, he runs and tells the teacher. Teacher comes to me and says "Did you throw sand?" And I say... talk to my insurance company and my lawyer...

My point of view.

Experience with lawyers, judges, and city gov people has proven otherwise to me. I've seen lawyers joke openly about "riding the gravy train." Perhaps your experience has been more positive. I stick by my comment: one lawsuit can ruin livelihoods and lives.

I'm not saying one should avoid liability, but the legal system is designed to deliver justice, not fairness. And that can include what other people think is "just," including CEOs, lawyers, and lobbyist toadies.

John Polk wrote:To operate a farm as a business for IRS purposes, you will eventually need t show a profit.  I have been told that 3 consecutive years showing a loss is enough for 'them' to cut you off.

A family of 4 can turn a fairly sizable profit before the income becomes taxable.  Food, shelter, and much more are free, so how much do you want to earn?  Do the math, and figure at what point Uncle Sugar starts dipping into your pockets.

Get a good accountant.  An accountant that specializes in farms, not a city/corporate accountant.  A good one can save you a lot more than what he charges.

Amen to that last paragraph.

The question of business vs. hobby is actually fairly complicated, and which is preferable is not clear cut either. If you run a farm as a hobby, you can only take expenses off of your farm income, but you don't have to pay self-employment tax, which is the equivalent of Social Security and Medicare taxes for both the employee and employer's sides. What the IRS really looks at is whether profit is the motive. The 2 of 5 year rule is important, but there are a lot of other considerations: how much time do you spend on it, what proportion of your income comes from it, do you advertise, is it licensed, etc., etc.

One caveat about profit: you can easily be making a profit even if you don't have enough money to pay your bills, if you are building equity in your business/farm by paying down loans. Many an entrepreneur has had their businesses closed because of that. That is especially true if you are paying personal bills with money from the business.

As to the question of incorporation, the rough rule of thumb I've heard is that it costs about $600 a year minimum to do the proper paperwork for corporations, and you need roughly $40,000 in profit for incorporating to be worthwhile. Please note, those are very rough numbers and could very greatly depending on your locale.

15 years ago I started a candy company, sole proprietor for a few months, then incorporated, sub-S when I took on a partner. The corp was a simple matter and offered some protection, but there were no deep pockets to reach into. I took out liability insurance a couple months later as the pockets deepened and exposure increased-several hundred stores carried my lollipops. Had I been sued, the insurance company might have put up some defense, it was some time ago, but as I recall there was some clause in there about it. About a year later, the partner and I had some disagreement. I ended up resigning. This resulted in sinking the operation but it got the guy gone.

Lessons learned:
-liability insurance is handy once the business gets big enough to justify the expense, there is something to protect, or sales extends past people you know.
-incorporating is a must if you have partners
-if you take on a partner, do so in unequal portions if possible. Corporations make this possible. One person makes all decisions. All others can make suggestions. Its better if they dont. And by god don't ever let them get their hands on the checkbook.
-NEVER, EVER take on a partner.
-Sole Proprietorship has a place and goes well with good insurance.

chefconnor McCoy wrote:I mean starting an LLC or other type of corporation, for tax and liability purposes, and running your garden as though it were a business even though it might not be a profitable operation anytime soon.

I've just got to chime in that an LLC is not necessarily a corporation. It stands for Limitied Liability Company. See the discussion at https://permies.com/t/7544/farm-income/Applying-Business-license-advice for more info.

John Wheeler wrote:
As to the question of incorporation, the rough rule of thumb I've heard is that it costs about $600 a year minimum to do the proper paperwork for corporations, and you need roughly $40,000 in profit for incorporating to be worthwhile. Please note, those are very rough numbers and could very greatly depending on your locale.

John has the right idea. I think the expense of $600 per year could be less, but the first year set up could be more. Set up filing fees are around $250 in some states, and if you enlist CPA or attorney assistance, you're looking at an additional cost of $400-$1,500 (or more). The renewal, or annual filing fee is often $60-150, so to get to John's $600, the rest must be included for additional bookkeeping and/or CPA fees. Though if the owner is savvy enough, they could do a lot of the bookkeeping and/or tax filing themselves.

The $40,000 in profit might be a bit low. The small businesses I'm familiar with usually have profits closer to $80,000 and up before they worry about becoming an s corp.

On the other hand, there is something to be said for setting it up the way you want it at the start, for future growth, etc. This is because changing from a sole proprietorship (or a sole-member LLC) to an S Corp LLC requires new state and federal tax id's.