A common question I get from aspiring farmers is: "Do I need to be an LLC to be in business?"
The short answer is no - you do not need to form a Limited Liability Company (LLC) to start farming or selling agricultural products. While many farmers choose to form an LLC or other business entity, it is not required to begin operating.
LLCs have become a popular choice for business owners, including farmers, primarily because they limit personal liability while still offering flexibility in operation. Because of their popularity, LLCs are discussed a lot on various platforms. Somewhere along the way, many people began to assume that forming an LLC is necessary to be considered a “real” business. It is not.
There are several options for structuring a business. Let’s walk through a few and flesh out what each means from a legal standpoint.
Options for Structuring a Business
Sole Proprietorship (Default)
The simplest business structure for a beginning farmer is a sole proprietorship. No formal registration or filing is necessary to create a sole proprietorship. If you begin conducting business activities - such as raising livestock, selling produce, eggs, or other farm products for profit - you are operating as a sole proprietor by default.
Best Practices for Sole Proprietors
While no formal paperwork is required to form a sole proprietorship, it is recommended that you -
- Obtain an EIN (Employer Identification Number).
- Open a separate business bank account.
- Maintain detailed and accurate business financial records that track farm income and expenses separately from your personal expenses.
If your farm operates under a name other than your own, you will need to register a “Doing Business As” (DBA) with the county.
Important: A sole proprietorship does not create a legal separation between you and your business. You own all the business assets, and you are personally responsible for all of the business’s debts, liabilities, and legal obligations. within the business activities.
Farm income and expenses are reported on Schedule F of your individual income tax return.
General Partnership
If you are farming with someone else, you may already be in a general partnership, even if you never filed any paperwork or created an agreement. If you are jointly managing the farm, sharing profits, and presenting yourselves to the public like you are in business together, the law likely sees you as a partnership.
Legal Considerations
- Each partner has joint and several liability for the actions of the partnership. This means that each partner can be held responsible for all of the obligations of the partnership - including liability created by the other partner.
- Partnerships file a separate tax return (IRS Form 1065). Income flows through to individual partners on a Form K-1 and is taxed at individual rates.
- Although not required, it is strongly advised to enter into a written partnership agreement that outlines the partners’ roles, responsibilities, capital contributions, and decision-making structure.
While general partnerships are easy to form, they carry significant risk due to the shared liability between partners.
Important: Until recently, many farmers preferred general partnerships over LLCs because of the USDA program payment limitations (see discussion below under LLCs). Recent changes in the law made it so that an LLC taxed as a partnership is no different than a general partnership in regard to USDA payment limitations.
Limited Liability Company (LLC)
An LLC is a legal entity that is separate from its owners (called “members”). Forming an LLC requires filing Articles of Organization with the state’s Secretary of State office.
The primary advantage of an LLC is that it limits the liability of the owner/members for things that happen within the business. This means that your personal assets are generally protected from debts (unless you personally co-sign or guarantee) and liabilities of the business, as long as the LLC is properly created and maintained.
Requirements for Forming and Operating an LLC
- File Articles of Organization with the state Secretary of State.
- Obtain an Employer Identification Number (EIN) from the Internal Revenue Service (IRS).
- Open a separate business bank account in the LLC’s name and EIN.
- Maintain detailed and accurate business financial records that track farm income and expenses separately from personal expenses.
- Determine which farming assets will be transferred to the LLC or purchased by the LLC.
- Conduct all business activities - including contracts, insurance, loans, etc. - under the LLC name and EIN.
- Comply with state filings (annual or bi-annual).
Even if not legally required, LLCs should have an operating agreement that defines how the LLC will operate.
Single-Member vs. Multi-Member LLCs
An LLC may have one member (single-member LLC) or more than one (multi-member LLC).
- A single-member LLC may be treated as a disregarded entity for federal income tax purposes. This means income and expenses are reported on Schedule F of the member’s individual income tax return (like a sole proprietorship), but the member still benefits from liability protection.
- A multi-member LLC is generally taxed as a partnership, requiring a separate tax return and the issuance of K-1s to each member. Farm income flows through to the partners and is taxed at each partner’s individual income tax rate.
LLCs and USDA Farm Program Payment Limits
For many years, a farm operating as an LLC was subject to a single program payment limitation (cap) across most USDA programs. In contrast, each partner in a general partnership received their own cap. This created a significant disincentive to create a multi-member LLC for farms with program payments approaching the single payment limitation. Due to a recent law change, a multi-member LLC taxed as a partnership will be treated no differently than a general partnership for USDA program payment limitations.
Other Entity Types
Other business entities (such as C corporations, S corporations, and limited partnerships) have certain advantages but are typically more complex and less common for beginning farms. These entities involve stricter formalities and have different income tax consequences.
Conclusion
You are not required to form an LLC to start a farm business. And, if you start operating as a sole proprietorship or partnership, you can convert to an LLC later.
You should evaluate whether forming an LLC or other entity would be a good choice for you. If you plan to engage in higher-risk activities, such as agritourism, u-picks, on-farm events, over-the-road deliveries, or even hiring employees, limiting personal liability becomes more important. If you plan to farm with others, forming an LLC can provide structure and help protect each person’s personal assets. If you are planning to bring other people (family or nonfamily) into the business in the future, an LLC can provide a solid framework to do that.
If you are considering forming an LLC or other business entity, it is important to discuss your individual situation with an attorney or tax professional familiar with agriculture.