Farmers’ Workbook for Deciding on a Second Business Structure

Here we will take a look at five situations where an additional business structure could be helpful. Take note if any of the below situations apply to you.

1. 1. My new venture will bring in valuable assets such as processing equipment.

If the new venture involves new and valuable assets, creating a separate business structure can help protect those assets from liability. By creating a separate structure, only the assets in the new business enterprise will be available to satisfy the liabilities that accrue to the new business structure. Of course, we always want insurance as our first line of defense, but a second business structure can be a good secondary line of defense to limit the assets available to that specific venture.

1. 1. I am bringing in business partners or investors to support my new business venture.

Bringing in new and different business partners or investors can introduce new dynamics, and you may want new rules that shape how the new venture makes important decisions and governs itself. You can manage the risk of disputes and promote good communication, as well as clear roles and responsibilities by creating a separate entity for the non-agricultural venture with its own governance document that addresses how big decisions are made.

1. 1. My new venture will expose my business to different or greater liability risks than it has previously experienced.

Does your new venture involve new practices, equipment, or potentially hazardous situations? For example, adding a forestry business to your farm that involves chainsaw work and tree-felling, or adding value-added foods that come with food safety hazards. Both add new, different, and greater risks to the current operation. By creating a separate business structure, we can separate the new venture’s liabilities from the existing business. That way, the increased risks of the new venture don’t put the assets of the existing business at increased risk.

1. 1. My new venture will be non-agricultural, such as a cidery or restaurant, where the primary labor performed by workers will be something other than the cultivation of soil and raising/harvesting of agricultural crops and livestock.

Many new agritourism, educational, and processing ventures involve non-agricultural employment. The distinction between agricultural and non-agricultural employment can be complex and nuanced, and any farmer planning a new venture will need to explore their new employment law obligations. If the new venture involves non-agricultural labor, it can be beneficial to create a separate entity, because it allows us to be very clear about for which one a person is working, including clocking in and clocking out and issuing separate paychecks for each entity. With clearly separate entities, we may be able to follow agricultural employment rules for one and non-agricultural employment rules for the other.

1. 1. I anticipate my farm or ranch business and my non-agricultural business venture may be owned and operated by separate people in the future.

If your business transition dreams involve different people taking over unique parts of the business, it could be beneficial to create separate business entities now, each with their own governance documents that address how partners enter and exit the business. This may make it easier to craft clear, separate succession plans when the time comes.

If one or more of the situations above applies to you, it is worth seriously weighing the costs and benefits of forming an additional business structure. We will do that in the next section. If none of the scenarios above apply to you, an additional business structure may not be worth the time or money for you right now. But there are still things you can do to improve your legal resilience as you move forward with your exciting business ideas. Move ahead to the section, “Consider Alternatives” to learn more.

Forming a new business structure may be looking pretty good right now. But all the benefits are counterbalanced by one big drawback: forming and maintaining a new business structure can take a lot of money and time.

Let’s take a look at what that money and time might actually amount to. Think back to the costs associated with creating your current business structure, and the costs associated with maintaining it. It might be helpful to have your books accessible for reference. List out each individual cost you may need to take on in creating a new business structure.

*Hint: To find the filing fee and annual or biennial fee for establishing a business structure, start with your state’s business entity registration office (usually the Office of the Secretary of State).

Time is also required to maintain an additional business structure. In the same way that you want to keep your personal accounts and affairs separate from your business, you will want to have separate books, bank accounts, and governance documents for each of your businesses. Setting up and maintaining these systems may require significant time and effort.

Of course, needing to invest your time and money into these systems and operating procedures is not inherently negative. Many business owners will learn valuable information in the process of drafting a governance document or evaluating their need for an insurance policy. Engaging with the process of creating a new business structure can strengthen all of your businesses in the long run. Here’s one more quick reflection question before we consider ways to improve your legal resilience without creating an additional business structure:

Now that you have an estimate for how much creating and maintaining a new business structure might cost you, does it feel worthwhile?

If you are wary of the costs associated with a new business structure, take a moment to consider some alternatives. The fact that you sought out this workbook means that you are making changes to your business that necessitate corresponding changes to your legal resilience. But forming an additional business structure may not be the necessary change! There are two main things you can do to move forward with your business’s growth and strengthen your legal resilience without forming an additional entity:

1. 1. Update your insurance

Any changes to your operation begs a look at your insurance policy. New ventures like tours, workshops, or processing likely won’t be covered by a typical farm insurance policy. Getting a clear understanding of what you need coverage for with your new business venture will go a long way in strengthening your legal resilience. You can read more about risks you might need coverage for in our guide, Managing Farm Risks with Insurance

1. 1. Update your governance document

It is also very possible that changes or additions to your current governance document could create the structural efficiency you might need without having to form an additional entity. It is possible to create a separate class of members or shareholders, with their own procedural rules, that are only relative to the new business structure. To learn more about updating your governance document, check out our Farmers’ Workbook for Creating a Governance Document.

Hopefully, at this point you’ve assessed whether your situation warrants another business structure and you’ve assessed whether the additional business structure is worth it to you.

If you feel like you need more information to better understand your situation, we commend you! It’s very wise to recognize your hesitations and dig in a little deeper before deciding.

Not sure if your new venture will bring in valuable assets such as processing equipment?

Take a moment to crunch some numbers. What is the total value of material assets involved in your new business endeavor? If an asset is shared across your business enterprises, leave it out. Include the costs of assets you don’t have yet but plan to buy or build.

Not sure that bringing in new business partners or investors means you need a new business structure & governance document?

Consider your current decision making process. How would it need to change to account for new partners? Does your current governance document outline how big decisions will be made?

Unclear if your new venture involves new or increased risks?

List out all the ways your new venture brings new or increased risk to customers, visitors, and employees. Consider equipment, processes, and risk of physical injury or illness.

Trying to figure out if your new venture involves non-agricultural labor?

Consider all the tasks employees perform or will perform at your business that would be considered non-agricultural labor. This could include processing produce or meat, teaching workshops, preparing food, making deliveries or selling at markets.

Once you have your list, visit our Selected Essentials in Farm Employment Law for your state to understand how obligations for non-agricultural labor law apply to you.

Not sure whether your business succession plans would be supported by an additional business structure?

Consider when you would like to transfer your business ownership. If ownership transfer is in the distant future, it may not be worth it to create separate business entities now given the associated costs. If ownership transfer is in the near future (~5 years), consider making plans now.

It is no small thing to take the time to work through these questions and make informed decisions about the future of your business! On behalf of the people you will feed, fiber, and heal for years to come, we thank you for your diligence and insistence on making it work.

At this point, there are a few options to pursue. Here are some additional resources to support you on your journey.

If you are feeling confident that an additional business structure is right for you, the next steps are to A) form the structure and then B) write the governance document.

• Revisit the steps for creating a business structure, and the structures available to you, in our Farmers’ Guide to Business Structures
• Use our Farmers’ Workbook for Creating a Governance Document for step-by-step assistance in drafting a governance document that will serve your business
• Visit the Commons Community to ask questions to support your process

You may instead prefer to incorporate your new business activities into your existing business structure.

• Use our Farmers’ Workbook for Creating a Governance Document to account for additional business partners or decision making processes in your existing governance document.
• Speak to a trusted insurance agents about getting liability coverage for new risks.

We’re rooting for you!