Farmers’ Workbook for Deciding on a Second Business Structure

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

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

If the potential 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 able 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 vital secondary line of defense to limit the assets available to that specific venture.

·       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 to shape how this venture will make important decisions and govern itself. You can manage the risk of disputes, promote good communication, and clearly define roles and responsibilities by creating a separate entity for the non-agricultural venture with its own governance document.

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

Does your potential venture involve new practices, equipment, or potentially hazardous situations? For example, this could include adding a forestry business to your farm that involves chainsaws and tree-felling or adding value-added foods that come with food safety hazards. Both additions create 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. This will ensure that the increased risks of the new venture don’t put the assets of the existing business at increased risk.

·       My new venture will be non-agricultural, such as a cidery or restaurant, where the primary labor will involve something other than soil cultivation and the 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 state’s employment laws and obligations. If the new venture involves non-agricultural labor, a separate entity can enable you to be very clear about an employee’s labor, including tracking hours and issuing separate paychecks for each entity. With clearly defined entities, we may be able to follow agricultural employment rules for one business and non-agricultural employment rules for the other.

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

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 help you to craft separate succession plans as the time comes.

If one or more of the situations above applies to you, it is seriously worth 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 look quite appealing 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 amount, cost and benefit, that your investment of time and money could bring. Think back to the costs associated with creating your current business structure and then those to maintain it. It might be helpful to have your books accessible for reference. List out each potential individual cost you may need to take on in creating a new business structure.

*Hint: To find the application fee and annual fee for establishing a business structure, start with your state’s business entity registration office.

You also need to consider the amount of time that is necessary to maintain an additional business structure. In the same way that you want to keep your personal accounts and affairs separate from your business accounts, 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 of 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 worksheet means that you are making changes to your business that will 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.  Update your insurance. Any changes to your operation should cause you to look at your insurance policy. New ventures like tours, workshops, or processing 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 insurance coverage of specific risks in our guide, Managing Farm Risks with Insurance.
2. 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 entire 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.

At this point, you should have a strong sense of 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 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 the ways that your potential 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 might 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 to understand how obligations for non-agricultural labor law apply to you.

Not sure if 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 your employees and customers that you serve diligently, we thank you for your diligence and insistence on making it work. 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.

1.   Revisit the steps for creating a business structure, and the structures available to you, in our Farmers’ Guide to Business Structures.

2.   Use our Farmers’ Workbook for Creating a Governance Document for step-by-step assistance in drafting a governance document that will serve your business.

3.   Visit the Commons Community to get referrals for attorneys or accountants to help your process.

Instead, you may prefer to incorporate your new business activities into your existing business structure.

4.   Use our Farmers’ Workbook for Creating a Governance Document to account for additional business partners or decision-making processes in your existing governance document.

1.   Speak to a trusted insurance agent about getting liability coverage for new risks. Visit the Commons Community to ask for insurance agent referrals if needed.

We’re rooting for you!