Farm Business Entities
Explore the pros and cons of different business structures to find the right fit for your farm or ranch.
Sole Proprietorship
A sole proprietorship is the simplest and most common business structure. You and the farm are legally the same entity. That means there’s no legal distinction between your personal assets and your farm’s assets. You manage the operation independently, and profits flow directly to your personal income.
Pros:
- Simple and inexpensive to set up
You don’t need to file special paperwork at the state or federal level to start—just begin operating under your own name or a trade name. - No separate tax filings
All business profits and losses are included on your individual tax return, reducing administrative burden. - Full control over business decisions
You don’t need to consult partners or shareholders—every decision about your farm is yours to make.
Cons:
- Unlimited personal liability
There’s no legal separation between you and your farm, meaning your personal assets (like your house or savings) could be used to pay business debts or lawsuits. - Harder to raise capital
Banks and investors may see sole proprietorships as higher risk, limiting access to loans or outside funding. - Succession planning can be complicated
Partnership (General or Limited)
A partnership involves two or more individuals or entities sharing ownership. It can be a general partnership (all partners manage and share liability) or a limited partnership (some partners are only investors). Partnerships are typically based on a written agreement that outlines how profits, losses, and responsibilities are divided.
Pros:
- Shared decision-making and resources
Partners can pool skills, labor, equipment, or capital, which helps ease financial strain or workload. - Pass-through taxation (profits and losses pass to individual partners)
The business itself doesn’t pay taxes. Instead, profits and losses are passed through to each partner’s personal tax return. - Relatively easy to establish
It’s usually straightforward to register, though a written partnership agreement is highly recommended.
Cons:
- Shared liability in a general partnership
Each partner is personally responsible for the debts and obligations of the farm—even if they weren’t the ones who created the debt. - Disagreements among partners can cause problems
Differing visions for the operation, financial issues, or decision-making conflicts can strain partnerships. - Succession planning can be complicated
You’ll owe taxes on your share of the profits even if you choose to reinvest that money back into the farm.
Limited Liability Company (LLC)
An LLC combines the liability protection of a corporation with the tax benefits of a partnership. It creates a separate legal entity from its owners (called members), helping shield personal assets from business debts or lawsuits.
Pros:
- Limited personal liability
If the farm faces debt or legal action, your personal assets are generally protected, unlike in a sole proprietorship or general partnership. - Flexible management structure
LLCs can be managed by the members themselves or by appointed managers, giving flexibility in how decisions are made. - Pass-through taxation available
Income is typically taxed at the individual owner’s level, avoiding double taxation, though you can elect to be taxed as a corporation if needed. - Easier to transfer ownership than sole proprietorships
Ownership interests can be transferred according to the LLC’s operating agreement, making succession planning more straightforward.
Cons:
- More paperwork and costs to set up than sole proprietorships or partnerships
You’ll need to file Articles of Organization and may face higher setup fees and annual filing costs. - State-specific rules and fees
Each state has its own requirements for LLCs, including annual reports and franchise taxes. - May require operating agreements
To clarify roles, profit-sharing, and management, an operating agreement is essential—especially in multi-member LLCs.
S Corporation (S-Corp)
An S-Corp is a corporation that elects to pass income, losses, deductions, and credits to shareholders for federal tax purposes. It limits personal liability while allowing income to flow through to the owners' personal tax returns, avoiding double taxation.
Pros:
- Limited liability protection
The personal assets of shareholders are protected if the farm faces lawsuits or debts. - Pass-through taxation (avoiding double taxation)
The corporation doesn’t pay income taxes at the corporate level—profits and losses go directly to shareholders' tax returns. - Potential payroll tax benefits
Owners who pay themselves a reasonable salary may save on self-employment taxes by splitting income between salary and distributions. - Good structure for multi-generational succession
Shareholder structure allows for gradual transfer of ownership to family members over time.
Cons:
- Strict IRS eligibility rules (limits on number and type of shareholders)
S-Corps can’t have more than 100 shareholders, and shareholders must be U.S. citizens or residents. - More formalities—annual meetings, corporate minutes, etc.
You must maintain detailed records and follow corporate procedures, which adds administrative responsibility. - More complex to set up and maintain
Articles of incorporation, bylaws, and regular filings with the IRS and state are required, potentially needing professional assistance.
C Corporation (C-Corp)
A C-Corp is a separate legal entity owned by shareholders. It is taxed independently from its owners, meaning the corporation pays taxes on its profits, and shareholders are taxed again on dividends.
Pros:
- Strong liability protection
Like LLCs and S-Corps, owners' personal assets are shielded from the corporation’s debts and legal claims. - Unlimited potential for growth (can issue multiple classes of stock)
There’s no cap on the number of shareholders, allowing you to raise capital through investors. - More flexibility in fringe benefits and retained earnings
C-Corps can offer better health insurance, retirement plans, and other benefits to owners and employees, and they can retain profits in the business to reinvest without immediate tax implications for owners.
Cons:
- Double taxation
Corporate profits are taxed at the corporate level, and shareholders are taxed again when profits are distributed as dividends. - Strict compliance requirements
C-Corps must hold annual meetings, keep detailed corporate records, and file separate tax returns, adding to administrative complexity. - Complex to manage
The formal structure requires adherence to more rules and procedures than simpler entities, often needing legal and accounting expertise.
Non-Profit
A non-profit corporation is a legal entity organized to operate for charitable, educational, or community-focused purposes rather than to generate profit. Any surplus revenue is reinvested back into the farm's mission rather than distributed to owners or shareholders. Non-profit farms may focus on food access, agricultural education, conservation, or community development.
Pros:
- Eligibility for tax-exempt status
Many non-profit farms qualify as 501(c)(3) organizations, meaning they are exempt from federal income taxes and may also be exempt from state taxes. - Access to grants and donations
Non-profit status allows farms to apply for government grants, foundation funding, and accept tax-deductible donations from individuals and businesses. - Community and mission-driven focus
A non-profit farm can prioritize social, educational, or environmental goals, building strong community ties and volunteer networks. - Limited liability protection
Board members and staff are generally protected from personal liability for the farm’s debts and legal issues.
Cons:
- Strict compliance and reporting requirements
Non-profits must maintain detailed financial records, submit annual IRS filings (Form 990), and adhere to state regulations. - No profit distribution
Earnings cannot be distributed to founders or board members, limiting personal financial gain. - Governance by a board of directors
Decision-making authority rests with a board, which may slow processes or limit individual control over farm operations. - Public scrutiny and transparency required
Financial records and governance practices are typically public, which can create additional accountability pressures.
Hear from real farmers on why they chose their entity-types.
LLC & Non-Profit
LLC
Sole Proprietorship
Sole Proprietorship
See which entity type may be right for you!
Take the quiz below to see which farm or ranch entity type might make sense for you:
Additional Resources
Federal benefits received from FSA may be handled differently depending on your business entity type. It's important to consult with an expert before making your decision.