Farm Business Arrangement AlternativesFarm Business Arrangements Page 1Farm Business Arrangement AlternativesIntroduction If the new and established operators decide to farm together after the testing stage, they are ready to move from the beginning farm business arrangement to a more permanent arrangement. The move to a more permanent arrangement can be done in one step or it can be done in several steps. Whether the move is done quickly or over several years depends on the ability of the beginning operator to obtain financing to buy into the business and the comfort of all of the operators with their working relationship. This chapter discusses the most commonly used legal arrangements for the more permanent business relationship. In recent years, limited liability companies (LLCs) have become the most common form of newly organized farm entities. However, sole proprietorships, partnerships and corporations are discussed first so that LLCs can be explained by comparing them with the other entities. Combinations of these legal arrangements can be used. For example, an LLC may be formed to own the land or other assets that are rented to the operating entity, which could be a sole proprietorship, corporation or another LLC. Operators should think through the creation, operation and dissolution of their farm business arrangement before they settle on which arrangement is best for them. In most cases, the goal of the beginning operator is to acquire equity in the business entity and the goal of the established operator is to have a plan for reducing his or her contribution of labor and management and at the same time providing resources for his or her retirement years. Sole Proprietorships A sole proprietorship is owned by one person who has full control of and responsibility for the business. The sole proprietor can hire managers but is ultimately responsible for all management decisions. A sole proprietor is liable for all of the debts of the business. There are no restrictions on the sole proprietor's right to sell the business. There are no agreements or formalities required to form a sole proprietorship. Partnerships Definition A partnership is an association of two or more persons contributing their assets to the business and sharing with each other the management responsibility, profits, and losses. Each partner pledges faith in the other partners and stands liable for the actions for all partners, within the scope of partnership activities. There are two main types of partnership arrangement used by farm businesses. They are the general partnership and the limited partnership. General PartnershipThe general partnership has only general partners and each of these general partners has unlimited liability. All of these general partners may and generally do participate in the management of the farm partnership.
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