The Importance of Business Structure for Agribusiness Innovator Entrepreneurs
Ice Miller can help innovators overcome critical challenges to grow successful agribusinesses. Learn more about the unique business and legal challenges facing food and agricultural innovators and how to protect and grow that innovation in our 2015 Agribusiness Guide
. An excerpt follows:
Benjamin Franklin famously said, “There are only two certainties in life – death and taxes.” For agribusiness entrepreneurs, choosing the most appropriate business structure may reduce the latter of life’s certainties. The business structure not only affects the amount of taxes paid, but also establishes the level of personal liability, establishes recordkeeping requirements, and delineates the investors’ role.
Personal Liability and Taxes
Just as there are two certainties in life, there are two predominant considerations when choosing a business structure: personal liability and taxes. Historically, a business owner could minimize one, but not the other. A sole proprietorship or a partnership minimized taxes because the income “pass-through” the entity to the owner or partners, leading to income being taxed only once. However, the owner or partners faced unlimited personal liability for the entity’s obligations. Forming a corporation eliminated personal liability because a corporation exists as a separate legal entity and is responsible for its own obligations. Except in a few rare instances, only a shareholder’s investment is at risk. While a corporation provides limited liability, it also results in double taxation. The corporation pays taxes on its income and shareholders pay taxes on dividends paid by the corporation.
Eliminate Double Taxation through an S-Corporation
Entrepreneurs forming a corporation can elect to be taxed as an S-Corporation. While S-Corporations eliminate double taxation, they may have no more than 100 shareholders and may issue only one class of stock. In addition to the limited number of shareholders, shareholders must generally be individuals, who are U.S. citizens or green card holders. This limitation can later create problems if a company seeks outside institutional investors.
Flexibility with Limited Liability
Beginning about twenty years ago, states authorized creation of limited liability companies (LLCs). Today, LLCs provide agribusinesses with limited personal liability and the ability to elect “pass-through” or corporate tax treatment. LLCs also provide entrepreneurs the opportunity to create a flexible business structure that meets their needs, without the restrictions associated with S-Corporations.