A recent update by Kelvin Leibold (“Business Entities“), a farm management specialist at Iowa State University (ISU) Extension, explained that, “The state of Iowa allows for several different forms of business. The choice of a business entity affects liability, taxation, capitalization, decision making, agricultural government payments, gifting or transfer options. Such a decision requires much thought and advice from professionals such as attorneys and accountants when deciding on which business structure is appropriate. This publication is not intended to provide legal advice but to familiarize you with some of the terms and concepts.
“The business structures allowed in Iowa include:
- Sole Proprietorship
- General Partnership (Iowa Code chapter 486A)
- Limited Partnership [Domestic or Foreign] (Iowa Code chapter 488)
- Limited Liability Partnership [Domestic or Foreign] (Iowa Code chapter 486A)
- For Profit Corporation [Domestic or Foreign] (Iowa Code chapter 490)
- Nonprofit Corporation [Domestic or Foreign] (Iowa Code chapter 504)
- Professional Corporation [Domestic or Foreign] (Iowa Code chapter 496C)
- Limited Liability Company [Domestic or Foreign]”
The ISU update highlighted several factors to consider when choosing a business entity, and noted in part that:
Liability
“Individual liability for debts and torts varies based on the business structure. Often preference will be given to a business structure that limits the individual’s financial liability to the equity contributed and shields the other personal assets from possible business exposure.”
Decision Making
“The business structure can also impact the amount of decision making and control that other investors have. Certain classes of shareholders may or may not have voting rights. Some may have buy-sell agreements or other restrictions on transfer of shares or units. The structure also impacts the complexity of the organization, record keeping, tax reporting, and related costs.”
Ag Program Payments
“In the past, USDA farm program payments have been a substantial part of farm profits. Eligibility and payment limits can be impacted by the type of business structure. The USDA rules have changed over time and continue to be a moving target. Currently the programs look at payments at the business level and at the individual level.”
Also in his ISU Extension update, Mr. Leibold indicated that, “The type of business structure may impact USDA Farm Service Agency programs as well as other government programs. Rules change over time, to find out the current implications, visit the local FSA office to understand liability issues beyond what the entity may provide and reasons that you may still have liability issues.
“When putting together a business structure think about how the business will deal with gifts, transfers, sales, buy-sell agreements, financial stress, death, termination, or transfer to the next generation.
“There are other business arrangements such as labor sharing agreements, machinery sharing agreements, livestock production contracts, and strategic alliances that may be useful.”
