In a time of economic uncertainty and lower farm incomes, many people are starting a “side” business as an additional revenue source.

Recently, a young farmer (an agronomy graduate from Iowa State) inquired about starting a crop consulting business. He’s farming with his father and would involve his father and potentially a cousin in the operation. He wants to form a limited liability company but isn’t sure if an LLC is the right entity choice. Since this would be a startup operation, he wants to keep it simple at first and grow from there.

Is an LLC the right fit?

Iowa law does allow for a simple, low-cost LLC, or other entity formation with a few follow-up requirements (online reporting, etc.). The primary benefit of an entity, such as an LLC, is to limit your individual financial liability to the equity contributed to the entity and that the LLC would act as a “shield” for the other aspects of your farming operation.

As you might suspect, there is no “magic” or perfect entity. A farm family must look at the options and choose the best fit, gathering information from their legal, financial and tax advisers.

Iowa law allows you to create entities such as a partnership, a C or S corporation, an LLC, or a limited liability partnership (LLP). There are nuances to each entity, but the reason for formation is typically to shield that business and keep it separate from other aspects of the farming operation.

While it is relatively “cheap” to set up an entity, you want to make sure you put together a plan for operating the entity and examine the goals of the operation with your trusted advisers. Drafting a good operating agreement is key to the success of this arrangement and the operation of the entity, especially if others are involved in the operation.

Questions to ask

Here are points to ponder:

Remember, there is no one-size-fits-all entity plan. Each family and each farming operation needs a personalized plan. In my experience, communication is key to developing a plan that will actually be implemented successfully.

To read the relative advantages and disadvantages of different business entities, visit Iowa State University Extension. This article, published by ISU Extension and authored by farm management specialist Kelvin Leibold, highlights several key considerations and links to helpful websites and taxpayer services.

Herbold-Swalwell is an attorney with Brick-Gentry in Des Moines. Email [email protected].