2 bfug conference - business entity selection

Selecting the Appropriate Legal Structure

Mitchell Widener

Urban Food, Farm & Agriculture Law Practicum


What is a Business Entity?

• Anything other than a natural person that can enter contracts, incur debts an hold assets in its own name.

1. Corporations2. LLCs3. Cooperatives4. 3LC5. Nonprofit


Corporations• Comprised of three different groups of people: Shareholders,

directors, and officers

• The shareholders own stock; the directors and officers run the company

• Who’s liable? (who gets sued if something goes wrong?):• Shareholders have no personal liability

• Generally, directors and officers have no liability besides personal wrongful action (stealing money, etc.)

• Who’s taxed? Corporations are double taxed• Corporation itself gets taxed as a separate entity

• Shareholders subject to individual tax on own shares

Corporation Formation• Articles of Incorporation must

include– Name of the corporation

– Name and address of each incorporator

– Statement of the corporation’s purpose

– Information about corporation’s stock

• Bylaws – Establish procedure,

responsibility and meeting regulation

– Adopted by the Incorporators at the Organizational Meeting

– Amended, repealed, created by shareholders

Corporations not required to have bylaws



Is a corporation for you?• Typically, not ideal for small businesses.

• Usually used by the largest of companies

• Disadvantages for small businesses:– Establishing and maintaining a corporation is tedious and complex

– Double-taxed


Limited Liability Company (LLC)• Who’s in control?

– Member Managed: Better for LLCs with fewer members

– Manager Managed: Better for larger LLCs

• Who owns it? Members. They put in the money and reap rewards

• Liability: No personal liability for members

• Taxes: each member/s profits taxed at the individual level

• Formation

– Articles of Organization: Name, address, etc.

– Operating Agreement : contract between members of an LLC which govern its affairs and business operations and the relationships of its members an mangers

• LLC does not require an operating agreement


Is an LLC for you?• Advantages– No personal liability– Flexibility in

management• You choose how the LLC

operates: membership, management, etc.

• Disadvantages– Filing procedures

different in ever state– Unfamiliarity with the

business structure

Verdict: • Run your own business with only have a few members? member managed LLC

seems like the right fit. • Don’t have the money? manager managed LLC works. You still control the day-

to-day activities.


Cooperatives

• Co-ops are groups of individuals or businesses who come together to form a working group.

• The group pools its resources to assist in developing and marketing

• Benefits: small groups who generally would not have the resources to market on their own– Strength in numbers


CooperativesOrganizational style very similar to a corporation• Control: Directors or officers• Money: shareholders• Liability: no liability• Taxes: shareholders and corporation– Agricultural co-ops may receive tax-exempt status

• Formation: Articles of Incorporation


Is a Cooperative for You?• Advantages:

– Access to established marketing groups

– Access to supplies

• Disadvantages– Less control– Percent of profits must

go towards co-op


Nonprofits • Corporation established specifically for the purpose of serving

a public need– Profits go towards furthering that public need

• Organized like a corporation (shareholders, directors, officers)• Money: Shareholders cannot earn income from nonprofit, but

directors/officers may be paid• Liability: same as corporation• Tax: **most agricultural nonprofits are tax-exempt


Is a Nonprofit for you?

• If you primarily want to make a profit, then no• However, if you a religious organization or

community development, for example, that wants to grow, then yes. – The profits would just need to go back towards the

public interest or need


L3C• A combination of nonprofit and LLC

– A Low Profit LLC

• Nonprofit The company was primarily formed to further a public purpose.

• LLC The company may produce income• Appropriate purposes: religious, charitable, scientific,

educational– May not attempt to influence legislation or participate in political

campaigns

• **not tax exempt • Present in only 9 states: Michigan, Illinois, Louisiana, Maine,

North Carolina, Rhode Island, Utah, Vermont, and Wyoming

2 bfug conference - business entity selection

Business

agriculture law practicum

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urban food

small businesses

company

corporation

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