C corporation is an independent legal entity owned by shareholders. The corporation itself, not the shareholders that own it, is held legally liable for the actions and debts of the business. Corporations are more complex than other business structures because they have more tax and legal requirements. This structure is usually suggested for established, larger companies with multiple employees. A C corporation offers the ability to sell ownership shares in the business through stock offerings. “Going public” through an initial public offering (IPO) can attract investment capital and high-quality employees.
Formation: A C corporation is formed under the laws of the state in which it is registered. State laws vary, but generally corporations must include a corporate designation (“Corporation,” “Incorporated,” or “Limited”) at the end of the business name. To register your business as a C corporation, you need to file articles of incorporation with your state’s Secretary of State office. Some states require corporations to establish directors and issue stock certificates to initial shareholders during the registration process. Contact your state business entity registration office for precise details about forming a C corporation. Once your business is registered, you must obtain the usual business licenses and permits.
Pets cannot be legal partners in a corporation, sorry.
Photo by Dwight Sipler.
Taxes: C corporations are required to pay federal, state, and in some cases, local taxes because they are separate tax-paying entities. Regular corporations are called “C corporations” because Subchapter C of Chapter 1 of the Internal Revenue Code is where you find general tax rules affecting corporations and their shareholders. Unlike sole proprietors and partnerships, C corporations pay income tax on their profits. C corporations use IRS Form 1120 or 1120-A, U.S. Corporation Income Tax Return, to report revenue to the federal government. The corporation and the employee each pay one half of the Social Security and Medicare taxes, but this is usually a deductible business expense.
Advantages: With a C corporation, shareholders’ personal assets are protected from the debts and liabilities of the company. Shareholders can generally only be held accountable for their investment in stock of the company. C corporations have the ability to raise funds through the sale of stock. Owners of a C corporation only pay taxes on corporate profits paid to them in the form of salaries, bonuses, and dividends, while any additional profits are awarded a corporate tax rate, which is usually lower than a personal income tax rate. C corporations can offer employees partial ownership through stock options and thus attract high-quality workers.
Disadvantages: A C corporation is a more costly and time-consuming structure to use than the other options. Incorporation requires startup, operating, and tax costs that most other structures do not require. Because C corporations are highly regulated by federal, state, and in some cases local agencies, there are increased paperwork and recordkeeping requirements associated with this business structure. And C corporation owners are usually taxed twice: once when the C corporation makes a profit, and again when dividends are paid to shareholders.
S Corporation
Definition: What makes an S corporation different from a C corporation is that profits and losses can pass through to your personal tax return. The business itself is not taxed—only the shareholders are taxed. The shareholders must be paid fair market value, or the IRS might reclassify any additional corporate earnings as “wages.” For shareholders, liability protection is limited. S corporations do not necessarily shield you from all litigation, such as an employee’s lawsuit as a result of a workplace incident.
Formation: To file as an S corporation, you must first file as a C corporation. After you are considered a corporation, all shareholders must sign and file Form 2553 to elect your corporation to become an S corporation. Once your business is registered, you must obtain the usual business licenses and permits. You can request S corporation status for your LLC. Your attorney can advise you on the pros and cons of doing this. You’ll have to make a special election with the IRS to have the LLC taxed as an S corporation using Form 2553, filing it before the first two months and fifteen days of the beginning of the tax year in which the election is to take effect. The LLC remains a limited liability company from a legal standpoint, but for tax purposes it’s treated as an S corporation.
Taxes: States do not tax S corporations equally. Most recognize them similarly to the federal government and tax the shareholders accordingly, but some states (like Massachusetts) tax S corporations on profits above a specified limit. Other states don’t recognize the S corporation election and treat the business as a C corporation with that tax structure. Some states (like New York and New Jersey) tax both the S corporation’s profits and the shareholder’s proportional shares of the profits.
Advantages: While members of an LLC are subject to employment tax on the entire net income of the business, only the wages of the S corporation shareholder who is an employee are subject to employment tax. The remaining income is paid to the owner as a “distribution,” which is taxed at a lower rate, if at all. An S corporation designation allows a business to have an independent life, separate from its shareholders. If a shareholder leaves the company, or sells his or her shares, the S corporation can continue doing business relatively undisturbed.
Disadvantages: S corporations require scheduled director and shareholder meetings, minutes from those meetings, adoption and updates to bylaws, stock transfers, and records maintenance. A shareholder must receive reasonable compensation. The IRS takes notice of shareholder red flags like low salary/high distribution combinations, and may reclassify your distributions as wages.
Cooperatives
Definition: This structure is a business or organization owned by and operated for the benefit of those using its services. All profits and earnings generated by the cooperative are distributed among the members, also known as user-owners. Usually, an elected board of directors and officers operates the cooperative while regular members have voting power to control the direction of the cooperative. This is one of the more complicated business structures and anyone reading this book to start a microfarm is unlikely to use it, so I’m not going to explain it in more detail here. You should consult a business attorney if you are interested in this option.
What’s in a Name?
The naming of my microfarm was accidental. After I decided to use five-gallon pots for many of my superhot chile plants, I realized that I would need a soil expander, namely perlite, a naturally-occurring amorphous volcanic glass that when heated turns into very light, inert granules that prevent soil-packing in containers. And I needed a lot of it, but the product is expensive in the small bags sold by the big box home centers. I decided that I needed an account at a wholesale supplier. When I opened one, I thought of the name “Sunbelt Microfarm” on the spot.
The first step in establishing your brand is to give it a name. Hopefully, you will spend longer thinking about it than I did, because your identity—what other people call you—is more important than you think. Face it, “Dave’s Farm” is not an imaginative name at all, nor is “DeWitt’s Farm.” They both sound too small and a little amateurish. You want a farm name that sounds substantial and a little impersonal, but memorable. There’s a small farm here in the South Valley called “Red Tractor Farm,” and I like the whimsical nature of the name. I thought about changing the name of mine to “No Tractor Farm,” but I didn’t want anyone to think that I was using a mule and a plow.
Since you have to plan ahead, even from the very beginning, you should think about what you might call some value-added products. Does Sunbelt Microfarm’s Pickled Superhot Chiles have a
