basic legal structures...for local food value chain businesses . becky l. bowen, j.d. program...
TRANSCRIPT
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For Local Food Value Chain Businesses
Becky L. Bowen, J.D. Program Manager, CultivateNC
Basic Legal Structures
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LEGAL DISCLAIMER #1
Images used in this presentation are not the property of the author, North Carolina State University, or the North Carolina Cooperative Extension Service. They were all pulled from the Internet. We thank Charles M. Schulz, in particular, for his contribution to this presentation.
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LEGAL DISCLAIMER #2
This presentation does not constitute legal advice. Whenever forming a new business entity, always consult an attorney and an accountant.
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The Super Local Food Entrepreneur
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Before you hit the start button, ask yourself . . .
Do I have the money I need?
Am I willing to give up some control of the business to others?
What happens if I want to leave the business? Does everyone involved have common goals?
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Sole Proprietor
Partnership
LLC
C Corp
S Corp
Non-profit
Cooperative
B Corp
L3C
LLLP
PC
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1. Ease of Formation 2. External Liability 3. Taxation 4. Management and
Control 5. Transferability 6. Continuity 7. Mission
Things to Consider When Choosing a Legal Structure
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Ease of Formation
Easiest Hardest
Sole Proprietorship Partnership LLC Corporation Cooperative
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External Liability Greater Protection
Least Protection
Cooperative Corporation LLC Partnership Sole Proprietorship
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Taxation Pass-through Sole Proprietorship Partnership S-Corp Election LLC Cooperative Double Corporation (C) Exemption Nonprofit
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Management and Control Greatest Owner Control
Least Owner Control
Sole Proprietorship Partnership LLC Cooperative Corporation
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Transferability
Most transferable Corporation Cooperative Partnership/LLC Sole Proprietorship Least transferable
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Continuity
Perpetual Corporations Cooperatives LLCs
Limited Duration Partnerships Sole Proprietors
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Mission
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It Gets Down to the Money
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I know, let’s form a non-profit!
Nonprofit Corporations
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Nonprofit Corporations
Advantages: • Attractive to corporate donors and
foundations • Great for bootstrapping in respect of in-kind
contributions • May be tax-exempt • May or may not be member-based
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Nonprofit Corporations Disadvantages • Profits are not distributed but must be
reinvested in the social mission • There is no “owner” • Upon dissolution, all assets must be
transferred to another nonprofit • Risk loss of exempt status due to excessive
unrelated business income
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That money tree may lose its leaves, come fall!
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Sole Proprietorships Advantages • Easy and Inexpensive to Form (may need a DBA) • Direct Taxation • Full Control • No major reporting requirements
Disadvantages • Unlimited Liability/Need for Major Insurance • Difficulty Raising Debt Capital • Business Survival all depends on YOU!
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Partners Share! • In profits and losses • In management • In raising capital
Partnerships
But they also share: • Unlimited liability for the
partnership debt • Individual partners have the
authority to act for the partnership.
• Succession and transferability issues
General Partnership
Limited Partnership
Limited Liability Limited Partnership
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LOL
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Corporations (C Corps)
Advantages: • Limited liability for owners • Ability to raise major capital through sale of
stock • Transferability
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Corporations (C Corps)
Disadvantages • More complex and expensive to form • More governmental regulation • No pass-through of losses to shareholders • Double-taxation • Control resides in the board of directors
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Corporations (S Corps)
• Pass-through taxation • Limited liability • Limited to 100 shareholders who must
be US citizens or residents • Not desirable if wanting to expand • Limited ability to own subsidiary
corporations
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B Corporation
Not available in North Carolina.
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The LLC
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Limited Liability Companies Advantages • Pass-through taxation to members • Limited Liability • Perpetual Existence • Centralized management • Free transferability • Unlimited number of members • May own subsidiary corporations • May have multiple classes of stock
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Limited Liability Companies
Disadvantages • More expensive to form • Not a separate entity • Members must file quarterly estimated taxes • May be required to register with SEC if
members don’t manage it • Consensus may be difficult
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L3C or “4th Sector” Enterprises
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Cooperatives
4 Kinds • Producer • Consumer • Worker • Multistakeholder/Hybrid
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Cooperatives Advantages • Pass-through taxation • Technical assistance providers funded
through USDA-RD • Reduced costs and improved bargaining
power due to membership • Perpetual existence • Democratic organization
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Cooperatives
Disadvantages • Slow to form and capitalize • Lack of membership and participation
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Role of Cooperatives in Local Food System Development
PLEASE watch this webinar www.amsta.net/webinars.html
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We did it!
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References
Allen, Kathleen 2012. Launching New Ventures, 6th Edition, South-Western Cengage Learning. Mann, Richard and Roberts, Barry 2009. Smith & Roberson’s Business Law, 14th Edition, South-Western Cengage Learning. U.S. Small Business Administration. “Choose Your Business Structure: Cooperative”. https://www.sba.gov/content/cooperative. Co-opLaw.org. “Choice of Entity”. http://www.co-oplaw.org/entity/.
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Thank you! Becky L. Bowen, J.D. Program Manager CultivateNC, NCCES NC State University [email protected] (919) 628-4317
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http://www.southernsare.org/
This presentation was sponsored by:
http://www.ncgrowingtogether.org
Support for this webinar is provided in part by Southern Sustainable Agriculture Research and Education Professional Development Program, grant #ES13-119 and in part by NC Growing Together, a Center for Environmental Farming Systems-led initiative, funded by the United States Department of Agriculture, National Institute of Food and Agriculture, grant #2013-68004-20363.
Thank you to our collaborators.