A Guide to Starting A Farm Based Business – From LLCs to Insurance to Permits

It was an unusually calm morning when the phone rang.  

“Hi sir its Zela Martinez with Lucky Green Transport – I need to know what the status of your ISF is?”

“ISF, what’s an ISF?”

“Your customs filing, who’s your customs broker?”, she replied with a noticeable rolling of the eyes tone.

“What a customs broker?”

“Oh no, here we go…” came right back in what was now a clearly annoyed tone.  

At this point Zela was no doubt wondering why she was the “lucky” one to get stuck with this idiot today.  

The idiot was me.

 

Whenever you start any business, there are a variety of legal, compliance, licensing, permit, protection, and finance issues that you need to be aware of and take care of, both before and during the setup and operation of your business.

At a very base level when you start a new business here is what you need:

• An entity to hold the business.
• Potentially permits and/or licenses for that business and/or yourself.
• A set of rules and regulations to abide by.
• A process for maintaining regulatory compliance.
• A process for maintaining accounting compliance.
• Insurance to protect yourself and/or your business.

In my experience, most people contemplating starting a business view these issues as roadblocks permanently blocking the path to any future progress, or they default to the “too much information” position and start asking – just tell me what to do…

The problem is there isn’t a single person who can tell you “just what to do”.  Rules and regulations are different everywhere, businesses are different, and we are all different.

But despite those differences there is a basic framework to use to answer these unknowns.  Think of the approach as a road map and a scavenger hunt. The map will guide you where to go, but it’s up to you to go there, hunt down answers, figure things out, and fill in the blanks.

This is a framework for how I would approach starting any business in any field.  The goal is to demystify the process of starting a business from the business formation and organization side of business.

Keep in mind, I am not a lawyer or accountant and nothing in this article should be construed as legal and/or tax advice.  Seek the advice of licensed professionals before you take any action.

 

THE FRAMEWORK

Any time that you start a new business you want to make sure that you take care of yourself, take care of your customer, and take care of the jurisdiction within which you operate.  That means that you need to protect yourself with the appropriate business structure, accounting, and insurance. You need to adhere to rules and regulations so your customers get a regulatory compliant product that they can trust and is safe.  Lastly, you need to adhere to the local rules and regulations so your local jurisdiction can ensure that these set standards are enforced across the board (and so they don’t shut you down).

Given this, you will need to be familiar at a base level with the formation and organization of a business entity, basic business accounting, what insurance is available, and the local city, state, and federal regulations that apply to your industry.  

I think we can agree that this is intimidating and there is a lot more here than we could ever understand, but we can cut through all of the confusion by using some basic rules and dissecting the problem.    

When it comes to forming a business, here are my five rules:

• Rule #1:  Know the basic rules, regulations and laws of your industry as it applies to your business and your location.
• Rule #2:  Assume you will be audited.
• Rule #3:  Assume you will be sued.
• Rule #4:  Pay experts.
• Rule #5:  Review regularly.

Apply these rules before you start your business (they may keep you from starting it) and during the operation of your business.

 

Rule #1 – Know the Basics:

Take some time to research all of the local, state, and federal regulations that may fall over your operation.  Ignorance is not an excuse. It’s too confusing is not an excuse. If you are running a serious business this isn’t debatable.  

Rules and regulations are complex and boring, I get it, but it’s what we have to work with.  A lot of the legal material that you find may sound complicated, but I think after some initial reading it will start to get easier.  

Need help?  Don’t forget  government agencies are staffed at all levels and in all departments to answer questions and help guide you.  Odds are if you are stuck, confused, or don’t know where to start, there is someone dealing with this specific subject matter within the government.  Use them as a resource.

Case in point:  I recently received an invoice for Use Tax from the State of California.  My first thought was WHAT?!?  What is use tax, how do I deal with it and does it really apply to me?  I wasn’t sure, but the invoice that I received had a name and phone number on it.  I called them up, they answered on the first ring, and were extremely helpful. Within 5 minutes I had an answer and an invoice that I didn’t have to pay.  That phone call to an expert saved me a lot of research time and money.

Knowing the boundaries also protects you to some extent.  If an inspector or government agent comes onto your farm or sends you something through the mail, how do you know what’s right and what’s not, unless you have some idea of what is right and what isn’t.  You need to know what you are allowed to do and what you aren’t – and if you need a permit or a license to do so.

There is too much at risk here – your time, your money, and customers’ health just to name a few – so don’t take chances.  Act as if your life depends on it, because in many ways it does. Don’t bet your business’s future and your family’s livelihood on you being right and the government being wrong.

While some may favor the “It’s easier to ask for forgiveness than permission” approach, be very cautious here.  I personally would not do this unless I felt the risks and repercussions were very low.  Always be thinking, if I do this, how bad could it go against me? Is it really worth it?  In most cases the cost of compliance is low, so complying makes sense.

 

Rule #2 – Assume You Will Be Audited:

Each state, business, and type of business structure has its own advantages and disadvantages when it comes to accounting (in addition to litigation protection which I cover later).  When there are tens of thousands of dollars at stake, don’t guess. Being compliment now is cheap compared to costly penalties, fines, and interest which come down the line with accounting mistakes.

Before you start your business sit down with a CPA (preferably one familiar with working on schedule F returns for farms) and explain to them what type of business you are planning to start, what type of entity you were going to be organized as, and how the sales will flow.  Then ask them if this makes sense or if there is a better way. If you have a few ideas they will be able to run you through all of the scenarios.

A conversation with a CPA about starting a farm based business might go something like this…

I am thinking about starting a pastured poultry business organized as an LLC.  This year I think we will do about $10,000 in sales. I think our startup expenses will be $2000.   I am running the business from my home and on the property where I live.

• Are there any accounting considerations I should be aware of?
• From an accounting standpoint is this the best business structure?
• I am wanting to write off as much as legally possible, without crossing the line, what am I allowed to write off?
  • Phone
  • Property Improvements
  • Utilities
  • Equipment
• I will need to purchase initial startup equipment – do I write this off or depreciate it?
• I would like to apply for grants through agencies like the NRCS – are these taxable?
• I will still be working my corporate job and I expect to make X.  Between this income and the farm income, how will this look tax wise?  Will I need write offs?
• When should we meet again to review this year’s business activity and make any end of year business moves – November?

This pre-mortem conversation might cause you to make changes to your business model and/or speed up or delay purchases which could help your individual tax situation.  It’s better to have a plan from the start than try to correct after you start. Trust me, I have made that mistake and it hurt.

How unique is your industry?  Does your accountant understand your business?  

Certain industries may have specific tax considerations that you need to be aware of, and a general practice CPA may not be aware of these industry specifics.  If they aren’t, you may be missing things that could help you with your tax return. I once worked in a finance company who shared office space with a CPA who specializes in tax returns for investors who owned a very specific type of investment.  I guarantee that he knew more about the tax code as it related to these niche investments than your average IRS auditor, and his clients benefited from this knowledge. If you aren’t sure about the knowledge level of your CPA or you still having questions, get a second opinion – another cheap one time expense that could save you thousands in the long term.  

 

Rule #3 – Assume You Will Be Sued:

Plan for the worst, hope for the best.  

If you are starting a business selling meat or produce then you are selling a product that is known to be potentially dangerous, even causing death, if the product isn’t prepared and handled correctly.  Saying it more bluntly, you are selling something that could kill someone – or someone’s kids.

This is one reason why it’s important to know your local rules and regulations.  Many regulations are put in place to ensure the safe handling and storage of product.  Adhering to those regulations helps you avoid getting someone sick.

Inevitably something will happen despite your best measures to make sure that it doesn’t.  Knowing that, you want to be protected.

Setup your business in a legal structure that protects you.  Fully understand what protection that structure provides and what it doesn’t provide.  

• Where are the potential loopholes?  
• If you get sued, what would that look like?  What is at risk?
• Can you separate the land from the farm business?  
• If you live on the farm property and you are sued how does that affect your house and other personal property?

Consult with a lawyer to see how vulnerable you might be if things go really wrong.

I think the starting point for all conversations should be around forming an LLC, not a sole proprietorship.  What type of LLC?  A CPA can help classify how the LLC is treated tax wise.  I think the cost of starting and maintaining an LLC is cheap given the protection that it provides.  But again, I am not a lawyer, so if you are really worried about this issue, then a lawyer bill is cheap compared to losing it all.  

Having private insurance is another way to protect yourself if things go wrong.   Contact a good insurance agent and tell them about your business – the structure, what you are selling, to whom, and where.  Go in with some idea of all of the things that could go wrong and see how various insurance policies could protect you. The insurance industry is very creative and there is likely a way to insure against every possible scenario, and premiums are probably pretty cheap given the protection they provide.  The key is to find the right agent that understands your business, so for a farm based business, you ideally want to find an insurance agent that specializes in farm insurance. Like a CPA, not all insurance agents are going to cut it or work. Ask around, call around, and find someone that you think understands the industry that you are in.

Lastly, if you are worried about something going really wrong, then don’t do this type of business activity.  There are a lot of low risk business ideas out there, you don’t have to do this thing. Your sleep and your sanity aren’t worth it.

 

Rule #4 – Pay Experts:

When you don’t know, ask.  When you think you know, ask.

The tax and regulatory system at a city, state, and Federal level is unbelievably complex and ever changing.  It’s irrational to think that you will ever understand it all. No one does. Understand the basics, and pay for the specifics.  

Experts are just that – people who specialize in one particular field.  They have the tools, the relationships, the experience, and the resources to get answers much faster than you ever could.  They have examples of when things go well, and when things go bad. Use experts as much as you need to. They won’t feel cheap now, but zooming out, it’s cheap.  And keep in mind that I think this is an area where you get what you pay for.

One way to optimize your dollars spent is to go into each interaction having a plan.

I try to go in with an idea of how I think it should be done, then I ask what they think – Is there a better way, a more efficient way, a cheaper way, a more secure way, etc.?  When I legitimately don’t know then I make sure that I at least know what my concerns are and what I am worried about asking – “Should I be worried about this?”

When advice seems off don’t be afraid to get a second opinion.  You have to be confident in your plan, and advice is cheap.

Start locally when sourcing out experts.  The CPAs, insurance agents, and lawyers working in your area are probably more familiar with local businesses and local regulations than one farther away.  If you are looking for reasonably priced more universal legal advice, LegalZoom is a great place to start. I have used them in the past and was very happy with the results for the price.  

 

Rule #5 – Review Regularly:

Just because it is best now doesn’t mean it will be best later.

Administrations change, laws change, policies change, and businesses change.  Don’t become complacent in your accounting, your business structure, and your compliance with regulations.  As your business grows, you may need to change things around.

Periodically take some time to make yourself aware of new or amended regulations.  Talk with other farmers and your experts about the ever changing paper landscape of taxation, legal, and regulatory compliance.    

Part of running a business is a REQUIREMENT to maintain compliance with current rules and regulation, so you have to pay attention here.

 

Rule #1:  Know the basic rules, regulations and laws of your industry as it applies to your business and your location.

Rule #2:  Assume you will be audited.

Rule #3:  Assume you will be sued.

Rule #4:  Pay experts.

Rule #5:  Review regularly.  

These five rules give you a map to approach business formation.

Now that we have the map, let’s start moving forward and answering some of your unknowns.

 

Before we start to answer any unknowns about our specific business, we first need to understand what our business is and how products/services and money flow through it.

Ask these types of questions about your business:

• • What does that business do?
  • What service does it provide or what product does it sell?
  • Where does the product come from?
  • How is the product handled?
  • How is the product stored?
  • How is it sold?
  • To whom is it sold?
  • How is the product delivered or is the service rendered?
  • Is everything done in house or are outside contractors or businesses needed?

Answering these questions may sound obvious, but it isn’t, especially if you overwhelmed and confused.  Taking some time to answer these questions about your business helps you develop a list of questions to which you need to seek out answers.  It turns “I don’t know where to start?”, into “This is where to start.”

 

If we use one of my businesses, Paperpot Co, as an example the analysis would look like this…

A business that sells imported and domestic product within California, the rest of the US, and outside of the US.  The imported product comes from Japan and the domestic product comes from within California and other states. The product is stored at a business located in San Diego County, California.  All product is shelf stable, not consumed by or used on a person, and can be considered low risk in terms of causing physical or chemical harm. The product is sold in person and online. Some sales are within California, others are across the US, and others are outside of the US.  The product is sold to individual customers, not retailers or wholesalers. Note: To keep it simple I ignored accounting issues in this example.

This short analysis gives me a starting point to think about issues that I am potentially dealing with:

1. Importing product – customs compliance, use tax, tariff and duty charges.
2. Selling product in state – sales tax?
3. Selling online and in person – sales tax?
4. Selling out of state – sales tax?
5. Sell out of the country – customs compliance?
6. Storing and selling product at a location – zoning issues, is location vulnerable for litigation?
7. California business – local and statewide compliance, permits, business license?
8. Litigation risk – low – insurance, protection – needed?
9. Heavy product being shipped – if hiring someone – worker safety, compliance, protection.  

Now I have nine points to start researching.  We have gone from “Where do I start?” to “Here is where I start.”

 

Now let’s look at a pastured poultry example…

A business that sells fresh and frozen processed raw poultry from a farm stand and at a farmers’ market.  All sales will take place in Vista, California and in San Diego County. All product is picked up at the farmers’ market or on farm, nothing is delivered.  All products will be processed on farm, or possibly off farm, and stored in chest freezers on farm. The product is sold raw and is known to be a potential health risk if it isn’t handled and prepared correctly by the end user.  Note: To keep it simple I ignored accounting issues in this example.

Looking at this example, it is very clear that regulatory compliance will be higher and litigation risk is higher than my Paperpot Co example.

Doing a similar analysis…

1. Selling a fresh, raw meat product.
   1. Handling and storage requirements from processing, to storage, to customer?  
   2. Disclosure needed?  
   3. Customer purchases meat, or purchases the live animal which is then processed on farm or off?
   4. Insurance – what do I need – umbrella policy?  Specific meat sales insurance?
   5. What does farmers’ market require for storage and display of product?  Do they require insurance?
   6. Do I need a permit or license?
2. Processing on farm.
   1. Am I allowed to?
   2. What is required if I am allowed to – equipment, process, labelling?
   3. Where can I sell if I do?
   4. How many birds can I process on farm over what time period?
   5. If a customer gets sick from the meat, am I directly at risk?
3. Processing off farm.
   1. Is the meat inspected?  If so, state or USDA?
   2. Where does the inspected meat allow me to sell?
   3. The customer purchases a live animal and then pays for processing at an independent processor?
   4. If a customer gets sick from meat am I directly at risk or is the processor?
   5. If the processor isn’t compliant or screws something up, am I at risk?
4. Product sold locally.
   1. Sales tax?
   2. Food handler, food safety license?
   3. Retail permit?
5. Livestock raised on property – local compliance and regulations – what is legal?
6. Stored on farm – freezer equipment or temperature requirements.
7. Transported from processor to farm and from farm to market – storage requirements in transit?
8. Litigation risk.
   1. Is the land, the farm, and everything else exposed if a suit comes in?
   2. Insurance?
9. Selling at a farmers’ market
   1. State requirements for meat sales at a market.
   2. Individual farmers’ market requirements.
   3. County health department requirements.  

Now I have another list to start seeking answers to.  

Keep in mind this initial list may not be fully comprehensive and definitive,  and your search to answer these questions may bring up other questions, but this gives you a starting point to systematically work through the previously “unknown” problem.

 

You can then take this list and start dividing it up into areas to research:

• Farmers’ Market
• Insurance
• City
• County
• State
• Processor
• Insurance
• Legal

By having a divided and specific list of questions, you make very targeted “asks” to get answers.  This helps you in a few ways…

You know you have to probably be dealing with 8 individuals or entities.  That’s manageable.

You will probably get to the right answer faster because you have a general familiarity with the issue and the potential problems.  

If you are talking to an expert, it’s easier for them to deal with an educated person asking questions than a complete ignoramus, so you don’t need to take up too much of anyone’s time and therefore any favors are small, not big, asks.  “Would you mind if I asked you a couple questions for 5 minutes?” goes over a lot easier than, “Could I pick your brain for an hour?“.  One is easy, one isn’t.  

You get the most out of your paid time.  

When you are paying an expert this wasted time hurts even more, it’s expensive.  It’s much cheaper to spend your “free time” organizing your thoughts than doing it while paying a lawyer $250 an hour.  I recently had a 30 minute consult with a lawyer to get some business questions answered and I needed 10 minutes. Why? I went in with a list and went through that list shotgun style, making ultra efficient use of my time and hers.  Believe me, you can get a lot of questions answered in 10 minutes. I can’t even imagine using a full hour.

 

Now you have some rules and a process to start answering your unknown in order to successfully form your business.

1. Define your business entity and make sure that is optimized from a protection and accounting standpoint.  
2. Find out what licenses and/or permits the business and/or you might need.  
3. Know what rules and regulations that business has to comply with prior to, and during operation.
4. Protect your business with insurance.
5. Establish a system for maintaining regulatory and accounting compliance.

As you work through this you will likely come up with new unknowns.  Simply use this process and the rules to help guide you through to get the answers that you need.

I think you should go in assuming that you will make mistakes and forget things, that’s just part of doing anything new.  

                                                                                 

If we go back to the idiot example – what happened and what went wrong?

The aforementioned idiot was me.

The first big error that I made was not looking into what needed to be done when you import a shipping container into the country.   Without a doubt some very light Googling would have made me aware that you need to file an ISF form with customs and complete various other steps prior to the shipping container setting sail.  Along with that information I would have learned that most people simply employ a customs broker to handle everything. I hadn’t done this, and here I was in process with a big problem (or so I thought).

After my short and stress inducing call with Zela I immediately Googled a customs broker, called them up, and they took care of everything.  Fortunately, we caught the error at a good time and coupled with the fact that I was a first time importer, I was allowed to slide on the penalty fee.  Future errors would not be viewed with such leniency.

In hindsight, I could have avoided this problem and the stress completely.  The solution was out there and it was simple, I just didn’t look. Learn from my mistake and do the research ahead of time.  

Keep in mind that mistakes will happen, errors will be made, and things will be missed.  The goal is to make as few mistakes as possible, and to be certain that the mistakes you do make are as small as possible.  

The process of forming a business is relatively easy, but it does involve a lot of work and research.  At the end of the day you are going to have to put in some time and money to seek out the answers that you have for forming your future business.  While the answers may seem daunting and complex, this basic framework gives you a logical process to work through the problem.

When it comes to starting a business this is never the fun part.  Don’t rush through this process or skip steps. Getting the right answers in place now can avoid costly mistakes which could jeopardize your new business.  Use those answers to put a plan in place so you can confidently move forward and focus on all of the fun stuff that you are excited about.

If you want to learn more about this subject, Business Startup and Formation is 1 of the 22 modules included in The Farm Business Essentials Online Course.  The course is your complete A to Z guide to planning, forming, managing, and growing a farm based business.  Learn more about the course at FarmBusinessEssentials.com.