Persona Activity

The following flyer was shared as a PDF in a monthly county newsletter and posted at the Extension office.

Food Business Course Flyer

The rest of this page is a sample lesson from the online course. Consider your personas as you work through the page. How might each of them experience the content?

Choosing a Business Entity and Legal Start Up Requirements

Watch the following video to hear Peggy Hall explain the first two steps in starting off organized: choosing a business entity and following legal-start up requirements.

Business Entities

Should you create a formal business entity like an LLC for your food business, or is it okay to simply operate as a Sole Proprietorship? The answer is... it depends.

Choosing the right entity is important, as it can impact issues such as personal liability, taxation, and the daily operation and management of the business. That's because each type of entity has unique characteristics, and different laws apply to different types of business entities. 

Selecting the Entity for Your Food Business

Your challenge is to understand the options available to you, then choose the business entity that best fits your situation. There are many relevant questions to consider before making a decision, such as:

• How many people will be involved in the business?
• Do you or the other owners have significant personal assets? 
• How do you want to operate on a daily basis--informally or with certain formalities for making decisions, spending money, and taking similar actions? 
• How will your income taxes be affected? 
• What steps are necessary to form and operate a certain type of business entity? 

Your answers to these questions can help lead you to your entity choice. To ensure that you fully understand the implications of your choice, it's critical to make the decision in consultation with an attorney and your accountant.  We recommend scheduling a meeting with your professional advisors to review your options and choose the best entity for your situation. But first, prepare yourself by learning more about your business entity options. 

Types of Business Entities

While there are many different types of business entities, the two most common types for home-produced and farm-based food businesses are the Sole Proprietorship and the Limited Liability Company.  Less common are the Partnership and Corporation. In the overview below, we provide an explanation of each of these four types of entities, and examine four characteristics: formation and governing documents, management, liability, and taxation.

Sole Proprietorship. A Sole Proprietorship is a business owned by a single person who is referred to as the “sole proprietor.”  The sole proprietor and the business are one and the same—there is no separate legal business entity and no separation between the owner's personal and business assets.  

• Formation and governing documents. A Sole Proprietorship is an "informal" business entity, which means a person does not have to complete formal steps to be legally recognized as a Sole Proprietorship and does not have to register. Simply engaging in an ongoing business activity creates a Sole Proprietorship. There is no governing document that outlines how the business will operate. This helps reduce start-up costs and operating expenses. However, there are legal requirements to use a trade name or fictitious “doing business as” name for a Sole Proprietorship. Otherwise, the name of the individual owner is the name of the Sole Proprietorship.
• Management. The owner of a Sole Proprietorship has full management control of the business. There are no officers, board members, shareholders, or business partners to consult with when making a business decision.  
• Liability. A Sole Proprietorship provides no personal liability protection to the owner, because business and personal assets are under the same ownership. If a liability incident occurs as a result of business operations, the owner and all of the owner’s personal assets can be subject to the business liability.
• Taxation. A Sole Proprietorship is taxed as an individual and reports its net income on a federal Schedule F for a farm business or a Schedule C for a non-farm business, as a separate schedule attached to the owner’s Form 1040. The Schedule F or C income or loss is added to the sole proprietor’s other sources of income and taxed accordingly. 

LLC. An LLC is the newest and most popular type of business entity. That's because it offers personal liability protection, income taxation options, and an informal management structure. 

• Formation and governing documents. To form an LLC in Ohio, a business must file its Articles of Organization with the Secretary of State. An LLC should also have an internal governing document, called an Operating Agreement, which lays out membership interests, management structure, voting and decision making, allocation of profits and losses, dissolution of the business, and other important terms that guide business operations.
• Management. An LLC can choose its management structure, as outlined in the LLC’s Operating Agreement. When there are multiple owners, called "members," the members can choose whether to conduct the day-to-day business of the LLC or to have one designated member be the manager. 
• Taxation. LLCs can also choose how to be taxed.  An LLC can choose to be a “pass-through entity” for income tax purposes, and income is only taxed at the individual level. Or, the LLC can elect to be taxed as a C-Corp and pay income tax on the business income.
• Liability. It's easy to mistake the meaning of the name -- "limited liability company." This doesn't mean an LLC has limited liability for its own obligations. Instead, it means an LLC member is not personally liable for the liabilities of the business. If the LLC has a debt or liability incident, the only assets at stake are the assets within the LLC, and the personal assets of LLC members are not subject to the liability.  This personal liability protection is a very desirable feature of the LLC. Note, though, that members can be at risk of personal liability if they commit a wrongdoing or intentional tort while acting for the LLC.

Partnership. A partnership exists when two or more individuals or “partners” jointly own and conduct a business for profit. A “General Partnership” consists of partners who each have management authority and personal liability for the partnership and who report income from the partnership as individual income. A different type of partnership, the “Limited Partnership,” allows investors to enter a partnership as “limited partners” without involving them in management and exposing them to personal liability for the partnership.

• Formation and governing documents. There are no formal formation and registration requirements or organizing documents required for a General Partnership. In the eyes of the law, a General Partnership arises simply by the sharing of profits between the partners. However, the partners must register a trade name or fictitious name if they choose to use one and the partners should consider developing a written Partnership Agreement when they begin the partnership. If they don’t have a Oartnership Agreement or don’t address certain issues in their agreement, Ohio’s Uniform Partnership Act steps in to resolve partnership issues.  A Limited Partnership, on the other hand, does require filing Articles of Incorporation with the Secretary of State.
• Management. Unless otherwise agreed to, partners in a General Partnership have equal management authority and the management actions of one partner are binding on the partnership. A written Partnership Agreement can provide more management structure if desired and can outline requirements for how the partners make management decisions.
• Liability. An important characteristic of a General Partnership is that all partners are equally responsible for the full liabilities of the partnership. If one partner makes a decision that creates liability for the partnership, the other partners are not just personally liable for their “share” of the partnership but are responsible for the full extent of the partnership's liability. Likewise, each partner is fully and personally liable for the entire amount of all partnership debts. There is no personal liability protection for the partners. A Limited Partnership can change this liability outcome by protecting limited partners who aren’t involved the partnership’s management from personal liability.
• Taxation. As with a Sole Proprietorship, partnership income passes through the partnership. Taxation only occurs at the individual level for each partner.

Corporation. A for-profit corporation is a legal “person” separate from the individuals who own it. This legal separation protects owners from personal liability for the business and sets up taxation of the corporation’s income at the business level. The owners are “shareholders” in the business, while management is through a formal structure such as a board of directors and elected officers. There are two types of corporations: an S-Corporation (S-Corp) and a C-Corporation (C-Corp), named after Internal Revenue Code provisions that address taxation of the corporation and its shareholders.

• Formation and governing documents. Because a Corporation is the most formal of the business entities, it is generally the hardest and most expensive to set up. Formation requires determining a business name and filing the company’s Articles of Incorporation with the Secretary of State. The Corporation must also develop internal Bylaws that govern the roles for the board of directors, officers, and shareholders and how the Corporation will function. Additionally, a Corporation must file forms at the federal level stating how it intends to be taxed for income tax purposes. 
• Management. The management structure of a Corporation is more formal than other types of entities.  The “directors” are responsible for the overall management, while the "officers" are responsible for day-to-day management. The directors and officers must follow the Bylaws and must manage the Corporation for the benefit of its shareholders.   
• Liability. A positive characteristic of a corporation is that it provides personal liability protection to its owners, the shareholders. The Corporation, as its own entity with separate “personhood,” is solely responsible for its liabilities. The shareholders and their assets are protected from personal liability for any debts or liabilities of the business.
• Taxation. The income earned by a Corporation that elects to be a “C-Corp” can be subject to “double taxation,” which means the income is taxed at the corporate income tax level and dividends paid to shareholders are taxed at the shareholder’s personal income tax rate. Note that Ohio does not have a state corporate tax but does have a commercial activity tax that applies to all businesses with taxable gross receipts over $150,000 in a single calendar year. A Corporation may register as an S-Corp and bypass the federal corporate tax rate. Unique laws apply to an S-Corp, and it’s important to understand the full implications before choosing to be taxed as an S-Corp.

Distribution of Small Business Structures in the Food Industry

(fake data for teaching purposes)

Choosing the appropriate type of business entity for your food business requires understanding how the entities are similar and how they differ. The table below presents a summary comparison of several characteristics for the different types of entities.