Sole Proprietorship

Someone who owns an unincorporated business by himself or herself.

  • Formation: There is no formal process to form a sole proprietorship. This is the result of the individual going into business, where the business is owned by one person.
  • Liability: There is no shield. Sole proprietor is liable for all of the debts and expenses of the business.
  • Taxation: Must report all business income and losses on the individual’s tax return. IRS requires different forms to file, however, the most common form will the Form 1040 U.S. Individual Income Tax Return

The duties of those owning farmland through a sole proprietorship are no different than individual landowners. They are not accountable to shareholders, other members or partners, or beneficiaries.

Agency

“Agency is the fiduciary relationship that arises when one person (a “principal”) manifests assent to another person (an “agent”) that the agent shall act on the principal’s behalf and subject to the principal’s control, and the agent manifests assent or otherwise consents so to act.” RS 1.01

  • Formation: No formal reporting required to form an agency. Manifestation is the action taken to express the desire for another person to act on your behalf. This can be either written or verbal.
  • Liability: There is a liability shield associated with Agencies. Courts will often look at the principal’s (owners) control over, benefit from, and consent to the agent (person who is working on behalf of the owner).
  • Taxation: The principal and the agent are taxed individually, unless the agent is an employee of the principal. Form W-2 is filed for employees.

This business structure is usually used between two persons and doesn’t contain an ownership aspect. It is applicable, however, to landowners using the services of farm managers. In relation to soil stewardship, the duties of the agent will largely be determined by the contractual arrangement. Landowners should carefully review the management contract and express any desire to ensure stewardship is a priority.

Partnership

“The association of two or more persons to carry on as co-owners a business for profit forms a partnership whether or not the persons intend to form a partnership” RUPA 202

  • Formation: No formal reporting required to form a partnership. This type of structure is created when two people start to do business with one another and there is “intent” to carry on in the business.
  • Liability: Partners are personally liable for the debts and obligations of the business. There is no liability shield from those debts that the other partner incurred. The debts of the business are the debts of each partner.
  • Partnership Agreement: Document outlining the authority and duties of each partner. This is the entire agreement, which gives structure and accountability to the partnership. Although there is no liability shield in a partnership, specifics on how the particular business will be run can be written in the partnership agreement. In the event there is disagreement, this document will be used to resolve that agreement.
  • Taxation: Partnerships must file annual information returns to report income, deductions, gains, and losses from operations. Partnerships do not pay income tax. Income tax is “passed through” to the partners. Therefore, each partner files their individual tax returns, including their share of the partnership’s income or loss.

Iowa’s Uniform Partnership Act, Iowa Code Section 486.404, provides more limited duties than that of LLCs and Corporations. This law provides for the duties of loyalty and care, but states that the duty of care “is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.” This statute clearly deviates from the reasonable person standard required of LLC members and managers and Corporate directors and officers. Members of partnerships should be aware of this significant different.

Limited Liability Company

Formed by signing and delivering to the Secretary of State for filing a certificate of organization RULLCA 201(a)

  • Formation: Requires filing Articles (Certificate) of Organization with the Secretary of State. The Articles are outlined in Iowa Code 490A.303 and must include the following information:
    • Name of the LLC
    • Street address of the LLC’s initial registered office and the name of its initial registered agent
    • Street address of the principal office for the LLC
    • Period of duration (usually perpetual)
  • The articles can then set forth following:
    • Statement of whether there are limitations on authority of members to bind the LLC
  • There is a mandatory filing fee for the Articles of Organization
  • Operating Agreement: Much like the partnership agreement, the operating agreement outlines all of the authority and duties of the members of an LLC. This document is used to run day-to-day operations and settle any disagreement within the LLC.
  • Liability: A member of an LLC is not personally liable just for being a member of the LLC. A person may be liable under a judgment for a debt, obligation, or liability of the LLC. The assets of the LLC are at risk of being used to satisfy a judgment and, therefore, the investment the member has made is at risk. The personal assets of the member are not at risk.
  • Taxation: The LLC is treated in the same manner as the partnership. The entity is treated as a “pass through” where the business income passes through to the members, who then report the profits or losses on individual tax returns. Relevant form is Form 1040.

Iowa Code Section 489.409 establishes the duties of loyalty and care for members and managers of LLCs. This statute requires members and managers “to act with the care that a person in a like position would reasonably exercise under similar circumstances and in a manner the member reasonably believes to be in the best interests of the company.” Significantly these statutory duties may be altered by the LLC’s Operating Agreement. It is also important to note that other members or managers may challenge the actions of other members or managers as violations of these duties, but the burden of proof rests on the individual bringing the action. They must prove a violation occurred as well as the damages that were suffered.

Corporation

Must deliver articles of incorporation to secretary of state for filing MBCA 2.01

  • Formation: corporation is a legal person, separate from owners and managers who run the business.
  • Liability: Corporations offer limited liability to owners and managers, sometimes called the corporate shield or veil. The personal assets of the owners of the corporation are protected from creditors of the corporation. Only corporate assets are used to pay corporate debts. The shield can be pierced in certain situations:
    • Contributions to the corporation
    • Personal guarantees
    • Personal or direct injury
    • Taxes for wages
    • Commingling of goods or personal affairs
  • Taxation: Separate and distinct from the individual. The corporation must pay its own income taxes on profits, the profits do not pass through like in a sole proprietorship, partnership, or LLC. Subject to double taxation.
    • S corporations – business profits, losses, credits, and deductions pass through the corporation to the owners who report them on personal returns.

Iowa Codes Section 490.830 governs the duties of boards of directors of Iowa corporations. It requires directors to act in “good faith” and in a “manner the director reasonably believes to be in the best interests of the corporation.” This also essentially establishes a reasonable person standard. Officers of corporations have the same duties, under Iowa Code 490.842, with the additional assignment that they “act with the care that a person in a like position would reasonably exercise under similar circumstances.” These duties are also clearly owed to minority shareholders in a corporation, as set forth in the recent court case, Baur v. Baur Farms Inc, and minority owners may bring actions against the corporation and majority shareholders to enforce duties of good faith and ensure the actions taken by those with management control are in the best interests of the corporation.

Trust: This is an artificial entity, similar to a corporation. Need 4 elements to create a trust:

  1. Trustee
  2. Trust property
  3. Trust document: Specifies the rules of operation for the trust and trustee
  4. Beneficiaries: Share income and principal from the trust
  • Creation is done by the grantor who files a trust agreement. Which names the instructions to management, how assets are to be distributed, instructions regarding what happens when the person who created it dies.
  • Funding the trust is done by changing the title of ownership for each asset that will be placed in the trust from the individual’s name to the beneficiaries’.
  • Management: done by the trustee, which can be the grantor, a bank or trust company, other family member, or friend.

Iowa Code Section 633A.4203 requires trustees to “administer the trust with the reasonable care, skill, and caution as a prudent person would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust.” Further, under Code Section 633A.4205, trustees with special skills, such as those with farm management experience, have a “duty to use those special skills or expertise.” Trusts have strong protections against actions that constitute waste of trust assets. It is also important to note that the duties owed by the trustee are largely evaluated in accordance with the terms of the trust. This provides significant opportunities for ensuring soil stewardship when the trust is created.