When starting your alpaca business you need to determine what form of business ownership you should choose. There are 3 major types of ownership; Sole Proprietorship, Partnership, and Corporation. I will describe each of these forms to help you better understand which one to choose for your alpaca business.
Sole Proprietorship
As the name implies a sole proprietorship is a one man operation. 72% of all businesses in the US fall under this category and the account for $18 out of every 100 made. I know you’re thinking what? 72% and they only account for $18/100? Yes, sole proprietorship is the driving force of America but it’s all small business, people like you, me, your plumber, doctor, hair dresser, and taxi driver.
So why is a sole proprietorship so popular? Let’s check out some of the advantages and disadvantages of this form of business.
Advantages:
• Simple to start – just walk down to your county office and say hey there county clerk I want to start a business. They give you a form, ask for about $30 and poof, you’re a registered business. Finish it up with a visit to your local bank, open up a business account. Apply for an EIN for tax purposes and you’re rockin’ and rollin’.
• Simple to start means it’s LOW cost. The cost of your DBA (Doing Business As) is the only out of pocket expense you have to become a sole proprietor.
• Because the business will either succeed or fail based on you and your efforts there is a very strong profit incentive.
• The business owner has the freedom to manage how they see fit. You now are “the man” only you can put you down.
• Confidentiality – you only report to you, so anything you do is your business
• Tax Savings – can you say deductions?!
• For as easy as it is to start the business it is just as easy to terminate it. Decide that you no longer want to be in business, close the bank account, tell the county clerk to take you off the books and send an form to the IRS stating this is the last year you’re sending in your taxes. Poof, business has gone bye bye.
Disadvantages:
• Unlimited Liability – you are your business
o Your responsibility to pay into the business
o Your responsibility to pay the debt of the business
o Your responsibility for any claims against your business
o If your business is sued so are you and all of your personal assets
• Limited Size – small businesses stay small
• Limited access to capital – “What’s in your wallet?”
• Succession – Most businesses die when the founder dies
• Limited management talent, skills and time
• Lack of opportunities for good employees
Partnership:
A partnership is 2 or more people in business for profit. Typically most partnerships are less than 4 people. Partnerships account for 8% of all the businesses and account for $5 out of every 100. Partnerships require obtaining a business certificate and come in 6 different types.
Partnership Types
• General Partner – They assume liability along with you
• Limited Partner – They are limited only by their losses (what they put into the business)
• Silent Partner – Has no management voice
• Secret Partner – Private
• Dormant Partner – Both a secret and silent investor
• Nominal In Name only
All partnerships need an article of Partnership. Long story short, it’s a document which spells out how the partnership is split (50/50 or 60/40), duties, responsibilities, what the business is worth, insurance etc.
Advantages:
• Still easy to start
• More people equal more capital and credit opportunities
• Improved decision making – 2 heads can be better than one
• More tax advantages
Disadvantages
• Liability to all the partners
• Disagreement – you now have to pass things by your partner
• Continuity – Death: Uh oh, your partner died. Now what?
• Frozen Investment
Corporations:
Corporations are an association of people coming together for a common goal. Corporations are treated like a “human” and have the same constitutional rights as you and me. Corporations have a common stock (1share =ownership=1 vote) Corporations are required to produce annual reports, have meetings, minutes and can either be public or private in nature. They account for only 20% of all businesses but bring in $77 out of every 100!
There are several different corporation types but for the alpaca business owner only the LLC is worth discussing for our small business adventures.
LLC or Limited Liability Corporation is the choice of many farms both alpaca and other and here’s why.
Advantages
• Sole Ownership – You still can be a one man show.
• Limited Liability! – Folks can only sue what the farm owns! If your house is on the same land as your farm this is a big deal. Your LLC could own your livestock, barns, pastures etc but has no claim to your personal assets like your bank account or house.
Disadvantages
• To set this up you need lawyers which cost $$$
• Yearly fees to continue your LLC
• Must separate your finances from your business
• Separate Taxes
• More time consuming to kill
Well there you have it. I know the question will arise so what did I do? I personally chose sole proprietorship to start with. I liked the ease and cost to get started and to terminate it should I find 3-5 years down the road this adventure is not for me. The thought of someone coming onto my farm, hurting themselves and suing me for everything does scare the crap out of me though. To curb those fears I hold a rather large and irrational amount of liability insurance. But, I now don’t sound like a wicked old witch to kids who want to pet the pony or hug an alpaca. Should my alpaca business grow and become profitable I am considering becoming and LLC to further protect myself.
Be sure to visit our Overview Page for more information about starting your alpaca business.