Basic steps in establishing a farm business
Start out right by laying the proper groundwork.
Anyone who owns acreage and pays taxes wants to get as much value from the land as possible. If you’re feeling confident that you could start and run an agricultural business, you could consider starting a farm enterprise—selling some type of commodity to make a profit such as livestock, crops, or even starting an agri-tourism venture, for example. First and foremost, you should check with your local zoning official to make sure your idea will be an allowed use in your township or city.
Next, you need to register your business name by contacting your County Clerk’s office. This is very important, as it is required on all government forms and applications. It is not necessary if you are using your own legal name as the business name. A more formal business entity is the Limited Liability Company (LLC). Filing an LLC with the State of Michigan will protect your name statewide, but it is recommended that you seek legal assistance if you go this route.
You also need to check for any regulations on the growing and/or sales of your chosen goods through the Michigan Department of Agriculture and Rural Development. If you are going to sell retail, you need a sales tax license from Michigan Department of Treasury. Farms that produce and sell commodities to other farms or agri-businesses are exempt from sales tax and do not require a license.
Here are some recommendations for a successful farm business:
- Have a written business plan to help you map out what you are going to produce, along with how and when you will generate a profit.
- Make sure to keep farm records separate from your personal records. Establish a farm checkbook where sales income is deposited and checks are written for expenses. You will be able to create a profit and loss statement quarterly anr/or annually with this information.
- Treat your farming activities as a trade or business so you can complete a 1040 Schedule F form when filing your income taxes (normally due March 1, unless you pay estimated quarterly payments). Be prepared to pay separate social security, Medicare and income taxes on farm profits.
- If you meet the standards of being a farm in the production and sales of a commodity for profit, then you can qualify to make production input purchases exempt from Michigan sales tax. You can complete a Sales and Use Tax Certificate of Exemption (form 3372) from the Michigan Department of Treasury and show it to vendors when making pruchases for your farm.
- According to the Internal Revenue Service, if you gross $1,000 or more in agriculture sales per year, you are considered a farm. In order to continue to be a qualified farm for tax purposes, 2/3 of your taxable income must come from the farm in the prior two years and your farming activities must show a profit in three of seven years.
Either a Michigan State University Extension Farm Management educator or an Innovation Counselor with the MSU Product Center can help you with a business plan and other steps mentioned here. The MSU Product Center, in partnership with Michigan State University Extension, provides business counseling to help Michigan entrepreneurs commercialize food, value-added agriculture, and natural resource products. For more information, visit the MSU Product Center website or call 517-432-8750.
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