Like the sole proprietorship, the general partnership is a fast and easy structure choice for a farmers market. The main difference between the two is that a sole proprietorship involves a single owner whereas a partnership involves two or more owners. The partnership is a for-profit business, and, as such, taxes are owed on any profits generated. The owners each bear the responsibility to account for the farmers market’s tax obligations with the state revenue department and the internal revenue service (IRS). The general partnership also shares the same risk as the sole proprietorship: the owners' personal assets are not protected from business liabilities.
A partnership is created without any formal action. It’s therefore possible to form a partnership without even realizing it. A partnership generally arises automatically under state law if two or more people (1) start a farmers market together as business partners (i.e., not if one person takes control and the other is hired as an employee) and (2) haven’t taken additional steps to become a nonprofit, limited liability company (LLC), or corporation.
- Easy to form. General partnerships may not require any additional steps for formation.
- Few to no annual maintenance obligations. General partnerships generally have no annual maintenance obligations in terms of business meetings or reports to the state, taxes aside.
- No personal asset protection. The owners of a general partnership may become personally liable for obligations and debts that the farmers market takes on.
Key characteristics that distinguish the general partnership from a nonprofit:
- Exclusive ownership and control. As with any for-profit business structure, the owners ultimately control all farmers market assets. Responsibility for day-to-day matters can be delegated to volunteers and employees.
- Exclusive rights to profits and losses. As with any for-profit business structure, the farmers market owners have exclusive rights to all profits or losses that the farmers market as a whole generates (not the profits or losses generated by individual vendors).
- Donations not tax-deductible. As with any for-profit business structure, if the farmers market plans to receive donations from organizations or community members, donations will not be tax deductible for the donor.
- For-profit business structure. A farmers market organized as a partnership is considered a for-profit business whether or not the market actually generates a profit. The perception of being a “business” may be beneficial in some circumstances but not in others.
- Limitations on use of volunteers. As with all for-profit business structures, general partnerships are limited in their ability to legally use volunteers and unpaid staff persons. More on that here.
Potential “Accidental” Partnerships
Partnerships can “accidentally” be created when two or more people operate a farmers market, including:
- Two or more community members
- A market owner and market vendor
- A nonprofit and market owner
If a court determines that a partnership is created, the people involved will be deemed to have joint authority and joint liability. Keep reading to learn more.
A general partnership is an easy business structure to launch; you simply start working with one or more people to plan and begin market operations. Each person who invests time, money, or something else of value is generally considered a partner or owner of the farmers market venture. If the partners have not taken additional steps regarding choosing a business entity, the farmers market is a partnership by default. This happens automatically and can even happen by accident.
Although there are no required procedures to form the general partnership itself, there are, of course, other laws that must be followed. Farmers market owners, including partners, will need to explore these issues.
- If the farmers market goes by any name other than the partners’ personal names (for example, Henry and Betty Smith’s Farmers Market), the name must be registered with the state or county. This paperwork ensures that individuals can discover which people own the farmers market. This paperwork is generally called a trade name application or registration. A modest fee is usually required.
- Some municipalities may require that farmers markets secure a farmers market or retail license before conducting business. These licenses may go by different names including retail food permits or event permits. Farmers market owners will need to check with their state, county, and municipality to learn if a license is required.
- A sales tax license may be required if the market itself plans to sell goods such as tote bags or mugs.
This list is not exhaustive. State, county, and local governments may require additional licenses, permits, or registrations. Local government offices and Small Business Administration offices are able to provide further guidance.
Partnerships Aren’t Shielded from Liability
Just as for the sole proprietorship (single owner), the biggest drawback to a general partnership (multiple owners) involves the issue of liability. All farmers markets are exposed to potential liability. Guests can trip and fall. Loans are taken out and cannot be paid back. Wind can blow tents into vehicles. The most concerning aspect of a general partnership is that all partners’ personal assets are potentially available to satisfy these business liabilities. That means if an injured person sues the farmers market and wins, the person can ask the court for each partner’s personal assets to satisfy the claim. Likewise, a creditor can go after each partner’s personal assets to satisfy a debt.
Individual partners have joint authority and joint liability
For general partnerships, not only are each partner’s personal assets available to cover the farmers market’s liabilities related to their own actions, they are also at stake to cover any commitments any of the other partners make. This means that individual partners have joint authority and joint liability.
When it comes to joint authority, each partner can usually bind the whole farmers market to a contract or other business deal. As for joint liability, each individual partner can be sued for—and required to pay—the full amount of any debt that the farmers market takes on. In other words, not only is the farmers market as a whole bound by the contracts each partner authorizes, each partner is individually on the hook to cover all the farmers market’s liabilities—not just his or her share of the business.
Personal assets are at risk
If one partner has more personal assets than the others, they are particularly at risk. Their only recourse may be to sue the other partners to recover their share of the debt. But if the other partners have no money, doing so would be futile. Recall too that a general partnership can be formed without the partners even realizing it. A court may decide that a partnership was formed—and that each partner is responsible for the other’s actions and accountable for all of the farmers market’s liabilities—simply based on the fact that two or more people started a farmers market together.
Why are the individual partners’ personal assets at risk? This is because, just as for a sole proprietorship, the law does not distinguish between a general partnership and its individual owners. It treats the owners and the partnership as one and the same. By contrast, with LLCs and corporations, the law treats the business (and its legal obligations and debts) as distinct from the owners (and the owners’ personal legal obligations and debts). As a result, an obligation of an LLC or corporation is an obligation of the business alone, not the individuals who run it. Likewise, a lawsuit against an LLC or corporation is considered to be a lawsuit against the LLC or corporation itself, not the individuals who run it. In a lawsuit, generally only the assets of the business are at stake, not the personal assets of the owners. This is why people say that corporate forms “shield” their owners from personal liability for business matters.
While these concerns are real, and every farmers market that is operating as a general partnership should be made aware of them, they shouldn’t be overstated. There are mechanisms to help protect the personal assets of the partners. These include insurance and partnership agreements.
Insurance provides some protection
First, businesses primarily rely on insurance to manage their liability concerns. Businesses, including farmers markets, buy insurance policies to cover potential injury and property damage liabilities. The insurance company pays any judgment, up to the policy’s limits. With insurance, both the business assets and the owners’ personal assets have protection. A corporate structure is often considered a second line of defense, with insurance as the primary risk management strategy. In the case of debt, partners may rely on the bankruptcy code which will protect some assets such as homestead and primary vehicle.
A partnership agreement provides some protection
Another way to provide some protection for the individual partners is to prepare a partnership agreement to outline the relationship. The partnership agreement allows the partners to establish the share of profits and losses that each partner will take, the responsibilities of each partner, any limits on authority (e.g., all partners must agree before obligating the farmers market to a debt of more than $500), and what will happen if a partner leaves. If a partnership agreement is not in place, or if it is not thorough, state partnership statutes will fill in the blanks and determine what rules govern in such scenarios.
The benefit of having a partnership agreement is that you can decide what is best for the farmers market rather than relying on the state’s fallback rules. A partnership agreement is essentially an agreement or contract between the partners outlining how the farmers market will be managed. It does not need to be filed with the state, but should be kept in a safe place for easy reference.
For more information on what partnership agreements cover, how they are created, and what businesses do with them, see the resource Farmers’ Guide to Business Entities, available to download free at www.farmcommons.org. Although written for farmers, farmers markets will find the material just as relevant to their operations.
Assessing the risks of partnerships
For many business owners, the risk of exposing personal assets to business liabilities is too great. These business owners prefer to form an LLC, corporation, or other entity that offers personal liability protection. Business owners who choose to form an LLC, corporation, or other entity give up conveniences and take on expenses for this protection. Farmers market owners should be aware of the costs and obligations before choosing to form an entity that offers personal asset protection, issues which are discussed in each entity section.
Let’s say Betty and Maria start operating River Hill Farmers Market and they choose to structure the business as a general partnership. Betty signs a lease with the general store to host the farmers market in the parking lot. Both Betty and Maria are equally responsible for fulfilling the lease’s obligations such as making rent payments, etc. If they are unable to meet those obligations, the general store owner could choose to sue either Betty or Maria or both. The general store owner could ask the court to give him the rights to Maria’s lake house, Betty’s stocks and bonds, or other personal assets to pay off the rent debt, for example.
Now, let’s say that Betty and Maria have their own stall at the farmers market where they do outreach and management duties. Maria is responsible for putting the tent up in the early morning. One day, she forgets to latch the bottom hook. The tent catches a gust of wind and hits a guest in the face. The guest files a claim against the farmers market for the injury. In the ideal case, Betty and Maria would have insurance for the farmers market and would hand over the claim immediately to their insurance company. The insurance company would handle the case and pay on any resulting judgment. If for some reason the insurance did not cover the incident or the judgment exceeded the policy limits, the injured person could ask a court for access to the personal assets of both Betty and Maria. This is the case even though Betty wasn’t even there when the incident happened. Because they have a general partnership, Betty and Maria are each accountable for the other’s actions or inactions related to the farmers market.
Control and Decision-Making Is Generally Equally Split
Partners can opt to create a partnership agreement to outline how they will share control and decision-making as well as profits and losses. If the partners do not have a written agreement in place, or if their written agreement doesn’t address a significant issue, such as how profits and losses are shared, state partnership laws will kick in to fill in the blanks. Generally, unless otherwise agreed upon, the partners share equal ownership rights and responsibilities. This means they have equal decision-making power and split the profits and losses equally. In addition, because the individual partners have joint authority and joint liability, the partners are each fully responsible for the business’ liabilities, debts, and tax obligations.
Through a partnership agreement, the partners may base control and decision-making authority on the amount that each partner invested. For example, if one partner invested $6,000 and the other invested $4,000, then they would own 60% and 40%, respectively, of the farmers market venture. The partners may also delegate decision-making authority to one or a few partners (often called a managing partner), employees, and independent contractors. The partnership agreement may also require all partners to unanimously agree on major decisions. If this is the case, the partnership agreement will need to specify what a major decision is—which may include decisions about spending a significant amount of money, entering large contracts, admitting new partners, and so on. For example, a partnership agreement might specify that any contract or expenditure involving more than $1,000 requires unanimous consent.
Setting such parameters in a partnership agreement helps protect the partners against poor decision-making or overreaching by one or a few partners. Ultimately, having a partnership agreement in place helps create shared expectations and clearer lines of communication.
It’s important for markets to think proactively about leadership changes before they happen. Keeping files organized and in one place can help create an easy, go-to spot for finding answers about the market and for ensuring continuity during transitions. Learn more about how you can prepare for smooth transitions in Recordkeeping.
A General Partnership Is Not Taxed as a Business
General partnerships, as businesses, are not taxable entities themselves. As the internal revenue service (IRS) sees it, all profits and losses of a partnership are the individual partner's, to be accounted for on each of their annual tax returns based on their percentage ownership of the partnership. In the language of the law, the profits and losses “pass through” the business to the owners. Generally, partners simply report their business profits and losses on their personal tax returns (for farmers market partnerships, the Form 1040 Schedule E is used), and are taxed at personal income tax rates based on their total income, credits, and deductions. Partnerships are not taxed at corporate tax rates. While the partnership does not have to pay taxes, it does have to file a Schedule K-1 (Form 1065), an informational return, with the IRS each year. This form sets out each partner’s share of the partnership profits (or losses), which the IRS reviews to make sure the partners are reporting their income correctly. The partnership must also provide a copy of the Schedule K-1 to each of the partners.
The annual tax obligation of a partnership is difficult to determine in advance because it depends on the business’ specific revenue and expenses along with the deductibility of those expenses. An excellent bookkeeping system can go a long way to efficiently manage the potential tax outcomes of the farmers market operation. Tax preparers and accountants can help the partners each anticipate tax obligations in real time as the end of the fiscal year approaches.
Each partner is responsible for self-employment tax
Each partner who has net earnings of $400 or more from the farmers market business must pay self-employment tax. Self-employment tax includes Social Security and Medicare taxes. Each partner reports self-employment tax on Form 1040 Schedule SE. For 2017, the self-employment tax rate was 15.3% for the first $127,200 of net earnings. For more information on self-employment tax, click here.
Quarterly estimated taxes are paid ahead of the annual return
Partners generally must pay quarterly estimated taxes if they expect to owe $1,000 or more in taxes when they file their annual returns. As a farmers market owner just starting out, it can be difficult to know whether to expect a tax obligation of $1,000 or more at the end of the year. The safest route is to make estimated tax payments because the IRS can assess penalties for failing to do so—even if there’s a refund at the end of the year. For more on estimated taxes, click here.
Working with an accountant or tax preparer and having a reasonably accurate business plan can help partners manage tax obligations. Any business owner who does not plan to work with an accountant or tax preparer should prepare well in advance and thoroughly research how to file taxes, the potential outcomes, and the records that need to be kept.
Farmers market owners who also own a farm business should note that farmers market businesses are handled differently under the tax code as compared to farm businesses. The farmers market will likely need separate bookkeeping from that of the farm business. The farmers market business follows different rules for deductibility of certain expenses, depreciation, and so forth. For example, the owner will likely file a Schedule F for the farm business and a Schedule C for the farmers market business accounting.
For more information, visit the IRS website regarding partnerships and taxes here.
Employer Identification Numbers Are Often Required
An Employer Identification Number (EIN) is a number issued by the IRS to various kinds of taxable entities, including partnerships. By completing a simple form, a business can get an EIN in a matter of hours. Entities are required to get an EIN if they answer “yes” to any of the following questions:
- Do you have employees?
- Do you operate your business as a corporation or a partnership?
- Do you file any of these tax returns: Employment; Excise; or Alcohol, Tobacco, and Firearms?
- Do you withhold taxes on income, other than wages, paid to a non-resident alien?
- Do you have a Keogh plan?
- Are you involved with any of the following types of organizations?
- Trusts, except certain grantor-owned revocable trusts, individual retirement accounts (IRAs), and Exempt Organization Business Income Tax Returns
- Real estate mortgage investment conduits
- Nonprofit organizations
- Farmers’ cooperatives
- Plan administrators
Even if the IRS does not require an EIN, banks, lenders, and other institutions may require it. These other entities may require an EIN simply as a paperwork convenience or because they want the security that the general partnership is registered with the IRS, even if it isn’t required.
An Agreement Becomes the Governing Law
The partners have the option to create a partnership agreement to outline how the partners will share control and decision-making as well as profits and losses. In essence, this private agreement becomes “the law” of the partnership. If the parties go to court over an issue, the court will look to the partnership agreement as the first source to resolve most issues. If the partners do not have a written agreement in place, or if their written agreement doesn’t address a significant issue (such as how profits and losses are shared), state partnership laws will kick in to fill in the blanks.
Frequently Asked Questions
- A friend and I organized and set up a farmers market. She did most of the work, and I don’t think of myself as an “owner.” How do I know if I’m also an owner and whether we have a general partnership?
- My farmers market doesn’t have any assets, doesn’t make a profit, and has few to no transactions itself. Is the farmers market still taxable as a business?
A friend and I organized and set up a farmers market. She did most of the work, and I don’t think of myself as an “owner.” How do I know if I’m also an owner and whether we have a general partnership?
This can be a tricky question! We rarely think of a farmers market as a business with owners. Instead, we think of it as a collection of farmers who are working together to sell their product in the same location. This may be the case, but the market can still have owners. Let’s say two people generally make all of the decisions for the market. Let’s also say those two people manage the collection of fees, pay expenses such as leases, secure permits, and generally handle the business of the market itself. Even if one person does “most” of the work, if the other person participates, takes control, or makes significant decisions regarding certain components of the farmers market, he or she will likely be considered an owner or partner and the farmers market a general partnership.
A person can be the “owner” of a farmers market (i.e., a partner in a partnership) and still designate all responsibility to another person without creating a general partnership. For example, the owner could hire a market manager as an employee and pay that person for the help. The owner can ask the market manager to be in charge of all day-to-day responsibilities and give that person wide authority to make decisions. Ownership sometimes comes down to whether a person can shut down the business and expect control over any profit made. Employees and volunteer farmers market managers generally cannot shut the market down, open bank accounts, or manage the market’s tax obligations. Thus, they are generally not owners. Owners are people who are responsible for those bigger, more significant decisions.
On the other hand, let’s say one person is generally responsible for carrying out the will of the farmers market vendors as a whole. For example, let’s say a committee of vendors directs one person to sign leases, get permits, etc. Because the decisions are actually made by the vendors as a whole or their representatives on the committee, it’s less likely that there is an owner. Instead, this situation is more likely to be an unincorporated nonprofit association.
When it’s unclear whether a person is or is not an owner, the best route is to consult an attorney. This is an important question, and it can only be answered by looking at exactly how decisions are made, how responsibility is delegated, and who holds responsibility for the tax obligations of the farmers market overall.
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My farmers market doesn’t have any assets, doesn’t make a profit, and has few to no transactions itself. Is the farmers market still taxable as a business?
In a word, yes. All enterprises, no matter how big, small, profitable, or not profitable, need to account for their tax obligations to the IRS in some form or another. Simply convening farmers in a specific place for the purpose of vending product creates an obligation to the IRS. In this section, we discuss what that obligation is as a general partnership. (A market might also be an unincorporated nonprofit association or a sole proprietorship, if there’s just one owner.) If the farmers market has no assets, no revenue, and no expenses, the required tax forms should be very easy to complete! But, they still need to be completed. Most farmers markets will have assets, expenses, and revenues. For example, a lease can be an asset with market value. Selling tote bags or charging fees for credit card usage can create revenue. Permit fees or credit card processing fees are farmers market expenses. Certainly, many farmers markets spend as much as they take in and generate no net profit. Regardless, the IRS needs to know that no profit has been made. Thus, the farmers market needs to keep careful records and each of the owners still needs to account for the market on his or her tax return.
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