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Everything You Need to Know About Turning Your Homestead into a Business

Once you start making money from your homestead, it’s time to ask yourself if you’re ready to start a business. An important part of this decision is knowing what legal steps homesteading laws require.

The good news: the law around your homestead business is not complicated and can be very straightforward! Read on to find out exactly what you need to know to turn your homestead into a business (legally). 

Table of Contents:

• A Business or a Hobby?
• How to Protect Yourself and Your Homestead
• Dangers of a Sole Proprietorship
• Benefits of an LLC
• How to Form an LLC (It’s easy!)

First, is your homestead a business or a hobby?

One of the most common questions homesteading clients ask me is, “what should I do if my homesteading is just a hobby, and I don’t want to make it a business?”

What they’re really asking: “is there anything the law requires me to do if I’m making some money from my homesteading hobby?”

Let’s use a common example: I have one client who has a thriving beehive, a field of adorable miniature horses, and a beautiful cutting garden every summer.  She started out giving bouquets of flowers to friends and family. Eventually, they began asking if they could buy a bouquet here and there for their friends and family, and the little bit of money she made covered the costs of planting. Then, photographers started asking if they could bring clients out for some family photo sessions. 

At the same time, she was posting photos of her flowers and how-to videos for beekeeping. Now, she has a thriving instagram page, and brands have started reaching out to her. 

She’s not making a huge amount of money, but she could. Not only do brands want to sponsor her, but people are asking if they can buy honey or  learn to take care of bees with her. Photographers are routinely reaching out and asking if their clients can take photos with her ponies and flowers.

She’s not sure if she even wants to turn this hobby into a business, but she sees an opportunity to make some money. What does she need to do to legally protect herself, her family, and her homestead? 

Hobby or not, if you make money homesteading, you need to legally protect yourself and your homestead.

Here’s a step-by-step guide of how to begin:

First, incorporate your homesteading business 

If you’re making money from your homestead, it’s time to consider incorporating your homesteading business. 

This is really just a fancy way of saying that you may need to form an entity to protect your homestead. For example, an LLC, corporation, etc. 

Before we dive into this- one note: ask your accountant or lawyer what’s best for your business and your situation. We’re going to be talking about LLC’s, because that’s usually the best choice, but it’s important to know what works best for you. We dive deeper into this topic in our post, The Best Business Structure for Your Farm.

Is Your Homestead a Sole Proprietorship?

When you make even your first dime from your homestead, the law considers you a “sole proprietor” by default. If you’ve ever made a trade or a single penny from your property, you’re a “sole proprietor”.

Being a sole proprietor does not give you any protection at all. This is just the government’s label for someone making any income. It really doesn’t do a single thing for you

Why is this important? Being a sole proprietor means you have no legal separation between your business’ liabilities and assets, and your own. This means you could get sued for something on your homestead and have no legal separation or protection from your creditors. I’ll explain this more below, but basically, you would be held personally responsible for any accidents caused by anything on or from your homestead.

Fortunately, if you have an LLC, that’s not the case.

Form an LLC if you make money homesteading:

Your attorney will be able to tell you exactly what formation will be best for you, but start by asking about an LLC. An LLC is a legal entity that is completely separate from you personally. 

Think of it as forming two separate bubbles of protection around your personal assets and liabilities and your business assets and liabilities.

How does this play out in the real world?  Let’s use the example of my client who sells honey and flowers and has animals on her property. Let’s say that one day, someone who buys her honey has an allergic reaction to it. Or let’s say that she does allow people onto her property for photos, but someone wanders into the horse paddock, and gets stepped on. Though neither of these scenarios are my client’s fault, they could try to blame them on her.

Let’s make the scenario even worse and say that they decide to sue her, and a judge agrees that she did do something wrong (in other words, the judge renders a judgement). If my client is just a sole proprietor, she has to pay the judgement. Even if it’s more money than what she’s made from her homesteading, a judge will make her dip into her personal accounts to satisfy the judgment. In some extreme cases, this can mean she would have to liquidate her personal assets. In other words, my client’s retirement savings, house, or car could be on the line because of an accident that happened on her homestead.

On the flip side: If my client had an LLC and the judge had rendered the same judgment against her, the judge could only require her to “satisfy the judgement” through her business’ accounts. For example, if she only had a few thousand dollars in her business bank account, but someone sued her for $100,000, a judge could not force her to use her personal assets to pay the remainder. 

So, as you can see, an LLC (or other form of business entity) can provide critical separation for anyone who is running a business. Again, this even applies to those who are just now starting to make money homesteading.

For homesteaders, farmers, and ranchers, especially: your business and personal lives will most likely be naturally intertwined more than the average person. After all, this business is literally your home. It’s even more important that homesteaders, farmette owners, ranchers, etc., do not wait to form an LLC. It’s critical that you keep your home and business separate from a liability standpoint. 

At the end of the day, you do NOT want your family or your personal assets to be on the line for anything that could happen to your business. And the good news is, filing an LLC is cheap and easy! 

When do you need an LLC?

This is one of the most common questions I get in my law practice, and here’s my extremely honest answer: you need to form an LLC as soon as you’ve decided to make any kind of money from your land. It doesn’t matter if you aren’t calling it a business just yet. 

For example, are you selling:

• Flowers and plants?
• Small crop, such as eggs or honey?
• Animals, such as lambs or chicks?

You need to have an LLC. 

Here’s what I tell my own clients: an LLC is meant to protect you, so let it do just that. As a general rule of thumb, when you’re making the same amount of money as the filing fees in your state, it’s time to consider forming one. Beyond the legal benefit, your accountant can likely employ a tax strategy that uses an LLC status to your advantage as well. This is another important aspect of choosing an LLC: it gives you more flexibility in terms of choosing how to be taxed. For example, ask your accountant if you can save money by being taxed as an S-Corp.  

How much does it cost to form an LLC?

First, it’ll depend on your state. In some states, such as Oklahoma, it only costs $100 a year, whereas Texas charges $300. After that initial filing, you’ll likely have to pay a small amount in what the state calls your “annual certificates”- for example, in Oklahoma, that’s a $25/year charge.

 So, for my clients in Oklahoma, I tell them as a general rule of thumb to start considering an LLC once they have brought in just $100 of revenue. But honestly, that recommendation is only appropriate for people who aren’t sure if they want to have a business or not. If you know you want to make any sort of money from your homestead, you should form an LLC. 

Another note: if you’re  accepting any form of compensation from anything you’re selling or trading from your property,  (ie, beginning to teach riding lessons, board animals, sell animals, etc), those endeavors may fall outside your general liability homeowner’s policy, as they could be considered a “commercial enterprise”. I recommend the formation of a formal entity sooner for clients who make any form of money from owning property or animals than typical business clients, simply because the liability is automatically higher. 

How do you form an LLC for your homestead?

First and foremost, forming an LLC is one of simplest steps you can take, legally speaking. While we will always recommend that you have a lawyer assist you with anything legal, the process is pretty straightforward. We can (generally) break it down into 4 easy steps. Note, this may differ slightly in some states. 

Here are the steps you need to take to form an LLC:

1. File your Articles of Organization with your state’s Secretary of State’s office
   1. This is the series of questions your Secretary of State’s office will ask you when filling out your paperwork. The name makes it sound fancy, but really, they will just be asking for:
      1. Your business name
      2. Your principal place of business
      3. The duration of your LLC (perpetual, meaning it will continue until you shut it down, or not)
      4. Your registered agent (this is the person the state will send mail to on behalf of the LLC)
      5. Your registered agent’s address
      6. And a signature!

Once you fill out your articles of organization, you will usually receive the paperwork electronically. Now, you need to:

2. Get your EIN number
   1. Did you know that it’s illegal to sell goods and services in the US without an EIN number? This is essentially a business’ social security number. After you’ve filled out your Articles of Organization, go to irs.gov. Fill out the free form to get your EIN number. 
3. Get an Operating Agreement
   1. An operating agreement is basically the “contract” that will govern your LLC. They’re actually not required in every state, but most banks will require that you have one to open a business bank account. The operating agreement will set forth how distributions and losses are shared, how the LLC is managed and taxed, how members can sell or replace shares, etc. Are you unsure if you’re going to add new members to your business someday? Your operating agreement, if written correctly, will cover all of this. How can your LLC be dissolved, restructured, or “wound up”? The language that you use in your operating agreement is imperative. If your LLC is involved in litigation, the court will consider it an enforceable contract. You can find our operating agreement example here. 
   2. There’s another reason why an operating agreement is a must. It will protect you from something called “piercing the corporate veil” (PCV).  Single-member businesses are particularly prone to this mistake. You can find more information about PCV in the “business bank account chapter”. Your operating agreement should never be a simple, flimsy document. Like I said, not only is it a contract, but it’s the contract that governs your business. Choosing to have a lawyer draft this agreement can make the difference between running your business the way you actually want to, or letting a faulty document dictate your business.
4. Open a business bank account
5. The fourth step is quite simple: open a business bank account! You must have your business finances separate from your personal finances to truly have separate liability. We put this step last because your bank will ask for a copy of your operating agreement. 

If You Make Money Homesteading, Protect Your Business.

Even if your homestead business is more of a hobby, it’s important to legally protect you and your homestead. Incorporating your homestead as soon as you start to make money homesteading will protect you and your personal assets when accidents happen. It doesn’t have to be difficult or daunting to get your homestead business the proper legal protection. It will save money and heartache in the long run. Follow my easy steps to form your LLC so you can focus on the joy of making money from your homestead business.

Mentioned in this Post:

• The Complete Legal Guide to Homesteading
• How To Start Homesteading (Legally)
• The Best Business Structure for Your Farm

Read Next:

• The Complete Legal Guide to Homesteading
• The Horse Owner’s Complete Guide to Liability
• Equine Law: The Ultimate Guide