What Constitutes a Successful Farm Business?

Businesses play a crucial role in the economy by providing goods and/or services to customers. In return it generates revenue as to continue doing business. A business can be a for-profit entity focusing on generating revenue for its owners, or a non-profit organization aiming to serve a particular cause or community without the goal of financial gain. 

Joe Salatin, in his 1998 book You Can Farm, suggested the concept of developing a "centerpiece enterprise". It involves finding a primary income-generating activity that serves as the foundation for the entire operation.

Example: If you decide to focus on fresh mushroom production as your "centerpiece enterprise", then later you can consider adding complementary enterprises such as value-added products like dried or powdered mushrooms, agritourism activities like tours, or even educational workshops on sustainable farming practices.

According to Salatin, the following are criteria for determining a "centerpiece enterprise":

• Low initial start-up costs relative to the ability to generate income
• High gross-profit margin
• Relatively low maintenance requirements
• High cash flow relative to expenses
• History of high success rates among new enterprises
• High demand and low supply in the current marketplace
• High product distinctiveness
• Relatively size-neutral profit potential

By concentrating on developing and expanding your primary income-generating activity, you can avoid spreading yourself too thin across multiple enterprises and risking burnout or inefficiency. Additionally, having a "centerpiece enterprise" can create synergy and cohesion within your farm business.

Hobby or a Business?

It is not uncommon for a small hobby farm to develop into a business. For tax purposes, the IRS has a 9 part list to help you determine of your farm activities are considered a hobby or a business.

A business operates to make a profit. People engage in a hobby for sport or recreation, not to make a profit.

• Whether the activity is carried out in a businesslike manner and the taxpayer maintains complete and accurate books and records. 
• Whether the time and effort the taxpayer puts into the activity show they intend to make it profitable. 
• Whether they depend on income from the activity for their livelihood. 
• Whether any losses are due to circumstances beyond the taxpayer's control or are normal for the startup phase of their type of business. 
• Whether they change methods of operation to improve profitability. 
• Whether the taxpayer and their advisors have the knowledge needed to carry out the activity as a successful business. 
• Whether the taxpayer was successful in making a profit in similar activities in the past. 
• Whether the activity makes a profit in some years and how much profit it makes. 
• Whether the taxpayers can expect to make a future profit from the appreciation of the assets used in the activity.

What Should I Produce?

There are many enterprise possibilities for small acreage farms. Below is a list of the most common and a few questions to ask yourself about them.

Specialty Vegetable or Cut Flower Crops

Row or raised bed crop operation of higher profitability, seasonal vegetables, flowers, and/or herbs (usually offering varieties not commonly found locally).

Examples: Leafy greens, herbs, melons, beans, root crops, and fruiting vegetables. Daffodils, roses, lilies, sunflowers, dahlias, sweet pea flowers.

Small Livestock and Poultry

Raising animals is appealing to many small acreage owners. Although small farms have some limitations, there are many feasible livestock enterprises.

Examples: Cattle, hogs, beef, goat, and poultry meat for milk, fiber or egg production.

Additionally, specialty animal species enterprises exist, such as calf, sheep, goat or chicken pet breading, honeybees, or quail products.

Fruit and/or Nut Orchard

Perennial and biannual crops are a popular enterprise choice. Many of these types of business become an agrotourism location or a you-pick farm opening up to the public.

Example: Peaches, figs, oranges, lemons, strawberries, blueberries, grapes, walnuts, pistachios, and many more.

Nursery Crops (Horticulture)

Most nursery production systems include open-area potted production, high tunnels and greenhouses or other controlled environment agriculture.

Examples: Landscape trees and shrubs, fruiting trees or bushes, nut trees, flowering plants, indoor plants, cactuses and succulents, vegetables and herbs.

Value-Added Products

An operations that converts a raw item into a product to make it more valuable. Sometimes an enterprise may have an existing lower revenue generating agricultural product where the products can be processed into a higher revenue generating value-added product.

Example: Fruit jams, picked vegetables, cheese, sausages, flour.

Fungiculture

Aka, specialty mushrooms. This is a category all on its own, for it's a unique type of agriculture that involves specific growing conditions and techniques. The goal of mushroom farming is to grow fungi for food or medicinal use.

Choosing a Legal Structure

One of the crucial decisions you'll have to make is choosing the right legal structure for your operation. Each type of business structure has its own set of pros and cons that can significantly impact your farm's operations, taxes, liability, and overall success.

This is a list of the most common types of business legal structures an owner can choose:

Sole Proprietorship

Partnership

Corporation

S Corporation

Limited Liability Company

Nonprofit

Cooperative

ATTRA created a document "Tips about: Farm Business Structures" that discusses Advantages and Considerations for each of these structures.

Dive Deeper Resources:

ATTRA Tips about: Farm Business Structures https://attra.ncat.org/publication/tips-about-farm-business-structures/

WSU Extension, Business Structured for Small Farms: A Quick Guide: https://s3.wp.wsu.edu/uploads/sites/2073/2019/01/Business-Structure-For-Small-Farms_A-Quick-Guide.pdf

IRS Tax Information for Businesses: https://www.irs.gov/businesses

Gislason & Hunter Law, Choosing a Business Structure for your Family Farm: https://www.gislason.com/choosing-a-business-structure-for-your-family-farm/

U.S Small Business Administration, Chose a Business Structure: https://www.sba.gov/business-guide/launch-your-business/choose-business-structure

Extension University of Missouri, Small Acreage Business Planning in Missouri: https://extension.missouri.edu/publications/g411

Sources:

Internal Revenue Services, https://www.irs.gov/

IRS Tax Tip 2020-108, August 25, 2020, https://www.irs.gov/newsroom/earning-side-income-is-it-a-hobby-or-a-business

Joe Salatin, You Can Farm, 1998.