Choosing the Best Business Model for Today’s Farmers Market

By Juliette Enfield, Penn State Extension Educator, Warren Co

Many markets have rules and regulations for internal operations. While rules and regulations are important for setting guidelines for vendors at the market, they cannot be used when dealing with external business partners such as municipalities, businesses, or even customers.

According to the Penn State Center for Agricultural and Shale Law, more and more farmers markets are becoming legally incorporated in order to function in today’s business environment. Markets have had to become incorporated to comply with municipal ordinances, such as the requirement that all special events provide a certificate of insurance should someone get injured. Markets have also had to become incorporated in order to accept Electronic Benefits Transfer (EBT) cards at the market.

More and more farmers markets are becoming incorporated in order to function in today's business environment.

The days of informal farmers markets are no more. We are entering into an age, whether we like it or not, where liability protection is essential. Many farmers markets in Pennsylvania are not recognized as entities by the Department of State or the IRS, and therefore all liability rests on the farmers or small business owners themselves. There are two options for farmers markets seeking liability protection:

1.       Find an organization that is willing to umbrella the market

2.       Create a legal entity for the market

Designing a Business Model that Works for Your Market

Step 1: Register the organization with the Department of State

As with any business, farmers markets can have variety of different business structures. Some markets are owned by a single individual. In a sole proprietorship structure, the vendors pay their dues to the market owner in order to participate in the market. The market owner is responsible for all market activities and is personally invested in the market’s success. If there is no sole proprietor for a market, an existing business may be willing to umbrella the market, which means they assume full ownership and responsibility for the market. In this case, the market operates under the umbrella business’ name. This is a successful model if the existing business’ mission is in line with the farmers’ market mission, such as promoting healthy eating or supporting local farmers. If there is no sole proprietor, and no organization that would like to own the market, incorporation is the only other option. If a market chooses to incorporate, they must choose a board of directors (a minimum of three people) to manage the market. Incorporation also requires bylaws and articles of incorporation to be filed with the Department of State. A lawyer should be consulted for this process.

Step 2: Decide your tax status with the IRS

Depending on the structure that the farmers market chooses, a market may be a for-profit business or a non-profit business. Non-profit businesses have the option to file for tax exempt status with the IRS, which means that state and federal tax will not have to be paid on income or expenses. There are two types of tax exempt codes most commonly used by incorporated farmers’ markets- 501c3 and 501c4. A 501c3 organization must provide a benefit to the community such as providing education or benefiting a charitable cause. A 501c4 is an organization that is created for “social welfare”, meaning that the organization has come together for the benefit of its members. If a farmers market exists solely for the benefit of the individual vendors, and is not providing any education to the community or supporting a charitable cause, their activities reflect the activities of a 501c4. While both 501c3 and 501c4’s can accept donations to the organization, only the 501c3’s donations are tax deductible to the donor. Once the tax status has been obtained, the organization must file a 990 form-“Return of Organization Exempt from Tax” every year to declare their earnings, and they must keep meeting minutes on file. Since tax exempt organizations’ records are in view of the public, operations should be well recorded and transparent. The cost to file as a 501c3 or 501c4 is $400 if the gross receipts do not exceed $10,000 per year during the first four years of operations. If the market is a non-profit and is not generating much income (only generates a small amount of revenue from vendor dues), requesting 501c3 or 501c4 status may not be necessary.

501c3	501c4
Does not pay tax	Does not pay tax
Cannot lobby	Can lobby
Donations are tax deductible	Donations are not tax deductible
Must engage in charitable or educational activities	Does not have to engage in charitable or educational activities
Cost to obtain is $400 (if gross receipts do not exceed $10,000)	Cost to obtain is $400 (if gross receipts do not exceed $10,000)

 
Advantages of Structuring the Market

Structuring the market is becoming an obligation; however, it is not without its advantages. If the market becomes a non-profit, they are able to apply for a wide variety of grants. If the market is able to process EBT transactions, sales will increase, as will accessibility of the market goods to a larger percentage of the population. Forming a board or having a market owner could reinvigorate a market, bring in new ideas, and expand business connections in the community, all of which should lead to greater profitability for the market.



The new board of directors for the Warren County Farmers Market, Inc.
Photo courtesy Rob Andersen, Warren Times Observer

There is no one size fits all structure for Farmers Markets. The circumstances affecting each market in each community are varied. For further assistance or expertise when creating your legal structure, contact the Penn State Center for Agricultural and Shale Law. It is the lawyer’s job to think of all the potential problems that might arise in your new business structure, which will relieve the legal burden from you and allow you to focus on sales.

For more general information on non-profits, see my previous blog post An Agricultural Nonprofit Still Has to Make a Profit.

An Agricultural Nonprofit Still Has to Make a Profit

By Juliette Enfield, Penn State Extension Educator, Warren Co

A farm can provide benefits to a community that are not always easy to measure in economic terms. A farm can keep land in agricultural production, be used as a teaching tool or be used to grow food for charity. A for-profit farm may not have the capacity or time to focus on these types of educational or charitable activities. Quiet Creek Herb Farm and School for Country Living in Brookville, PA, Lundale Farm in Kimberton, PA, and The Rodale Institute in Kutztown, PA are a few examples of nonprofit agricultural organizations in Pennsylvania.  Quiet Creek Herb Farm and The Rodale Institute focus on agricultural and homesteading education through classes, publications, and research. Lundale Farm preserves farmland by leasing land to farmers.

A farm can be a valuable teaching tool.

What is a Nonprofit?
Churches, public schools, public clinics and hospitals, political organizations, research institutes, chambers of commerce, fraternal organizations, private foundations, museums, and public charities are all nonprofits. Nonprofits contribute to society by providing social and educational opportunities that we all enjoy. The most significant differences between a nonprofit organization and a for-profit business is that the nonprofit organization does not have to pay property tax, sales tax, or corporate income tax, and they have a charitable mission that drives the organization. The tax code used by nonprofit corporations is 501c3, which you may have heard of already. A typical for-profit business will pay the IRS taxes that amount to between 15-35% of their annual revenue. However, both nonprofits and for-profits have to earn enough revenue to cover their costs in order to function. Just like with any business, the nonprofit must fill a unique niche in order to earn its revenues, and should have a business plan. To determine whether or not your organization would fill a unique niche, research what other nonprofits in Pennsylvania are doing at www.guidestar.org .

The revenue made by a nonprofit organization is used for sustaining the organization and accomplishing its charitable mission, not for distribution to employees or shareholders. The only type of nonprofit organization structure that exists in Pennsylvania is a nonprofit corporation. Corporations have a unique structure that is very different from a sole proprietorship or a partnership. In contrast to sole proprietorships and partnerships, corporations allow business owners to claim the business’s assets instead of the owners’ personal assets if debt or legal issues arise. The state in which the corporation is created assumes some liability for the business and therefore, all finances of the corporation, including salaries, expenditures and revenues must be made publicly accessible. The nonprofit corporation can work with an accountant to keep detailed financial records which they must submit to the IRS and the Department of State every year. These agencies could take away tax exempt status if the nonprofit fails to file these records or if they are generating income that does not relate to their stated mission. In addition to having a sustainable business plan, nonprofit corporations are required to have a board of directors and a fundraising plan.

The Board of Directors
The board of directors must have a protocol for voting on operating procedures for the organization as well as a president, a treasurer, and a secretary. The operating procedures, or bylaws, are voted in and agreed upon by the board. A business attorney can help with the creation of the bylaws. The complexity of the bylaws is up to the organization but they can include rules such as board meeting procedures and roles of employees.  Board directors are either employees of the nonprofit or volunteers who share a passion for the organizations’ mission. The board is responsible for keeping the organization true to its mission, and it ensures that programs and plans are implemented. Although the board of directors is a mandatory part of a nonprofit, offering additional board memberships is optional. Additional members can help to steer the organization, offer diverse skill sets, and help with fundraising by paying membership dues. Board members have to be at least 18 years old and do not have to be residents of Pennsylvania. NOLO gives some great considerations for forming a board.


The board is responsible for keeping the organization true to its mission and it ensures that programs and plans are implemented.

Fundraising
Fundraising is an essential activity for nonprofits to engage in since revenues are low and accomplishing any mission costs money. Fundraising includes soliciting donations and applying for grants. Nonprofit organizations accept donations from businesses and individuals. These donations are tax-deductible for the donor, which is an incentive to donate. Many public and private grants are available for nonprofit organizations.  Since fundraising is an important part of a nonprofit organization, there should be a fundraising coordinator or grant writer on staff or on the board. For example, if the goal of your agricultural organization is education, you may need to seek grants that will cover the costs for school children to come to your farm. Penn State Extension offers grant writing workshops. Look online for dates and locations.

Although a nonprofit organization is mission driven and tax exempt, it has to be just as competitive as a for-profit business in order to succeed. Critical components of a nonprofit include a well thought out mission and business plan, a committed board of directors, a fundraising plan, an attorney and an accountant.

For more information on nonprofit management, The Pennsylvania Association of Nonprofit Organizations offers workshops, publications, and conferences. Additional questions about forming an agricultural nonprofit in Pennsylvania can be directed to the Penn State Agricultural Law Resource and Reference Center.