Alpaca Business – Choosing a Business Form

When starting your alpaca business you need to determine what form of business ownership you should choose. There are 3 major types of ownership; Sole Proprietorship, Partnership, and Corporation. I will describe each of these forms to help you better understand which one to choose for your alpaca business.

Sole Proprietorship
As the name implies a sole proprietorship is a one man operation. 72% of all businesses in the US fall under this category and the account for $18 out of every 100 made. I know you’re thinking what? 72% and they only account for $18/100? Yes, sole proprietorship is the driving force of America but it’s all small business, people like you, me, your plumber, doctor, hair dresser, and taxi driver.

So why is a sole proprietorship so popular? Let’s check out some of the advantages and disadvantages of this form of business.

Advantages:

• Simple to start – just walk down to your county office and say hey there county clerk I want to start a business. They give you a form, ask for about $30 and poof, you’re a registered business. Finish it up with a visit to your local bank, open up a business account. Apply for an EIN for tax purposes and you’re rockin’ and rollin’.
• Simple to start means it’s LOW cost. The cost of your DBA (Doing Business As) is the only out of pocket expense you have to become a sole proprietor.
• Because the business will either succeed or fail based on you and your efforts there is a very strong profit incentive.
• The business owner has the freedom to manage how they see fit. You now are “the man” only you can put you down.
• Confidentiality – you only report to you, so anything you do is your business
• Tax Savings – can you say deductions?!
• For as easy as it is to start the business it is just as easy to terminate it. Decide that you no longer want to be in business, close the bank account, tell the county clerk to take you off the books and send an form to the IRS stating this is the last year you’re sending in your taxes. Poof, business has gone bye bye.

Disadvantages:

• Unlimited Liability – you are your business

o Your responsibility to pay into the business
o Your responsibility to pay the debt of the business
o Your responsibility for any claims against your business
o If your business is sued so are you and all of your personal assets

• Limited Size – small businesses stay small
• Limited access to capital – “What’s in your wallet?”
• Succession – Most businesses die when the founder dies
• Limited management talent, skills and time
• Lack of opportunities for good employees

Partnership:
A partnership is 2 or more people in business for profit. Typically most partnerships are less than 4 people. Partnerships account for 8% of all the businesses and account for $5 out of every 100. Partnerships require obtaining a business certificate and come in 6 different types.

Partnership Types

• General Partner – They assume liability along with you
• Limited Partner – They are limited only by their losses (what they put into the business)
• Silent Partner – Has no management voice
• Secret Partner – Private
• Dormant Partner – Both a secret and silent investor
• Nominal In Name only

All partnerships need an article of Partnership. Long story short, it’s a document which spells out how the partnership is split (50/50 or 60/40), duties, responsibilities, what the business is worth, insurance etc.

Advantages:

• Still easy to start
• More people equal more capital and credit opportunities
• Improved decision making – 2 heads can be better than one
• More tax advantages

Disadvantages

• Liability to all the partners
• Disagreement – you now have to pass things by your partner
• Continuity – Death: Uh oh, your partner died. Now what?
• Frozen Investment

Corporations:
Corporations are an association of people coming together for a common goal. Corporations are treated like a “human” and have the same constitutional rights as you and me. Corporations have a common stock (1share =ownership=1 vote) Corporations are required to produce annual reports, have meetings, minutes and can either be public or private in nature. They account for only 20% of all businesses but bring in $77 out of every 100!

There are several different corporation types but for the alpaca business owner only the LLC is worth discussing for our small business adventures.

LLC or Limited Liability Corporation is the choice of many farms both alpaca and other and here’s why.

Advantages

• Sole Ownership – You still can be a one man show.
• Limited Liability! – Folks can only sue what the farm owns! If your house is on the same land as your farm this is a big deal. Your LLC could own your livestock, barns, pastures etc but has no claim to your personal assets like your bank account or house.

Disadvantages

• To set this up you need lawyers which cost $$$
• Yearly fees to continue your LLC
• Must separate your finances from your business
• Separate Taxes
• More time consuming to kill

Well there you have it. I know the question will arise so what did I do? I personally chose sole proprietorship to start with. I liked the ease and cost to get started and to terminate it should I find 3-5 years down the road this adventure is not for me. The thought of someone coming onto my farm, hurting themselves and suing me for everything does scare the crap out of me though. To curb those fears I hold a rather large and irrational amount of liability insurance. But, I now don’t sound like a wicked old witch to kids who want to pet the pony or hug an alpaca. Should my alpaca business grow and become profitable I am considering becoming and LLC to further protect myself.

Be sure to visit our Overview Page for more information about starting your alpaca business.

Alpaca Business – Writing an Alpaca Business Plan

Most alpaca ranchers are not going to go to a bank and attempt to take out a loan to fund their initial alpaca herds.  So the type of alpaca business plan you’ll probably need is not as in depth as what a bank is looking for.  What I use my business plan for is to keep my spending, marketing, breeding, and sales on tract and I use 1 year, 2 year and 5 year goals in my plan. 

The biggest reason you should have an active business plan is in the off chance you are audited by the IRS.  Many alpaca ranchers run the fine line between running a farm for profit (business) and running a farm at a loss (hobby).  Don’t get me wrong, there is technically nothing wrong with running your farm at a loss and most of you will probably be in the red for 3-5 years after your starting your farm until your herd builds up and you are able to make your first sales. The trick is if the IRS audits you to make sure you are seriously running your farm and attempting to make a profit.  Having a business plan is step one in proving you are running a farm as a business.

Writing a business plan is going to take some time and some homework on your end.  However don’t let it scare you.  In the end you’re technically just interviewing yourself. 

Business Plan Outline – for self use not for banks

  • Purpose
    • Brief description of objectives
  • Description
    • Business Form: DBA, Partnership, LLC, Corporation etc
    • Type of Business: Retail, wholesale, manufacturing, service, etc
    • What is your product/service
    • When does your business open/start?
    • What have you learned from other businesses of similar type?
    • Why will your business be profitable?
    • What are your personal and business goals?
  • Product/Service
    • What are you selling? Seed stock, raw fiber, processed fiber, end products, boarding, shearing, training?
    • What benefits are you selling with your product/service
    • What makes your alpacas, products/services different from other farms?
  • Market
    • Who is your customer? Who will buy from you?
    • Is the alpaca market growing, steady or declining?
    • Is your share growing, steady or declining
    • Are you segmenting your markets? How?
    • Are the markets large enough for you to expand?
  • Competition
    • Write down your closest competitors (alpaca, sheep, goat, fiber farms)
    • Who are your indirect competitors  (Walmart, Joann Fabrics, Local yarn stores)
    • What have you learned about your competition’s advertisements?
  • Product Development
    • What products/services are you considering?
      • Huacaya, Suri, Both
      • Produce high quality seed stock or mid range?
      • Boarding, shearing, sorting, training services?
      • What are you going to do with the fiber?
        • Process yourself, mill, co-op, donate
      • Are you going to sell end products?
        • Made by you? Made in USA? Made in Peru?
      • Where are you selling finished products
        • Online, farm store, farm market, craft fairs
  • Marketing
    • How will you attract buyers?
      • If selling alpacas how will you get your name out to others?
        • Show alpacas, AlpacaNation, OpenHerd, AlpacaStreet, Other?
    • Print advertising? Online? eBay? Etsy? Road Sign?
    • What markets do you plan on entering?
    • How do you price your products/services?
      • Location Location Location!
      • Is your farm easy to get to?
      • How far do people have to travel to visit your farm store?
    • What kind of space do you need?
      • Barns, Pastures, Hay storage, Farm Store
      • How is your land zoned?
      • Do you have parking and wide enough driveway to accommodate traffic for a farm store or for trucks with gooseneck trailers for alpaca transport?
    • Other demographic/market shifts in your area
  • Sales Plan
    • Weekly, Monthly, Quarterly Sales goals
    • What other checkpoints do you have
      • # of cria born per year
      • If you own a stud # of outside breedings sold
      • How many alpacas do you want to board
      • How many head do you want to shear/sort
  • Personnel/Operations/Management
    • I combine these because chances are you are your only employee
    • What is your background/experience? What skills do you have?
    • What are your strengths and weaknesses?
    • What are your plans for training and education?
    • Clearly define your duties
    • What additional resources do you have? (Day job?)

I’ve tried to incorporate many of the alpaca specific questions you would need to ask yourself when writing up your business plan.  Do not expect to answer all of these questions immediately!  I will be going in to many of the headlines over the next few weeks to give you a better idea of how you go about collecting and computing the information needed in your plan. 

Click Here for the Overview and links to other articles

For more personalized help with your business plan stop by your local chamber of commerce, the business department at your local college or university or http://www.sba.gov