Should I Start an LLC for My Irrigation Business?

LLCs are a simple and inexpensive way to protect your personal assets and save money on taxes.

You should form an LLC when there's any risk involved in your business and/or when your business could benefit from tax options and increased credibility.

LLC Benefits for an Irrigation Business

By starting an LLC for your irrigation business, you can:

• Protect your savings, car, and house with limited liability protection
• Have more tax benefits and options
• Increase your business’s credibility

Limited Liability Protection

LLCs provide limited liability protection. This means your personal assets (e.g., car, house, bank account) are protected in the event your business is sued or if it defaults on a debt.

Irrigation businesses will benefit from liability protection because of the risk of lawsuits related to personal injuries and property damage, among other things. 

Example 1: Your irrigation company is sued by a farmer who alleges you have not fulfilled the terms of the contract. If his suit is successful, he can only recover from business assets. Your personal assets would be protected from his legal action. 

Example 2: Your irrigation company is unable to keep up with the payments on an equipment loan. The bank threatens to take you to court. If it does, you can be sure it cannot go after your personal assets. 

Example 3: You close your irrigation business because you are retiring. But, your LLC does not own assets enough to pay off all creditors in full. Even if you have adequate personal assets, the creditors will not be able to go after them to clear the debts. Your personal assets are protected by the limited liability status of the LLC. 

Example 4: Your employees accidentally install a client’s irrigation system improperly, causing their yard to become waterlogged. The client sues your business for the damages.

An LLC will also protect your personal assets in the event of commercial bankruptcy or loan default.

To maintain your LLC's limited liability protection, you must maintain your LLC's corporate veil.

LLC Tax Benefits and Options for an Irrigation Business

LLCs, by default, are taxed as a pass-through entity, just like a sole proprietorship or partnership. This means that the business's net income passes through to the owner's individual tax return. 

The business’s net income is then subject to income taxes (based on the owner's tax bracket) and self-employment taxes.

Sole proprietorships and partnerships are taxed in a similar way to LLCs, but they do not offer limited liability protection or other tax options.

S Corp Option for LLCs

An S corporation (S corp) is an IRS tax status that an LLC can elect. S corp status allows business owners to be treated as employees of the business (for tax purposes).

S corp tax status can reduce self-employment taxes and will allow business owners to contribute pre-tax dollars to 401k or health insurance premiums.

The S corp status requires that the business pay the employee-owner(s) a reasonable salary for the work they perform. 

In addition, the business might need to spend more on accounting, bookkeeping, and payroll services. To offset these costs, you'd need to be saving about $2,000 a year on taxes.

We estimate that if an irrigation business owner can pay themselves a reasonable salary and at least $10,000 in distributions each year, they could benefit from S corp status.

You can start an S corp when you form your LLC. Our How to Start an S Corp guide will lead you through the process.

Credibility and Consumer Trust

Irrigation businesses rely on consumer trust. Credibility plays a key role in creating and maintaining any business.

Businesses gain consumer trust simply by forming an LLC.

A growing business can also benefit from the credibility of an LLC when applying for small business loans, grants, and credit.

Forming an LLC is easy. There are two options for forming your LLC:

• You can hire a professional LLC formation service to set up your LLC for a small fee
• Or, you can choose your state from the list below to start an LLC yourself

Select Your State

For most new business owners, the best state to form an LLC in is the state where you live and where you plan to conduct your business.

All businesses need insurance to protect their business assets — even LLCs. This is because the limited liability protection from an LLC protects your personal assets, not your business assets.

Irrigation companies should carry liability insurance to cover damage to their equipment. Such insurance also protects buildings, personal injury, and a host of other miscellaneous costs.

Common Situations Business Insurance May Cover for an Irrigation Company

Example 1: While your crew digs a trench, the client steps in the hole and breaks an ankle. General liability insurance would cover the cost of his medical treatment.

Example 2: The work you completed at a client’s business creates drainage issues, causing property damage to his building as well as to his neighbor’s building. Both sue you for the cost of repairs and lost revenue while they resolved the drainage issues. General liability insurance would pay for your legal fees and any court-awarded damages.

Example 3: Your new marketing campaign implies the other irrigation businesses in town don’t provide quality work. Several of your competitors file lawsuits against you, claiming their business suffered as a result. General liability insurance would cover your legal defense costs and any court-awarded damages. 

Other Types of Coverage irrigation Businesses Need

While general liability is the most important type of insurance to have, there are several other forms of coverage you should be aware of. Below are some other types of insurance all irrigation companies should obtain.

Commercial Auto Insurance

Since you will be driving your truck on public roadways, you are mandated by the state to carry a commercial auto policy. Auto insurance protects not only your vehicle but any liability you may have in an accident. Your personal car insurance will not cover you if you are driving the company truck, even if you are off duty.

Commercial Property Insurance

If you own your location instead of renting, you need commercial property insurance to protect the building. If your business is based out of your home, your homeowners' insurance will not cover the home when it is being used for commercial purposes. Property insurance also covers items owned by your business.

Irrigation companies invest heavily in the equipment that is used to complete their work. Be sure that you have enough coverage to replace all of your tools in the case of a loss. This coverage is generally offered in a Business Owner Policy (BOP).

In addition to the policies outlined above, there are a few other types of coverage your irrigation company may require depending on certain aspects of your operations. Some of these might not apply to you, so be sure to ask your agent which policies are right for your business.

Workers' Compensation Insurance

If your irrigation company has any employees (full-time or part-time), you are legally required to carry workers’ compensation insurance. This type of coverage will help compensate your employees in the case that they get injured on the job.

Read more about workers’ compensation insurance.

Business Interruption Insurance

In the event of a fire, flood, or other catastrophes, there is a good chance your business operations will be halted for some time. Business interruption coverage is designed to help you recoup a portion of the revenue your business would lose due to the inability to operate.

This type of insurance is typically included in a business owner’s policy.

Commercial Umbrella Insurance

Umbrella coverage allows you to extend above and beyond the standard limits of your other business insurance policies. If you are faced with a large lawsuit or other claim situation, there’s a possibility that the coverage limits of your standard policies will be insufficient. In this case, your umbrella policy will allow you to surpass these limits.

IRS: Limited Liability Company

IRS: S Corporations

IRS: EIN

SBA: Small Business Guide

SBA: Choose a Business Structure Guide

US Census Bureau: Small Business Statistics

SBA Office of Advocacy: Data on Small Business

FRED: SBA Data for Small Business