Many farms begin as a family operation; however, more farms should consider establishing a more formal business entity – the limited liability company, or LLC.
Attorney Rachel Armstrong, founder and executive director of Farm Commons in Duluth, MN, recently presented “Forming an LLC: The Basics” as a webinar for Food Animal Concerns Trust. Farm Commons specializes in agricultural legal issues with educational resources and leadership development.
According to a poll of attendees of the webinar, 52% operate as sole proprietorships, which Armstrong said is “very typical. But those interested in organizing are choosing an LLC.”
She clarified that sole proprietorships and partnerships differ as business structures. “The moment you start selling a product or selling a service, you’re a sole proprietor,” she said.
Technically, eight-year-olds selling lemonade at the end of the driveway are sole proprietors. But the moment a sole proprietor begins working with someone else in their business, a partnership is formed.
“Farmers have a long history of being organized as sole proprietorships and partnerships,” Armstrong said.
It often stems from a parent going into business with their children or siblings. But this kind of arrangement brings drawbacks. With sole proprietorship, “the owner’s personal assets are exposed to business liabilities,” Armstrong said. “If a successful judgement is filed against the owner, they can take the owner’s personal assets to satisfy the judgement.”
In the case of a partnership, that extends to the partner even if that person is not present. For example, if a farm partnership operates a hayride and a customer suffers an injury by falling off the wagon during a ride, the customer can sue both partners, including the partner who was gone for the day. The absent partner will have to pay to satisfy the judgement despite their lack of presence on the farm during the incident.
“Forty-five percent of farmers are organized as partners,” Armstrong said. “Some people don’t know the risk they’re exposed to. Some don’t see it as a deal breaker.”
Others think that their risk is low that someone will go after their personal assets. But for those who think this risk is unacceptable, the limited liability entities of the LLC and corporation offer protection of personal assets from business liabilities. If a customer sues, the farmer’s home, personal vehicle and other belongings are safe. Only the business assets are at risk.
“Most folks choose the LLC as it’s seen as more flexible,” Armstrong said. “It is more flexible in some very modest ways. Many farmers form corporations because their grandma did. And that’s fine too. You can obtain the same objectives.”
With an LLC, farms don’t need to appoint officers or have a governance document if there is more than one owner, although Armstrong advised that a governance document is still a good idea.
To protect business assets, farm businesses still need business insurance for protection. The LLC does not provide protection.
The rules for becoming an LLC vary somewhat by state, but in general, businesses must file Articles of Organization with their state-appointed entity.
“Articles of Organization is an official legal document,” Armstrong said. “Each article lays out a basic fact of how this business is organized, how it was brought together.”
The form may be completed at the Secretary of State’s website. This involves answering question such as the name of the business, where it is, what the business does and paying a fee.
Armstrong said that farmers must pick a business name that is completely unique. The name must include “LLC” or “Inc.” at the end, depending upon the type of business organization selected.
“I also highly recommend that you search the Secretary of State website and the internet,” Armstrong said. “Is anyone else using this name? Let’s say you don’t like the look of ‘LLC’ and it’s too long. What you’re supposed to do is register a trade name. ‘Doing business as’ or DBA is the same as a trade name.”
Farms that begin a new product line should have the full LLC name somewhere on the product, but they do not have to file for a new LLC name.
“Legally, you have multiple brands under that LLC,” Armstrong said. “I may want to shield the assets of one of my ventures from the debts and liabilities of everything else. If I move from wholesaling my milk to bottling, it comes with more liabilities.
“For distinct ventures, this is a common practice, but the law doesn’t require it. This can get very complicated.”
Legally, farms may register for an LLC or corporation with the same name as a farm registered in another state; however, for marketing purposes, it’s much better to have unique names, especially if their products will be or could be shipped elsewhere.
Many farmers struggle with separating their personal assets from their business assets. Living on the farm property makes it tougher to draw the line. “Your balance sheet is where this starts,” Armstrong said.
It’s also helpful to look at tax filings. Things claimed as business expenses are one example of business assets.
Businesses must also name a registered agent – the official person notified if the business becomes the target of a lawsuit.
“They have to deliver notice and must know where they must deliver notice,” Armstrong said. “The answer is they must tell my registered agent. It has to be a real person in a physical address, not a PO box. Oftentimes, it’s the owner at the place where they work. Most business owners want to be the ones notified. Some owners may not want that. They may not live in the state where they registered.”
If a farmer moves their business to a different state, they won’t have to move the LLC, but they do need to appoint a registered agent in the state where the LLC was filed. It could be a sibling or trusted friend who still lives in the state or a person hired to perform the duties.
The registration must list the owners of the business. Legally, they’re called “members,” which can be persons, citizens, non-citizens, entities or trusts. An informal family farm run by parents, siblings, aunts, uncles and cousins may not have clearly identified the owners. Is it the oldest? Is it the ones who performs the most on-farm labor? Or is it the one who does the most planning? What about family members who help seasonally? Are they all owners?
Gathering for a candid meeting can clear up who will be listed as owners. State laws vary on what types of farm structures are allowed for non-family members, so Armstrong advised seeking legal counsel on this – and about end-of-life planning to ensure that members of the LLC can plan succession for their portion of the farm’s ownership.