I’ve been asked recently by a number of farmers about whether they should form a Limited Liability Company (LLC) for their farm. There are a variety of reasons for this question, and, because each farm and situation is unique, it’s impossible to give a blanket answer.
Is it the right thing for every farm and family? Maybe not, but forming an LLC may be an alternative some farm families want to consider.
Barry Ward, Ohio State University Extension specialist and leader of Production Business Management, and Robert Moore, attorney with Wright Law Company, have developed an OSU Extension Fact Sheet called Starting, Organizing, and Managing an LLC for a Farm Business.
This fact sheet describes LLCs in great detail.
What is an LLC?
An LLC is a Limited Liability Company that is a legal entity created by Ohio statute. An LLC is considered to be a “person,” separate and distinct from its owner(s). LLC owners are known as members and can range in number from one to an unlimited number of owners.
Why an LLC?
A few of the reasons for forming an LLC include: An operating entity from which to run the business; liability protection for the owners of the LLC; An estate planning and tax management tool; an option to hold real estate; and a tool to use for succession planning.
Attributes of an LLC:
• Informal Organization — Ohio law allows LLC members to determine what management structure the company will have. Members can choose between a corporation or partnership.
• Flexible Tax Structure – owners can elect the desired status for federal tax classification.
• No Restriction on Ownership — there must be at least one, but there is no limit on the maximum number of members. Other LLCs, trusts, and estates may be members.
• Allocation and Distribution of Earnings – may be in different proportion than capital contributions.
Disadvantages of an LLC:
Liability Veil Piercing — Corporations are subject to a concept called veil piercing where the limited liability of the shareholders is challenged. A person cannot use a corporation to commit fraud, have complete control over the corporation that the corporation has no separate existence, or cause injury or unjust loss from the shareholder’s wrong.
If one of these exists, the court may declare the corporation and shareholder(s) are one and the same, or otherwise pierce the liability protection of the corporation. If this occurs, the shareholder(s) will have full liability for debt and acts of the corporation.
LLC liability protection is based on corporate liability protection. Therefore, the concept of veil piercing would apply to LLCs as well. A properly formed and managed LLC will have very little chance of having its limited liability shield pierced. Additional Costs – There are several costs associated with forming an LLC. These costs include a filing fee with the Ohio Secretary of State, attorney, and accountant fees.
Legal Requirements. A business does not become a valid LLC until it is registered with the Ohio Secretary of State. This is an easy process to complete that involves declaring a name and statutory agent for the LLC. The statutory agent essentially is the contact person for the LLC. The statutory agent does not have to be a member of the LLC, but must reside in the state where the LLC is being formed.
In many cases the LLCs attorney serves in this role.
Employer Identification Number
The EIN is to a business what a Social Security Number is to an individual. Except those with only one owner, all LLCs must apply for an EIN. The Operating Agreement is basically the same as bylaws for a corporation or an agreement in a partnership.
It is simply an agreement among the members that governs the operating and management aspects of the LLC. While not required by Ohio law, such an agreement is highly recommended.
There are a variety of ways an LLC can be structured. Options include centralized management (most common); member managed; and managing member. Each of these should be carefully evaluated so that the most appropriate one is chosen.
Creating an LLC for your farm business may be a wise thing to consider. However, there are a number of factors to consider before doing so. Several of these were addressed in this article, but there are many more that individuals and families must consider.
If you have an interest in forming an LLC it is highly recommended you meet with an attorney familiar with business law, especially farm business issues, and an accountant. For additional information, see Ohio State University Extension Fact Sheet, Starting, Organizing, and Managing an LLC for a Farm Business, available online or from your local Extension office.