GRAND FORKS, N.D. - When many people think of corporations or limited liability companies, the family farm is the last thing that comes to mind. With good reason - farming is one of the last places where a good day’s work can be accomplished without suffocating under man-made rules. That’s not to say farming does not have its own set of regulations to wade through, of course. But, the essence of farming is still man working with nature to grow a crop from tillage through harvest.
As a threshold matter, many states have instituted so-called “anti-corporate farming” laws in their statutes and constitutions. The names of these laws are misleading. The essence of anti-corporate farming laws is that unrelated people cannot invest money in a commercial enterprise engaged primarily in agricultural production. Subject to certain limitations, the anti-corporate farming laws do not prevent the organization of corporations, limited liability companies, limited liability partnerships, or certain other entities, by family members within a certain degree of kinship.
If they have not already done so, family farms would be wise to explore the benefits offered by these different legal entity forms. Businesses form as a separate legal entity, primarily to reduce exposure to liability. Debts incurred solely in the name of the entity remain those of the entity itself. Owners of the company are liable only to the amount of their investment, and their personal assets cannot be reached by a creditor. Just as important for an occupation as dangerous farming, liabilities incurred in the regular operations of the entity lie with the entity, not its owners.
In the not-too-distant past, the only legal entity available that would provide the limited liability protections was a traditional C corporation. This limited liability came at a price. With a C corporation, income is taxed twice. The income is taxed first on the corporate tax return, and then again on the owner’s individual return when that income is distributed.
Fortunately, farmers and other business owners, now have better options. S corporations, limited liability companies, and limited liability partnerships, all provide traditional limited liability protection, with the benefit of single taxation. The income earned in these so-called “pass through” entities flows directly to their owners, and is only taxed a single time at the individual level. While there are nuances to each of these forms, this liability protection and single taxation scheme is common to all of these types of entities, and are very attractive attributes for a farming operation.
Organizing as a separate legal entity can also ease the transition in passing the farm from generation to generation. When a business entity such as a limited liability company owns the farm’s assets, there is a continuity of ownership that exists despite personnel changes resulting from retirement, death, or the addition of a new farmer to the operation. If planned properly, the tax and business benefits may be invaluable for the players involved.
While every farming operation is different, almost all will benefit from organization as a separate legal entity. A well-planned business entity will allow you to operate your farm in virtually the same manner as before, and enhances the experience by offering liability, tax, and continuity protections that a sole proprietorship simply lacks.
Editor’s note: Welte is an attorney with the Vogel Law Firm in Grand Forks, N.D., and a small grains farmer in Grand Forks County. Roesler is an associate attorney at Vogel Law Firm in Grand Forks.
