A limited liability company can be a great tool for managing and transferring a farm.
An LLC is a business structure with attributes similar to both a partnership and corporation. The LLC provides liability protection for the owners like a corporation and flow through taxation to the members like a partnership.
The following are some things to do and some things not to do when forming an LLC:
Don’t rely on the statutory rules to manage your LLC. Customize your operating agreement, buy sell agreement and resolutions.
Don’t automatically give every member the same voting and management rights. Decide whether to have all the members manage the farm or to have the members choose a manager to run the day to day operation.
Determine whether a member has voting rights. Voting rights can be limited to certain members. Sometimes, older members will retain voting rights while transferring non-voting interest to new farmers.
Don’t wait for a problem to decide how to handle it. Provide instructions for making decisions regarding the removal of members, bringing in new members, resolving disputes and dissolving the LLC.
Don’t wait until a member leaves the LLC to decide how their membership interest will be transferred.
Set rules in the operating agreement or the buy sell agreement saying how membership interest is transferred on death, disability, retirement, divorce and voluntary or involuntary removal:
- Who can interest be transferred to?
- If the member’s interest is to be sold what are the terms of the sale?
- How is the price determined?
- How will the sale be financed?
- How is disability determined?
- How long after disability must the interest be sold?
- Who will vote your interest on death or incapacity?
Don’t leave the LLC behind when running the operation. Follow the terms of the operating agreement, buy sell agreement and resolutions. Use call and waivers, minutes and resolutions to memorialize decisions. Title assets properly to the LLC.
Don’t jeopardize the limited liability protection. Follow the formalities of the LLC. Separate assets from high risk operations. Keep LLC finances separate from personal finances.
Don’t forget to choose your tax option. Choose between the options of being taxed as a disregarded entity (default for a single member LLC), a partnership (default for a multi-member LLC), a corporation or an S-Corporation. Each of these will fit best for certain circumstances. Talk with you tax consultant when making this election.
Balzarini is an attorney at law with Miller Legal Strategic Planning Centers, P.A. Contact him at email@example.com.