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February 6, 2024
Most farms operate as either a corporation, signified by “Inc.” in their name, or a limited liability company. More and more, farms elect to do business as an LLC because the formation and reporting requirements are significantly less cumbersome, and LLCs have more flexibility when it comes to income tax considerations.
One unique feature of an LLC is that it can be governed by its members (owners), or it can be governed by one or more managers. An LLC governed by its members is called a “member-managed” LLC, while an LLC governed by one or more managers is called a “manager-managed” LLC. This begs the question: For manager-managed LLCs, who is the manager?
Farms frequently employ a number of managers. For instance, a dairy may have a dairy herd manager, a crop manager, a young stock manager or a personnel manager. A large dairy may have all of these, and more. But are these individuals considered a “manager” under LLC law? The answer — like all things legal — is: It depends.
Under most state LLC laws, a “manager” for an LLC is someone who is appointed by a majority of the members (owners) to serve in a legal position of control over the company. Specifically, the law provides:
Any matter relating to the activities and affairs of the company is decided exclusively by the manager, or, if there is more than one manager, by a majority of the managers.
Each manager has equal rights in the management and conduct of the company’s activities and affairs.
In short, if an LLC is manager-managed, the managers call the day-to-day shots, while the members remain relatively uninvolved in these decisions. In fact, most state LLC laws leave very little to the members to decide if the company is manager-managed.
Thus, turning back to the question of who is a manager: Farm owners must be mindful that the term has a very distinct legal meeting under most LLC statutes. In most LLC statutes, a manager of an LLC is someone who has been legally appointed to make decisions to bind the LLC and, in most cases, has the final say on business matters — even over the objection of an owner.
Certainly, it is possible for an LLC to have a “legal manager” while separately having one or more “operational managers” — individuals who are employed to handle key functions, but who lack legal authority to bind the company.
Who cares, you may ask ?
Believe it or not, the conundrum of legal manager vs. operational manager can create significant problems for farm owners. For instance, say you employ a crop manager who decides to sign a lease for additional cropland, but did not have the authority to sign such a lease. Because this crop manager held himself out to the landowner as a “manager” of the LLC, that lease would arguably be binding on your company, even though you never intended for him to enter into the lease.
Thus, it is imperative for members of an LLC to make a clear and unambiguous decision as to how they want their company to be managed. Do you want the member-owners to make the day-to-day decisions, or do you want one or more individuals to serve as a “manager” to make the day-to-day decisions? Once the management path is selected, then it is important that the company has a well-written, customized operating agreement dictating the roles of the members and, if applicable, the manager(s).
Farm owners are further encouraged to refrain from giving their employees the title of “manager,” where possible. Instead, using terms like “dairy herd supervisor,” “crop director” and “young stock coordinator” can convey a sense of title and authority without creating confusion with the legal term “manager.”
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