Most of our agricultural clients operate their farms through one or more limited liability companies. In basic terms, an LLC is a hybrid between a corporation and a partnership. As a hybrid entity, an LLC enables the members to have limited liability like a corporation and the more flexible management and ownership structure of a partnership. Generally, the members of an LLC do not have personal liability for the contractual, statutory or tort liabilities of the LLC.
Forming an LLC
An LLC is formed in Wisconsin by its organizers filing Articles of Organization with the Wisconsin Department of Financial Institutions. The Articles of Organization require the disclosure of the company’s name, registered address and agent; its management structure; and the names of the initial organizers of the LLC. Technically, filing Articles of Organization is all that is required to commence business operations as an LLC in Wisconsin. However, it is generally advisable and necessary for the LLC to take additional actions to be qualified to conducts its business and to comply with tax and other legal requirements.
The first recommended action is the adoption of a written operating agreement. Without a written operating agreement, the LLC operates under the default rules of Chapter 183 of the Wisconsin Statutes, which establishes each member’s rights, responsibilities and obligations. For agricultural clients, the default provisions of Chapter 183 do not reflect the management and ownership structure they envisioned when they decided to form the LLC. Therefore, our firm advises our agricultural clients that it is essential they adopt a written operating agreement to modify the default provisions to establish a clear and specific structure under which the company will be managed and owned.
Too often, people believe an LLC will guarantee them limited liability protection; however, it is not that simple. It is essential that the members take steps to preserve the LLC’s limited liability protection and avoid a “piercing of the corporate veil.” This generally occurs when a court disregards the limited liability protection of an LLC because the members did one of the following:
- failed to properly separate their personal and business transactions, funds and dealings
- failed to contribute sufficient capital to the LLC
- failed to observe corporate formalities
- failed to maintain corporate records
- entered into transactions at a time when the LLC was insolvent
- failed to use its legal name on contracts and business communications
To avoid a piercing of the corporate veil and ensure that clients maintain their limited liability protection, we advise our agricultural clients to do the following:
1. Financial matters. LLC members should establish a separate bank account for the LLC to maintain a separation of the LLC’s finances from personal finances. All income of the LLC should be deposited in the LLC’s accounts, and all expenses should be paid from its accounts. The personal expense of a member of the LLC should not under any circumstances be paid from the LLC’s financial accounts.
2. Written documents. All contracts, loan documents, agreements, deeds and other correspondence should be signed by a member, manager or agent of the LLC with the authority to execute such documents on behalf of the LLC and not in the personal name of the members of the LLC.
3. Notice of limited liability. When the LLC conducts business, the LLC should provide notice of its limited liability status and designation. Providing this notice informs third parties that they are transacting with a company that has liability protection and not with the members of the LLC in a personal capacity. The status of the company as an LLC should be clearly shown on all checks, stationary, purchase orders, invoices and bills, documents, agreements, and advertising materials.
4. Titling of assets. The personal property, real estate and other assets of the LLC should be titled the name of the LLC. The proper titling of assets provides separation between the assets of the LLC and the members of the LLC. Failure to properly title assets could place the personal assets of a member or members at stake.
5. Insurance. The LLC should obtain, in the name of the LLC, appropriate property, liability, worker’s compensation and other appropriate insurance to insure the assets and activities of the LLC. The LLC should obtain coverage for such assets and activities prior to the commencement of its business activities. In addition, each member of the LLC should consult with their insurance agent to ensure that the member has adequate personal liability protection since the LLC does not provide protection against claims relating to a member’s personal negligence for his or her own actions.
Mayer is a partner in the agricultural law firm of Twohig, Rietbrock, Schneider and Halbach. Call him at 920-849-4999.