Do you know who owns your farm? This is a silly question, right? Many farmers and ranchers in your shoes thought the same thing. “I paid for it, I run it, I work on it, I own it.” Unfortunately, many operators are finding themselves facing hefty litigation expenses defending their own ownership rights in their business. Why?
Many of you operate single-member or closely held entities (limited liability companies, partnerships or corporations). Often in these entities, the record book is a little light (if one even exists), and there is not always proper documentation to prove ownership. The business does not have an operating agreement; there are no formal ownership certificates, and there is a lack of transparency of tax returns. Sometimes, ownership interests are even intentionally concealed to avoid ex-spouses, creditors or even the Internal Revenue Service.
The result? You lack proof of ownership. Many of these countless ownership disputes revolve around three common themes:
• A longtime hired hand or family member who has been working in the business was promised ownership and at some point takes that promise as a current ownership interest. Then, the hired hand or family member brings suit to enforce his or her interest upon the occurrence of a death or disability of the previous “sole” owner.
• A good faith purchaser buys the business from an owner upon the belief that he or she is purchasing all of the ownership interests in the business. However, a small (less than 10%) ownership interest is claimed by a distant relative or past employee based upon capital he or she supplied to the business many years ago, resulting in a dispute over whether the capital was a loan, an investment or a capital contribution in exchange for an ownership interest.
• A forgotten heir of a deceased owner may also lead to a dispute. Many estates fail to hire qualified representation, and the deceased’s ownership interest may not get passed appropriately and officially. After a period of time, the remaining owners of the business may forget about the “silent owners” as they are not working in the business on a day-to-day basis, but nonetheless are the legal heirs of a deceased member.
How do you avoid this ticking time bomb? If you have an entity, regardless if you are the sole owner or if there are multiple owners, you should work with a qualified business attorney to draft or update the operating agreement for your entity. Although operating agreements are not required by law to establish an entity, they are an essential tool to protect the owners and the entity. An operating agreement not only governs the internal management of the entity, the owners’ financial and managerial rights and duties, and what procedures to follow if there is a dispute, but it also is the foundational document that puts the directions on paper so there is not a “he said, she said” disagreement down the road. It defines how ownership is obtained and what qualifies as proof of ownership.
Further, your operating agreement provides additional support for the liability protection that you likely sought by forming the entity in the first place. If your business does not have an operating agreement, you will be at the mercy of the state’s default laws. Don’t wait for the explosion. It is your business; you should decide who owns it and how it is governed.