January 31, 2022
You might be among the farm families who formed a business entity such as a partnership, limited partnership, corporation or limited liability company. Having an entity as the active farmer while you individually (or in your living trust) own your real estate can create an opportunity for some income tax savings.
The farm operation in an entity sometimes provides a way to incrementally transfer it to a successor by giving a small percentage of ownership each year. Having your land in an entity, preferably an LLC, might reduce the taxable value of your estate.
The most common reason for forming a corporation or LLC is to reduce your risk of a lawsuit, but does it work?
We’ll look at an LLC, but know practically all the same rules apply to corporations. By contrast, limited partnerships and partnerships provide little to no protection along these lines.
If you make a mistake driving equipment and you injure someone, you are liable. You, the driver, get sued for the injuries you caused. If you form an LLC for your business, this basic fact does not change. Even in business, if you are the person driving and cause an injury, you still personally get sued. Everything you own is still at risk: your business, your farm, your home.
An LLC does not protect you from your own mistakes. The lawsuit protection comes if you have employees, and they cause injuries. Without knowing the Latin legal term “respondeat superior,” you might have heard what it means: an employer (superior or master) is responsible for the actions of his employee. If you, with no business entity, have an employee who causes an accident and injures people, you are liable for the actions of your employee.
Cue the LLC.
You form the LLC for the business. You own the LLC, but the LLC owns the equipment and hires the driver. Now who is the employer of the driver if he causes the accident? The LLC. The LLC as employer (superior or master) gets sued. All the assets of the LLC could be lost; the LLC could even go bankrupt. But you as owner of the LLC are not personally sued, and your assets held outside the LLC are protected.
Operate with integrity
But it’s not just having an LLC that provides this protection. An LLC works because the law treats it as a separate person. The LLC is not you, even though you are the owner — it’s separate and distinct from you. This distinction must be clear, which means you must operate your LLC with internal and external integrity.
Internal integrity means the LLC functions from the inside as an organization, not merely as you with a different name. An LLC is operated by its managers. I recommend the LLC have at least two managers. Even better, have at least two owners, even if it is only a small percentage held by your spouse, son or daughter. This supports the idea this is an organization, not just one person acting with a different name.
Once you see it as an organization, then it makes sense to create some record that decisions are made with input from more than just you. The record is minutes of a meeting. The more minutes you accumulate over the years, the more proof there is that this LLC truly is a separate person under the law.
External integrity means an outsider knows they’re doing business with your LLC and not with you. The customer, elevator, landlord or supplier knows they are buying from, leasing to, or selling to your LLC. They need to know they are doing business with the LLC and not you. This is achieved by assuring all paperwork involved identifies the LLC as the party involved. Where signatures are required, a manager must sign for the LLC. It’s not hard and should be done consistently. The paperwork says the seller, tenant or customer is the LLC, and the signature line should clearly identify you as the manager.
If you don’t operate your LLC as something truly distinct from you, you can’t expect the courts to recognize it as distinct from you. You won’t be able to hide behind an LLC if you don’t operate it with integrity.
Ferguson owns The Estate Planning Center in Salem, Ill. Learn more at thefarmersestateplanningattorneys.com. The opinions of this writer are not necessarily those of Farm Progress/Informa.
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