Business and Financial
Barry Ward, F. John Barker, Eric Richer - Ohio State University Extension
Farming is a complex business and many Ohio farmers utilize outside assistance for specific farm-related work. This option is appealing for tasks requiring specialized equipment or technical expertise. Often, having someone else with specialized tools perform tasks is more cost effective and saves time. Farm work completed by others is often referred to as “custom farm work” or more simply, “custom work”. A “custom rate” is the amount agreed upon by both parties to be paid by the custom work customer to the custom work provider.
Ohio Farm Custom Rates
The “Ohio Farm Custom Rates 2022” publication reports custom rates based on a statewide survey of 223 farmers, custom operators, farm managers, and landowners conducted in 2022. These rates, except where noted, include the implement and tractor if required, all variable machinery costs such as fuel, oil, lube, twine, etc., and labor for the operation.
Some custom rates published in this study vary widely, possibly influenced by:
- Type or size of equipment used (e.g. 20-shank chisel plow versus a 9-shank)
- Size and shape of fields,
- Condition of the crop (for harvesting operations)
- Skill level of labor
- Amount of labor needed in relation to the equipment capabilities
- Cost margin differences for full-time custom operators compared to farmers supplementing current income
Some custom rates reflect discounted rates as the parties involved have family or community relationships, Discounted rates may also occur when the custom work provider is attempting to strengthen a relationship to help secure the custom farmed land in a future purchase, cash rental or other rental agreement. Some providers charge differently because they are simply attempting to spread their fixed costs over more acreage to decrease fixed costs per acre and are willing to forgo complete cost recovery.
New this year, the number of responses for each operation has been added to the data presented. In cases where there were too few responses to statistically analyze, summary statistics are not presented.
Charges may be added if the custom provider considers a job abnormal such as distance from the operator’s base location, difficulty of terrain, amount of product or labor involved with the operation, or other special requirements of the custom work customer.
The data from this survey are intended to show a representative farming industry cost for specified machines and operations in Ohio. As a custom farm work provider, the average rates reported in this publication may not cover your total costs for performing the custom service. As a customer, you may not be able to hire a custom service for the average rate published in this factsheet.
It is recommended that you calculate your own costs carefully before determining the custom rate to charge or pay. It may be helpful to compare the custom rates reported in this fact sheet with machinery costs calculated by economic engineering models available online. The following resources are available to help you calculate and consider the total costs of performing a given machinery operation.
Farm Machinery Cost Estimates, available by searching University of Minnesota.
Illinois Farm Management Handbook, available by searching University of Illinois farmdoc.
Estimating Farm Machinery Costs, available by searching Iowa State University agriculture decision maker and machinery management.
Fuel price changes may cause some uncertainty in setting a custom rate. Significant volatility in diesel price over the last several months has caused some concern for custom rate providers that seek to cover all or most of the costs associated with custom farm operations. The approximate price of diesel fuel during the survey period ranged from $4.50 - $5.25 per gallon for off-road (farm) usage. As a custom farm work provider, if you feel that your rate doesn’t capture your full costs due to fuel price increases you might consider a custom rate increase or fuel surcharge based on the increase in fuel costs.
For example, let’s assume the rate you planned to charge for a chisel plow operation was based on $4.50 per gallon diesel costs and the current on-farm diesel price is $5.50 per gallon. This is a $1 per gallon increase. The chisel plow operation uses 1.15 gallons of fuel per acre so the added fuel surcharge could be set at $1.15 per acre (1.15 gallons x $1 gallon).
The complete “Ohio Farm Custom Rates 2022” publication is available at: https://farmoffice.osu.edu/farm-management/custom-rates-and-machinery-costs
Do you worry about the possibility of long-term care needs and how those needs might affect your farming operation or family farmland? We'll examine that issue in an upcoming webinar for the National Agricultural Law Center. Join OSU Attorney and Research Specialist Robert Moore for the webinar, "Long-Term Care Impacts on Farming Operations."
Long-term care costs can be a significant threat to family farming operations. Nursing homes can cost around $100,000 per year, an expense that some farms cannot absorb while remaining viable. That's why many farmers believe long-term care will force the sale of farm assets, including farmland. But statistics and data indicate that, on average, this may not the case and that the average farmer can likely absorb the costs of long-term care. However, few farms can withstand the outlier scenario: where many years are spent in a long-term care facility.
In this webinar, Robert Moore will explore the costs and likelihood of needing long-term care. Using this data, he will analyze normal scenarios and the dreaded outlier scenarios of long stays in nursing homes. By understanding the actual risks of long-term care costs, we can better understand and assess strategies that can mitigate long-term care risks. Robert will review several strategies attorneys can use to lessen the exposure of farm assets to long-term care costs.
The National Agricultural Law Center (NALC) will host the webinar at noon on July 20. OSU's Agricultural & Resource Law Program is a research partner of NALC, and Robert's work is the result of funding provided by the USDA National Agricultural Library through our partnership with NALC.
There is no fee for the event, but registration is required. Register at https://nationalaglawcenter.org/webinars/longtermcare/.
Tags: long-term care, Estate Planning, nursing home costs
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It's time for another roundup of legal questions we've been receiving in the Agricultural & Resource Law Program. Our sampling this month includes registering a business, starting a butchery, noxious weed liability in a farm lease situation, promoting local craft beer at a farmers market, herd share agreements, and agritourism's exemption from zoning. Read on to hear the answers to these questions from across the state.
I want to name my farm business but am not an LLC or corporation. Do I have to register the name I want to use for the business?
Yes, if your business name won’t be your personal name and even if the business is not a formally organized entity such as an LLC. You must register the business with the Ohio Secretary of State. First, make sure the name you want to use is not already registered by another business. Check the name availability using the Secretary of State’s business name search tool at https://businesssearch.ohiosos.gov/. If the name is available, register the name with the Secretary of State using the form at https://www.sos.state.oh.us/businesses/filing-forms--fee-schedule/#name. If there is already a business registered with the name you want to use, you might be able to register a similar name if your proposed name is “distinguishable” from the registered name. The Secretary of State reviews names to make sure they are not already registered and are distinguishable from similar names. See the Guide to Name Availability page for examples of when names are or are not distinguishable from one another.
I am interested in starting a small butchery. What resources and information are helpful for beginning this endeavor?
There are legal issues associated with beginning a meat processing operation, and there are also feasibility issues to first consider. A good resource for initial considerations to make for starting a meat processing business is this toolkit from OSU at https://meatsci.osu.edu/programs/meat-processing-business-toolkit. A similar resource that targets niche meat marketers is at https://www.nichemeatprocessing.org/get-started/. On the legal side, requirements vary depending on whether you will only process meat as a custom operator or fully inspected operator, and if you also want to sell the meat through your own meat market. The Ohio Department of Agriculture’s Division of Meat Inspection has licensing information for different types of processors here: https://agri.ohio.gov/divisions/meat-inspection/home. If you also want to have a retail meat market, you’ll need a retail food establishment (RFE) license from your local health department. To help you with that process, it’s likely that your health department will have a food facility plan review resource like this one from the Putnam County Health Department.
Is Ohio’s noxious weeds law enforceable against the tenant operator of my farm, or just against me as the landowner?
Ohio’s noxious weed law states that the township trustees, upon receiving written information that noxious weeds are on land in their township, must notify the “owner, lessee, agent, or tenant having charge of the land.” This language means that the trustees are to notify a tenant operator if the operator is the one who is in charge of the land where the noxious weeds exist. The law then requires the notified party –which should be the tenant operator—to cut or destroy the noxious weeds within five days or show why there is no need to do so. The concern with a rental situation like yours is that if the tenant does not destroy the weeds in five days, the law requires the township to hire someone to do so and assess the costs of removal as a lien on the land. This puts you as the landowner at risk of financial responsibility for the lien and would require you to seek recourse against the tenant operator if you want to recover those costs. Another option is to take care of removing the noxious weeds yourself, but that could possibly expose you to a claim of crop damages from the tenant operator. A written farm lease can address this situation by clearing shifting the responsibility for noxious weeds in the crop to the tenant operator and stating how to deal with crop damages if the landowner must step in and destroy the noxious weeds.
Can we promote local craft beers at our farmers market?
Ohio established a new “F-11” permit in H.B. 674 last year. The F-11 is a temporary permit that allows a qualifying non-profit organization to organize and conduct an event that introduces, showcases, or promotes Ohio craft beers that are sold at the event. There are restrictions on how long the event can last, how much beer can be sold, who can participate in the event, and requirements that food must also be sold at the event. The permit is $60 per day for up to 3 days. Learn more about the permit on the Department of Commerce website at https://com.ohio.gov/divisions-and-programs/liquor-control/new-permit-info/guides-and-resources/permit-class-types.
Can a goat herdsman legally provide goat milk through a herd share agreement program?
Herd share agreements raise the raw milk controversy and whether it’s legal or safe to sell or consume raw milk. Ohio statutory law does clearly prohibit the sales of raw milk to an “ultimate consumer” in ORC 971.04, on the basis that raw milk poses a food safety risk to consumers. But the law does not prohibit animal owners from consuming raw milk from their own animals. A herd share agreement sells ownership in an animal, rather than selling the raw milk from the animal. Under the agreement, a person who pays the producer for a share of ownership in the animal may take their share of milk from the animal. The Ohio Department of Agriculture challenged the use of herd share agreements as illegal in the 2006 case of Schitmeyer v. ODA, but the court did not uphold the ODA’s attempt to revoke the license of the dairy that was using herd share agreements. As a result, it appears that the herd share agreement approach for raw milk sales is currently legally acceptable. But many still claim that raw milk consumption is risky because the lack of pasteurization can allow harmful bacteria to exist in the milk.
Can the township prohibit me from having a farm animal petting zoo on my hay farm?
It depends whether you qualify for the “agritourism exemption” granted in Ohio law. The agritourism exemption states that a county or township can’t use its zoning authority to prohibit “agritourism,” although it may have same zoning regulations that affect agritourism buildings, parking lots, and access to and from the property. “Agritourism” is an agriculturally related entertainment, recreational, cultural, educational or historical activity that takes place on a working farm where a certain amount of commercial agricultural production is also taking place. If you have more than ten acres in commercial production, like growing and selling your alfalfa, or you have less than ten acres but averaged more than $2,500 in gross sales from your alfalfa, you qualify under the agritourism exemption and the township zoning authorities cannot prohibit you from having your petting zoo. However, any zoning regulations the township has for ingress and egress on your property, buildings used primarily for your petting zoo, or necessary parking areas would apply to your petting zoo activity. If you don't qualify as "agritourism," the township zoning regulations could apply to the petting zoo activity, and you must determine whether a petting zoo is a permitted use according to your zoning district, which could depend upon whether or not you want to operate the petting zoo as a commercial business.
Tags: ag law roundup, business registration, meat processing, butchery, noxious weeds, craft beer, liquor permits, herd share agreements, raw milk, petting zoo, agritourism, Zoning
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Farms and other businesses can benefit by using independent contractors to fill labor needs while not having the same financial and legal responsibilities the business has for its employees. But state and federal laws allow those advantages only if the worker is truly an independent contractor. When a worker classified as “independent contractor” functions as an employee in the eyes of the law, a business can be liable for failing to meet its employer obligations for the worker. That’s exactly what happened in a recent case before the Ohio Supreme Court.
The company. The case involved Ugicom (the company), paid by Time Warner Cable under a subcontract to provide workers to install underground cable. Workers used the company’s website to select and document installation jobs and the company paid the workers at rates it determined. The installers were required to wear badges and vests identifying the company and to pass drug tests and background checks, all coordinated by Time Warner. The company required installers to sign a one-year independent contractor agreement containing a “non-compete clause” that prohibited them from providing installation services for competitors. The contract also required installers to respond to service requests within two hours. Installers had to provide their own hand tools, transportation, cell phones, and laptops, but used cable obtained from Time Warner. They could work any day or time consented to by customers. The company paid the installers by the job and did not withhold taxes or provide any benefits.
The Bureau of Workers Compensation (BWC) audit. The BWC audited the company to decide whether it had paid the correct amount of workers’ compensation premiums for all of its employees. The BWC examined the company’s treatment of workers it had hired to install cable as independent contractors. Concluding that the company exercised “too much control” over the installers, the BWC determined that the installers were actually employees for workers’ compensation purposes and the company owed $346,817 in unpaid premiums for the employees. The company unsuccessfully appealed the decision to the agency and the Tenth District Court of Appeals and the case ended up before the Ohio Supreme Court.
The Ohio Supreme Court review. For purposes of the workers’ compensation program, Ohio law provides that the controlling determination in whether a worker is an independent contractor or an employee is “who had the right to control the manner or means of doing the work.” There is not a bright-line test for making such a determination, however. Instead, the Ohio Supreme Court explained, the BWC must consider a set of factors related to who controls the manner or means of the work. Those factors include:
- Whether the work is part of the regular business of the employer
- Whether the workers are engaged in an independent business
- The method of payment
- The length of employment
- Agreements or contracts in place
- Whether the parties believed they were creating an employment relationship
- Who provides tools for the job
- The skill required for the job
- The details and quality of the work
The Ohio Supreme Court’s role was to determine whether the BWC relied upon “some evidence” when reviewing each of the factors to reach its conclusion that the company controlled the manner or means of the installers’ work. The Court concluded that most, although not all, of the BWC’s conclusions were supported by at least some evidence and upheld the BWC’s decision. The factors and evidence that received the most attention from the Court included:
- Independence from the company. The installers’ public image when working identified them as being with the company; they all wore the same badges and vests, and some had signs on their vehicles with the company’s name.
- Method of payment. The company controlled the rate of payment, which was nonnegotiable and did not include a bid process as is typical for independent contractors. The “take-it-or-leave-it” approach indicated control over the installers.
- Length of employment. The installers had an ongoing relationship with the company and did not advertise their services to the community at large.
- Agreements and contracts. The company’s non-compete clause restricted the installers’ freedom to work and indicated a measure of control over the workers.
- Skill requirements. The BWC concluded that the minimal skill required to install the cable was not high or unique, and the company offered no facts to show that the installers required specialized skills.
Disagreement on the court. Two of the Supreme Court Justices, Kennedy and DeWine, dissented from the majority opinion. Their primary point of disagreement was that there was no evidence supporting the BWC decision. The evidence instead suggested that the company controlled only how the installers were paid, and the installers controlled the manner and means of doing their work. The dissent criticized the BWC for jumping to a quick conclusion that the company’s true motives were “to evade the obligations associated with having employees.”
What does this mean for farm employers? Farms often rely on independent contractors for seasonal and intermittent help with work like baling hay, running equipment, and doing books. Are these workers true independent contractors or are they employees? That is a fact dependent question, but we can imagine many scenarios where the farm has a majority of the control over the mode and manner of such work. Farms are subject to Ohio’s workers’ compensation law, so a farm could be audited by the BWC just as the company in this case was and could see similar results for misclassifying employees as independent contractors.
Implications for all businesses. The case carries several implications that raise needs for businesses that use independent contractors:
- Recognize that state and federal tests can differ. Many are familiar with the IRS test for independent contractors but note that the Ohio Supreme Court applied its unique Ohio test for determining independent contractors in regard to BWC premiums. State and federal laws differ. It’s important to apply the appropriate test for the situation.
- Review the manner and means factors for each independent contractor. For each worker claimed as an independent contractor, review the nine factors listed above to ensure that the business isn’t exerting the most control over the manner and means of the work. Where possible, adjust practices that give the business unnecessary control over how and when the work is performed. Consider these:
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- Use employees to do the regular work of the business and independent contractors for high-skill or unique tasks.
- Ensure that the business isn’t controlling the public image of the workers. The workers should not be branded or identifiable with the business through clothing, name badges, hats, vehicles, etc.
- Require independent contractors to submit bids or proposals on the amount and method of payment for their work.
- Avoid using the same independent contractor for an extended period of time and ensure that the worker’s services are available to other businesses.
- Don’t restrict the worker’s freedom to work for others, especially via a contract or agreement.
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- Maintain records and evidence of the work situation. The BWC need only have “some evidence” that the nine factors indicate a high level of control over the mode or manner of work, but the business may offer facts and evidence to the contrary. Good recordkeeping is imperative. A business that can’t provide stronger facts and evidence in favor of the business, like the company in this case, might be at risk of an employee classification by the BWC.
While there are benefits of using independent contractors to meet labor needs, farms must recognize the associated risk of misclassification. For workers' compensation purposes, farms can avoid those risks by ensuring that it is the independent contractor, not the farm, who controls the "manner or means" of doing the work. Read the Ohio Supreme Court’s opinion in State ex rel. Ugicom Enterprises v. Morrison here.
Tags: Independent Contractor, workers' compensation, employment law, Employee
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By Robert Moore, Attorney and Research Specialist, OSU Agricultural & Resource Law Program
Establishing a new entity in Ohio is relatively easy. The first step is to submit an application to the Ohio Secretary of State along with a $99 fee. This application can be done online with the fee being paid with a credit card. For an LLC, the application only needs to include the name of the entity and the name and address of a contact person. Applications for corporations and other entities may require a bit more information but nothing overly burdensome. The Secretary of State reviews the application and either approves the application or rejects and provides information as to what needs corrected.
Upon approving the application, the Secretary of State will issue an Articles of Organization certificate, or similar document, for each new entity. This certificate is confirmation that the state of Ohio recognizes the entity, and it is permitted to conduct business in Ohio. Upon the entity being registered, business documents such as operating agreements and ownership certificates should be completed.
Usually, a few weeks after registering a new entity, credit card applications will begin to show up. As mentioned previously, each new entity must provide the name and address of a contact person for the entity. The name and address are publicly available on the Secretary of State’s website. Credit card companies retrieve this information and send applications hoping the new entity needs a credit card to conduct business. Credit card companies are not the only solicitors to use the contact information.
The credit card applications are easily identifiable, obvious in their intent and can be easily discarded if not needed. However, a more nefarious letter is likely to show up as well. It is common for new entities to receive an envelope that looks like it is from an official government entity. Upon opening the letter, a form that also looks official will request $67.50, $90 or some other amount for a copy of the certificate of organization or certificate of good standing. Upon first glance, the letter and enclosed form looks like something you would receive from a government agency.
The certificate of organization will be provided to the new entity upon registration. At any time, a copy of the certificate of organization can be obtained from the Ohio Secretary of State web site for no cost. A certificate of good standing, sometimes requested by lenders, can be obtained from the Secretary of State for $5. The certificate of good standing merely states the entity is still registered with Secretary of State. The point being, there is likely no reason to pay a company for the articles of organization or a certificate of good standing.
There is nothing illegal about the letters requesting money for a certificate of organization. If you look closely at the form, somewhere it will say it is not from a government agency. If someone wants to pay $90 for a certificate that is provided for free by the Secretary of State they are within their rights to do so.
The intent of this article is to make new business entity owners aware that they do not need to spend extra money on certificates after their entity is registered with the state. Paying for the requested certificates is probably just a waste of money. Unfortunately, people who are registering entities for the first time are often not aware of what is required by the state and just assume they are required to pay the extra fees. If in doubt, contact your attorney.
Below is an example form letter requesting $67.50 for a certificate of good standing. You will need to look closely to find the disclaimer that it is not from a government agency.
By Robert Moore, Attorney and Research Specialist, OSU Agricultural & Resource Law Program
There is no doubt that Long-Term Care (LTC) costs are a financial threat to many farms. Some farmers go to great lengths to protect their farm assets from potential LTC costs. Protection strategies include gifting assets to family members, transferring farm assets to irrevocable trusts and buying LTC insurance. But what do the statistics say about the actual risk to farms for LTC costs?
According to the Administration for Community Living, someone turning age 65 today has an almost 70% chance of needing some type of long-term care services in their remaining years. Due to women having longer life expectancies, predictions are that women will need an average of 3.7 years of care and men will need 2.2 years. While one-third of today's 65-year-olds may never need long-term care support, 20% will need it for longer than 5 years. The following data from the ACL provides more details as to the type and length of care needed:
This table shows that of the three years of LTC needed on average, two of those years are expected to be provided at home and one year in a facility. It is noteworthy that a majority of LTC services are typically provided at home because most people do not want to leave home for a facility, some at-home care isn’t paid for, and home care is less expensive than facility care. Many people may think all LTC will be provided in a facility, but as the data shows, this is not usually the case.
The next important statistic is cost. The following are costs of various LTC services from the 2021 Cost of Care Survey provided by Genworth Financial, Inc.
Nursing home costs are significantly higher than in-home services. People may think of LTC costs in terms of nursing homes, but as discussed in the previous paragraph, the majority of LTC services are the less expensive, in-home type. So, while all LTC costs are significant, they might not be as high as commonly thought.
Let’s use this data to come up with some possible numbers for an Ohio farmer. Assume the following:
- A 65year-old farmer has a 67% chance of needing LTC
- The length of that care will be around 3 years
- 1 year of care will be unpaid inhome services
- 1 year of care will be paid, inhome services at around $60,000/year
- 1 year of care will be in a nursing home at around $90,000/year
Based on the above assumptions, a 65-year-old Ohioan, on average, can expect about $100,000 in LTC care costs ($60,000 + $90,000 x 67%). Keep in mind that these costs are per person and a married couple will have double these potential costs. The next question is, can the average farmer absorb LTC costs without jeopardizing the farm? That's a question we'll examine in a future post in the Legal Groundwork Series.
Tags: legal groundwork, long-term health care, Estate Planning, transition planning
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UPDATE: Governor DeWine signed H.B. 95, the Beginning Farmer bill, on April 18, 2022. The effective date for the new law is July 18, 2022. The Governor signed the Statutory Lease Termination bill, H.B. 397, on April 21, and its effective date is July 21, 2022.
Bills establishing new legal requirements for landowners who want to terminate a verbal or uncertain farm lease and income tax credits for sales of assets to beginning farmers now await Governor DeWine’s response after passing in the Ohio legislature this week. Predictions are that the Governor will sign both measures.
Statutory termination requirements for farm leases – H.B. 397
Ohio joins nine other states in the Midwest with its enactment of a statutory requirement for terminating a crop lease that doesn’t address termination. The legislation sponsored by Rep. Brian Stewart (R-Ashville) and Rep. Darrell Kick (R-Loudonville) aims to address uncertainty in farmland leases, providing protections for tenant operators from late terminations by landowners. It will change how landowners conduct their farmland leasing arrangements, and will hopefull encourage written farmland leases that clearly address how to terminate the leasing arrangement.
The bill states that in either a written or verbal farmland leasing situation where the agreement between the parties does not provide for a termination date or a method for giving notice of termination, a landlord who wants to terminate the lease must do so in writing by September 1. The termination would be effective either upon completion of harvest or December 31, whichever is earlier. Note that the bill applies only to leases that involve planting, growing, and harvesting of crops and does not apply to leases for pasture, timber, buildings, or equipment and does not apply to the tenant in a leasing agreement. A lease that addresses how and when termination of the leasing arrangement may occur would also be unaffected by the new provisions.
The beginning farmer bill – H.B. 95
A long time in the making, H.B. 95 is the result of a bi-partisan effort by Rep. Susan Manchester (R-Waynesfield) and Rep. Mary Lightbody (D-Westerville). It authorizes two types of tax credits for “certified beginning farmer” situations. The bill caps the tax credits at $10 million, and sunsets credits at the end of the sixth calendar year after they become effective.
The first tax credit is a nonrefundable income tax credit for an individual or business that sells or rents CAUV qualifying farmland, livestock, facilities, buildings or machinery to a “certified beginning farmer.” A late amendment in the Senate Ways and Means Committee reduced that credit to 3.99% of the sale price or gross rental income. The bill requires a sale credit to be claimed in the year of the sale but spreads the credit amount for rental and share-rent arrangements over the first three years of the rental agreement. It also allows a carry-forward of excess credit up to 7 years. Note that equipment dealers and businesses that sell agricultural assets for profit are not eligible for the tax credit, and that an individual or business must apply to the Ohio Department of Agriculture for tax credit approval.
The second tax credit is a nonrefundable income tax credit for a “certified beginning farmer” for the cost of attending a financial management program. The program must be certified by the Ohio Department of Agriculture, who must develop standards for program certification in consultation with Ohio State and Central State. The farmer may carry the tax credit forward for up to three succeeding tax years.
Who is a certified beginning farmer? The intent of the bill is to encourage asset transition to beginning farmers, and it establishes eligibility criteria for an individual to become “certified” as a beginning farmer by the Ohio Department of Agriculture. One point of discussion for the bill was whether the beginning farmer credit would be available for family transfers. Note that the eligibility requirements address this issue by requiring that there cannot be a business relationship between the beginning farmer and the owner of the asset.
An individual can become certified as a beginning farmer if he or she:
- Intends to farm or has been farming for less than ten years in Ohio.
- Is not a partner, member, shareholder, or trustee with the owner of the agricultural assets the individual will rent or purchase.
- Has a household net worth under $800,000 in 2021 or as adjusted for inflation in future years.
- Provides the majority of day-to-day labor and management of the farm.
- Has adequate knowledge or farming experience in the type of farming involved.
- Submits projected earnings statements and demonstrates a profit potential.
- Demonstrates that farming will be a significant source of income.
- Participates in a financial management program approved by the Department of Agriculture.
- Meets any other requirements the Ohio Department of Agriculture establishes through rulemaking.
We’ll provide further details about these new laws as they become effective. Information on the statutory termination bill, H.B. 397, is here and information about the beginning farmer bill, H.B. 95, is here. Note that provisions affecting other unrelated areas of law were added to both bills in the approval process.
Tags: farm lease, verbal farm leases, lease termination, HB 397, beginning farmers, tax credits, HB 95
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By Robert Moore, Attorney and Research Specialist, Agricultural & Resource Law Program
Anyone who has ever been an Executor of an estate knows how much paperwork is involved with administering an estate. The county probate court, which oversees the estate process, requires many filings to verify the assets the deceased person owned, determine the value of those estates and to ensure that the correct beneficiaries receive the assets. Typically, administering an estate requires the assistance of an attorney familiar with probate rules and forms.
Like any professional providing services, attorneys will expect to be paid for their estate administration services. Legal fees charged by an attorney for an estate must be approved by the probate court. Many probate courts have established a schedule of fees that provides a benchmark for attorneys. Basically, if the attorney’s legal fees are no more than the schedule of fees, the court will approve the fees. The approved probate fees vary from county to county but are usually between 1% to 6% of the value of the estate.
It is important to note that the court approved probate fees are a benchmark, not a requirement. That is, the court is not requiring an attorney to charge those rates. Instead, the court is merely stating that fees that do not exceed the benchmark will likely be approved. It is up to each attorney to determine the fee structure to implement for their services. Some attorneys may use the probate rates for fees while other attorneys may bill based on an hourly basis.
Before hiring an attorney, Executors should have a thorough discussion regarding the attorney’s fee structure. The Executor should ask if the attorney charges on an hourly basis, flat rate basis or uses the county probate rates. Based on the fee structure used, the attorney should be able to provide a good estimate of legal costs for the estate administration. If the Executor has reason to believe the fees charged by the attorney may be too high, it’s helpful to consult with other attorneys who use a different fee structure and compare.
Consider the following examples:
- The county probate court allows a 2% legal fee rate for real estate that is not sold. Joe passes away owning a $100,000 house. Joe’s Will directs the house to be inherited by his daughter. The attorney assisting with the estate administration uses fees based on the county rate. The attorney will be entitled to $2,000 in legal fees.
- Let’s change the scenario so that Joe owned a $1,000,000 farm when he passed away. The attorney will be entitled to $20,000 in legal fees.
The above examples illustrate how probate rates work and also illustrates why executors should not automatically agree to pay the probate rates. In the examples, the attorney basically does the same work – transfers one parcel of real estate to the daughter. However, because the farm was worth ten times more in value, the attorney received ten times more in legal fees.
Let’s continue the scenario.
- The Executor thinks $20,000 in legal fees to transfer the farm may be too much. The executor finds an attorney that charges hourly for estate administration, rather than using the county rates. The attorney charges $200/hour and thinks it will take about 15 hours of work to have the farm transferred to Joe’s daughter. Executor quickly decides to hire the second attorney and saves $17,000 in legal fees.
Often, probate rates can result in reasonable legal fees. Charging $2,000 to transfer a $100,000 house is probably reasonable. In some situations, particularly for smaller estates, the probate rates may be inadequate, and the attorney may seek permission from the court to charge in excess of the rates. However, for farm estates, the county rates can result in excessive legal fees. Due to the capital-intensive nature of farming, farm estates will tend to have a much higher value than typical, non-farm estates. A modest farm estate of $5 million, at a 2% probate fee rate, will result in $100,000 of legal fees. An attorney charging $250/hour would have to bill 400 hours to make those same legal fees. A $5 million farm estate is not going to take 400 hours to administer.
Executors administering farm estates should carefully evaluate legal fees charged by the estate attorney. Applying county probate rates to farm estates can result in very large legal fees. Before agreeing to accept the probate rates as the fee structure, Executors should also inquire as to what legal fees would be if charged on an hourly basis. After getting an estimate of legal fees for both fee structures, the Executor can then make an informed decision as to how best to proceed with legal counsel.
Tags: Estate Planning, farm transition planning, probate, probate fees
Comments: 0
By Robert Moore, Research Specialist and Attorney, Agricultural & Resource Law Program
Prior to LLCs becoming available for common use, Limited Partnerships (LP) were used extensively to hold farmland. LPs provide liability protection for the limited partners and usually allow the land to be distributed out to the partners without tax liability. Additionally, the land in the LP can receive a stepped-up tax basis upon the death of a partner. LPs were a good choice to hold farmland.
The primary disadvantage of an LP is the liability exposure of the general partner. Because the general partner is tasked with management responsibilities for the LP, they receive no liability protection. Therefore, any liability created by the activities of the LP will transfer to the general partner and put all of the general partner’s assets at risk.
LLCs were developed in the 1990’s and started to become popular in the early 2000’s. LLCs can be taxed as partnerships and thus provide all the tax benefits of an LP. Also, LLCs provide liability protection for all owners regardless of their management roles. Therefore, LLCs provide all the benefits of an LP plus provide liability protection for the manager. Due to the superior lability protection of LLCs, LPs have been made obsolete in Ohio.
If you have an LP, you should consider converting it to an LLC. The conversion will extend liability protection to all the owners while maintaining the partnership taxation structure. Converting from an LP to an LLC is relatively easy.
The conversion is performed by completing Form 700 provided by the Ohio Secretary of State. The form can be filed through the mail or by submitting online. A $99 fee is required to be paid when the conversion is submitted. The form asks for the identification and structure of the current entity and the name and structure of the future, converted entity.
Any asset held by the LP is automatically owned by the LLC after conversion. For real estate, an affidavit is recorded with the county recorder stating the LP has been converted to an LLC. Because both the LP and LLC will have a partnership taxation structure, the same tax identification number can be used after the conversion. An operating agreement should be drafted for the new, converted LLC as the old LP agreement will no longer be in effect.
Consider the following example. XYZ Farms Ltd. is an LP and holds farmland. The owners of the LP wish to convert to an LLC to provide liability protection for the manager partner. Form 700 is filed with the Ohio Secretary of State along with the $99 fee. The conversion form states that XYZ Farms Ltd. is converting to an LLC and will have the new name of XYZ Farms LLC[1]. After the conversion, the LLC files an affidavit with the county recorder stating that XYZ Farms was converted from an LP to an LLC and the farmland is now owned by the LLC. The owners of XYZ Farms LLC draft a new operating agreement with terms and provisions applicable to an LLC.
LLCs have replaced LPs as the entity of choice to hold farmland. LPs that were established prior to the availability of LLCs can be converted to LLCs relatively easily. Owners of an LP should consider converting to an LLC to provide liability protection for the managing partner.
[1] Form 590, “Consent for Use of Similar Name”, and Form 610, “Articles of Organization”, must also be filed with the conversion form.
Tags: limited partnership, LLC, Limited Liability Company, business entities
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By Robert Moore, Research Specialist, OSU Agricultural & Resource Law Program
A common business strategy for farming operations is to place their machinery in a separate, stand-alone LLC. The idea behind this strategy is that by putting the high-liability machinery in its own LLC the other farm assets are protected. Unfortunately, the liability protection of a machinery LLC is sometimes overstated and may not provide as much protection as intended.
The compromised liability protection of a machinery LLC is not due to a defect in LLCs, but rather it is a result of who is operating the machinery. Typically, the persons operating the machinery are the owners or employees of the farming operation. Many liability incidents involving farm machinery are the result of operator error which pulls the liability back to the farming operation.
Consider the following example. XYZ Farms is a grain operation. To mitigate the liability of having large machinery traveling on roadways, XYZ Farms establishes Machinery LLC and transfers all machinery to the LLC. An employee of XYZ Farms causes an accident while driving machinery on a roadway. Because employers are liable for the actions of employees, XYZ Farms is liable for the accident even though the machinery was held in Machinery LLC.
A machinery LLC does provide some liability protection. If the liability incident is caused solely by an issue with the machine and not the operator, the LLC may prevent liability from transferring to other assets. Again, most accidents are caused by operator error so relying on this liability protection is planning against the odds.
As seen in the example, machinery LLCs do not completely insulate owners and other assets from liability. In fact, no entity used in a farming operation is guaranteed to prevent liability exposure for the owner. Therefore, liability insurance should always be the primary liability management plan for farm operations. Business entities should be used as the backup plan if liability insurance fails to cover liability exposure.
Machinery LLCs do have other beneficial uses. One of the more common uses is to consolidate various machinery ownership among family members. Having one entity own, buy, and sell all machinery is often a simpler plan than multi-ownership. For example:
Mom and Dad, Son, and Daughter each own some machinery. Each time they need to buy a new piece of equipment, it is a challenge to determine how the trade-in is handled and who should be the new owner. Instead, they establish a machinery LLC and put all their machinery in the LLC. They each receive ownership in the LLC in proportion to the ownership in the machinery. For all future purchases, the LLC provides the trade-in and buys the new machine.
The liability protection provided by machinery LLCs may not be as thorough as sometimes expected but they can still be a valuable component of a business structure plan. They do provide some liability protection and are useful in other ways such as consolidating ownership. Before establishing a machinery LLC, be sure to have a thorough discussion with legal counsel to fully understand it’s benefits and limitations.
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