business entities
What type of business entity is your farm? A common answer to that question is unfortunately the wrong answer: "I don't have a business entity for my farm." That's not a correct answer because every farm engaged in the business of farming is a business entity in the eyes of the law. Our new law bulletin series on "Structuring Your Farm Business" explains the different types of business entities available to farm businesses. The series also addresses tax and liability characteristics of different business entities, how business entities affect Farm Service Agency programs, how to start and manage an entity, and the important role business entities can play in protecting a farming operation for the future.
Supported by funding from the National Agricultural Law Center and USDA National Agricultural Library, the new series includes these bulletins:
- A Comparison of Business Entities Available to Ohio Farmers
- Tax Characteristics of Business Entities Available to Ohio Farmers
- Farm Service Agency Programs and Business Entities
- Using Business Entities to Manage Farm Liability Risk
- Using Multiple Business Entities for a Farm Operation
- Starting, Organizing, and Managing an LLC for a Farm Business
Authors of the Structuring Your Farm Business bulletins are Robert Moore, Attorney and Sr. Research Specialist for the OSU Agricultural Law Program, Zachary Ishee, Law Fellow with the National Agricultural Law Center (now in private practice) and Barry Ward, OSU Extension's Leader of Production Business Management and Income Tax Schools Director.
The entire Sturcturing Your Farm Business series is now available in the Business Law library on farmoffice.osu.edu.
Tags: business entities, LLC, corporation, partnership, tax, liability, Farm Service Agency
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Sometimes, a business owner may find themselves in a position where they want to move from one business endeavor to another. For example, the owner of XYZ Car Repair LLC decides to discontinue the car business and begin farming. The owner would like to use their existing LLC to operate the new farming operation. Is this possible?
The answer is yes. The same LLC (or any business entity) can be used to operate different businesses. Using the example above, the owner could simply use XYZ Car Repair LLC for their farming operation. While operating a farm under the name of a car repair business may be a bit odd, it is possible. Fortunately, the name of an entity can be changed.
An entity name can be changed by amending its Articles of Organization. For an LLC, a Certificate of Amendment (Form 611) is filed with the Ohio Secretary of State requesting to change the name of the LLC. If the new name is available and not in use by another entity, the request will be granted. The name-change process involves filing a simple form online and paying a $50 fee. A similar method is used to change the name of other entity types.
If a name of an entity is changed, the IRS needs to be informed of the name change. If the entity has not yet filed a tax return, a letter must be sent to the IRS informing it of the name change. If the entity has already filed a tax return, the name change can be identified on the tax return. Also, the bank that holds the entity’s bank account must be informed of the name change as well as all vendors.
In addition to changing the name, the purpose of the LLC may also need to be changed. When an LLC is registered with the Ohio Secretary of State, a purpose may be included with the articles. The purpose is sometimes used to limit the scope of the activities of the LLC. If no purpose is identified, the LLC can engage in any lawful purpose. Using the example above, assume the owners of the LLC included a purpose of “car repair and related business activity” for the LLC’s purpose. Before the LLC is used for farming, the LLC’s purpose should be changed to “farming” or “any lawful” purpose. The purpose identified on the articles of organization should match the actual operations of the LLC. The purpose is found by searching the entity on the Ohio Secretary of State website.
There may be circumstances where it may be just as easy, or easier, to set up a new LLC rather than using the same LLC for a different purpose. A new LLC can be registered with the Ohio Secretary of State for $99. A new tax ID number can be obtained online for no cost. It may be more convenient to establish a new entity rather than explaining to your bank and vendors that you have the same LLC with a different name.
To summarize the above discussion, it is possible to use an entity for a new business endeavor. However, you may want to change the name and/or the purpose of the LLC, both of which can be done by filing an amendment to the Articles of Organization. It is also worthwhile to explore establishing a new LLC for the new business as it may be easier than changing names and purpose.
A challenge that many farm families face is how to bring the next generation of farmers into the farming operation. In addition to the challenges of management, delegation of responsibility and communication, the intensive capital nature of farming presents a unique challenge to many farm families. That is, how to bring a 25 year-old into a multi-million dollar farming operation? The next generation farmer may not have the resources to buy into the farming operation. Also, the current generation may not want to make a large gift to get the next generation into the farming operation. Using multiple entities can help reduce the challenges of this situation.
Let’s start with a typical farming operation that has all assets under common ownership, either as individuals or an entity. The value of this entity is the combined value of all the farm assets. For the next generation farmer to gain ownership in this operation, the total value of the farm assets is used to calculate their buy in or gift. This scenario is illustrated in the following diagram:
In this scenario, Mom and Dad own all the farming assets in their names. The total farming operation is valued at $3.5 million. For Daughter to even enter the farming operation as a small percentage owner, say 10%, she should either need $350,000 to buy into the operation or Mom and Dad would need to gift her $350,000. Also, Mom and Dad may be reluctant to give Daughter part ownership of the machinery and land in event Daughter ends up not staying on the farm.
To overcome this difficult situation, the farming operation is divided into three separate entities. The operating assets are held in an Operating LLC, the machinery in a Machinery LLC and the land in a Land LLC. By dividing assets among multiple entities, the total value of the farming operation has been divided among the entities. See the following diagram:
Each entity has a value which is considerably less than the total value of all farm assets. Now, Mom and Dad can bring Daughter into the Operating LLC as a 10% owner for only $50,000. Daughter may have $50,000 available for a buy-in or, more likely, Mom and Dad are more comfortable making a $50,000 gift. Also, it may be possible to get the Operating LLC to a near $0 value by distributing out the cash and grain to Mom and Dad before Daughter enters the operation.
The entity diagram after Daughter becomes an owner in the Operating LLC is as follows:
Daughter has become and owner in the Operating LLC and can help with management and decision making for the farming operation. However, Mom and Dad retain full ownership and control over the machinery and land. Perhaps after a few years, when Mom and Dad are more confident Daughter intends to stay on the farm, Daughter begins to buy into the Machinery LLC or is gifted ownership. Or, perhaps Daughter eventually buys her own machinery for the farming operation. The same can be done with the land LLC.
When bringing in the next generation into the farming operation, a multi-entity should be considered. It is a good method for the next generation farmer to enter the farming operation without the burden of accounting for the value of all farm assets. It also allows the current generation to maintain ownership and control of the more important farm assets.
Tags: Estate and Succession Planning, business entities
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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, 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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Food is likely on the minds of many people as we head into the holiday season. Being an agricultural attorney, it’s hard to think about food without also worrying about food product liability. Whether growing turkey or romaine lettuce, producing food for human consumption is a risk-laden endeavor that can lead to legal liability for a farmer. That’s why knowing and following Good Agricultural Practices (GAPs) is imperative for farmers who raise produce, eggs, meats, and other foods for direct human consumption. Employing those production practices is critical to producing a safe food product. But what if a food isn’t safe and causes illness or death?
No one wants to believe their food product would harm someone or that their customers would sue them for such harm. But it’s a reality that food producers must face. I’ve recently had the pleasure of working with farmers in OSU’s Urban Master Farmers Program and OEFFA’s Begin Farming Program who are taking these risks to heart and learning not only about GAPs, but also about other tools that address food product liability risk. Teaching these producers has reminded me of how important it is to remind all producers about these tools. So here’s a rundown on four important food product liability tools:
- Management practices. In addition to using production practices such as GAPs, a producer’s management practices can also manage food liability risk. Thorough employee training, for instance, ensures that everyone is following GAPs and other risk management procedures. Documentation of production procedures can be useful evidence when determining liability for a food product. Keeping records of such documentation along with other records such as sales and training records can help inform what caused the incident and whether it can be traced to a producer’s product. Regulatory compliance, such as following Ohio’s Uniform Food Safety Code, might also be necessary, depending upon the food product. Each of these management practices feed into a solid risk management plan. This requires a producer to engage in continuing education.
- Insurance. An insurance policy can be an excellent way to manage food safety liability risk. But to obtain adequate insurance coverage, a producer should review all food products and food sales activities with an insurance professional. A farm’s standard liability policy might offer adequate coverage for the foods and food sales activities. Alternatively, a producer may need to add an endorsement or “rider” or obtain a separate commercial food product liability policy. The goal is to ensure coverage for medical and related costs if someone contracts a food borne illness from a particular food product sold in a particular way. It’s also important to revisit the insurance coverage when taking on a new activity or creating a new food product. Doing so will ensure maximum protection and reduce the possibility that an incident is not covered.
- Recall insurance and planning. A producer who sells a sizeable quantity of food products through a number of sources or a food broker may need to consider recall insurance. This type of policy will kick in when a food product must be recalled because it has been identified as a food safety risk. It can help cover the costs of notifying the public about the product and removing the product from stores, institutions and consumers. Likewise, having a detailed recall plan can minimize such costs by ensuring that the recall process is responsive, efficient and effective.
- Business entity formation. “Do I need an LLC?” is a common question we receive, and the answer is usually “it depends.” Organizing as a Limited Liability Company (LLC) or Corporation won’t prevent a producer’s liability, but it can limit the liability to the assets of the business. An LLC, for example, contains a producer’s business assets and separates them from the producer’s personal assets, such as a home. If there is a legal liability incident, the LLC assets would be subject to that liability. It would be difficult for someone to get beyond the LLC and into the producer's personal assets. The LLC doesn't relieve the producer from liability, but it can safeguard those personal assets.
Talking about legal liability has a way of ruining one’s appetite, but hopefully that won’t stop food producers from thinking seriously about food product liability risk. The good news is that like most liability exposure areas, tools can help minimize liability risks for our food producers. Using those tools might just help settle our worries about food product liability.
Tags: Food Safety, liability, food safety liability, product liability, Insurance, business entities, LLC
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