LLC

By Robert Moore

Attorney/Research Specialist

In the prior post, we explained partition and the risk it poses to family farmland.  Fortunately, there are a few strategies that can be implemented to avoid partition. 

One strategy that can prevent partition is the use of a Limited Liability Company (LLC).  The concept of using the LLC is to replace the multiple owners of the land with one LLC owning the land.  Then, those same owners own the LLC rather than the land.  Partition rights only apply to real estate, not to business entities.  So, instead of three people owning the land, three people own an LLC that owns the land.  Since there are no partition rights with an LLC, no one owner can force the sale of the land. 

Consider the following example.  Andy, Betty and Charlie are siblings and own a farm together.  Each is aware of partition rights and wants to prevent any of the owners, including future owners, from exercising their partition rights.  They establish an LLC and transfer the land into ABC Family Farms LLC.  The LLC operating agreement states that land can only be sold with the consent of all members. 

The three owners of the land have eliminated the threat of partition to the family farmland.  The legal owner of the farmland is now the LLC, not the three siblings.  Andy, Betty and Charlie are the owners of the LLC but Ohio law does not provide for partition rights of an LLC.  Additionally, as added protection, the siblings require unanimous consent before any of the land in the LLC can be sold.  By placing the land in the LLC, the three owners have ensured that the only way the farm will leave the family is by joint agreement of the family.  A well-designed LLC can make it nearly impossible for land to leave the family without the agreement of the family. 

The above example illustrates how an LLC prevents partition by the owners and family members, but LLCs also protect against creditors and lawsuits.  Let’s assume Andy has financial problems and creditors have filed and won lawsuits against him.  Without the LLC, the creditor could force the sale of the land through foreclosure on Andy’s share.  However, Ohio law only allows creditors to attach to an LLC owner’s interest.  This means that a creditor is entitled to an owner’s share of the LLC profits but cannot force the sale of the assets owned by the LLC.  In this example, Andy’s’s creditors are entitled to receive his share of the profits from the LLC but cannot force the sale of the land.  An LLC can prevent an owner’s financial problems or lawsuits from causing the sale of family farmland.  

LLCs are often used in estate and succession planning to protect the family farmland.  Instead of multiple family members inheriting land (and the risk of partition), mom and dad may establish an LLC for the farmland.  Then, the children inherit the LLC without the partition rights.  By transferring the land via an LLC, mom and dad do not need to worry that one child or their creditors will force the family farmland to be sold. 

Consider the following example.  Mom and Dad want their three children to inherit their farmland.  They would like their children to own the farmland together as it is too difficult to divide up the land equitably.  Mom and Dad are aware of partition rights and want to make sure that no co-owner can force the sale of land against the family’s wishes.  Mom and Dad transfer their land to an LLC.  Their three children will inherit the LLC with the land.  Because each child will own an interest in the LLC, and not an interest in the real estate directly, partition rights are not available.  Mom and Dad also established the LLC with the requirement that any transfers of land require unanimous consent of all the members. 

This example illustrates how LLCs can be incorporated into estate plans to minimize the risks of partition.  By having multiple heirs and beneficiaries inherit the LLC, and not the land itself, the land will not be transferred out of the family due to partition.  We often think of using LLCs for liability protection but LLCs may be even more valuable to protect against partition rights. 

Another way to protect against partition rights for heirs is to use a trust.  With this strategy, the land is owned by a trust rather than the beneficiaries. Since the beneficiaries do not legally own the land, they are not entitled to partition rights.  The disadvantage to this strategy is that the trust beneficiaries will not be able to use the assets as collateral nor to build their wealth. 

Consider the following example. Mom and Dad want their children to have the benefit of their land upon inheritance but want to be 100% sure that their children do not sell the land before their grandchildren can inherit it. Mom and Dad establish a trust that holds the land for their children’s lives. During the children’s lives, the children receive the rent but do not own the land. Thus, the children cannot take action to sell the land. Upon the death of the children, the grandchildren will receive the land. 

While the land is in trust, the children do not own the land. Thus, they do not have partition rights and cannot force the sale of the land. The grandchildren are nearly certain to inherit the land. On the other hand, the land is not available as collateral for a loan and the other benefits of ownership are not available to the children. 

As the example shows, trusts are an excellent method to avoid partition. However, trusts also severely restrict the rights of the beneficiaries while the land is held in trust. A careful analysis of the benefits and disadvantages of using a trust to avoid partition must be carefully considered. 

In conclusion, before allowing land to be owned jointly, the owners should consider the risks of a forced sale of the land through partition. Partition can be avoided by using LLCs or trusts to hold the land. Be sure to consult an attorney to determine the best course of action to address the perils of partition. 

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.

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:

1. 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.
2. 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. 
3. 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.
4. 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.

The midterm elections are over, and Thanksgiving is upon us.  A lot of activity is expected out of Washington and Columbus as the legislative sessions wind up.  The OSU Extension Agricultural and Resource Law team will continue to keep you up to date on the legal issues affecting agriculture as we enter into the holiday season.

Here’s our gathering of ag law news you may want to know:

State of Ohio sued over wind turbine setbacks.  Four farmers in Paulding County have joined with The Mid-Atlantic Renewable Energy Coalition to sue the State of Ohio over wind turbine setbacks added to the 2014 biennial budget that some allege curtailed wind energy development in Ohio.  In that budget bill, lawmakers included provisions late in the lawmaking process to amend Ohio Revised Code § 4906.20, which establishes the setback requirements for wind turbines.  Those provisions more than doubled the distance that wind turbines must be located away from the nearest residential structures.  The plaintiffs in this lawsuit allege that including these restrictions in the budget bill violated the single-subject provisions of the Ohio Constitution because the setbacks lack a “common purpose or relationship” to the rest of the budget bill.  On this issue, the Ohio Supreme Court said in the case In re Nowak (cited as 2004-Ohio-6777) that the single-subject rule is a requirement that legislators must abide by, but that only a “manifestly gross and fraudulent” violation will result in the law being struck down.  The plaintiff’s complaint is available here.  Stay tuned to the Harvest for updates.

Department of Labor proposes rule requiring H-2A advertisements be posted online.  The U.S. Department of Labor (DOL) published a notice of proposed rulemaking in the Federal Register on November 9th that would change how employers must advertise available positions before they may obtain H-2A worker permits.  H-2A permits are work visas for temporary agricultural workers who are non-U.S. citizens.  Currently, employers must advertise work in a local newspaper of general circulation for at least two consecutive days, one of which must be a Sunday.  This requirement is located in the Code of Federal Regulations at 20 C.F.R. § 655.151.  The DOL now proposes to modernize the recruitment advertising rule by requiring employers to post the jobs online instead of in print.  The DOL’s notice explained that it believes online postings would more effectively and efficiently give U.S. workers notice of job opportunities.  Further, the notice explained that the DOL intends to only require online advertisements, which would render newspaper advertisements unnecessary.  U.S. Secretary of Agriculture Sonny Perdue issued a press release in support of the DOL’s proposal.  The public may submit comments to the DOL about the proposed rule.  Those wishing to comment may do so until December 10th, 2018, by visiting the proposed rule’s webpage in the Federal Register.

LLC agreement to adjust member financial contributions must be in writing.  The Ohio Fourth District Court of Appeals recently affirmed a decision finding a verbal agreement to adjust contributions between members of a Limited Liability Company (LLC) to be unenforceable, even if the other party admitted to making the statements.  Ohio Revised Code § 1715.09(B) requires a signed writing in order to enforce a “promise by a member to contribute to the limited liability company,” and therefore the court could not enforce an oral agreement to adjust contributions.  The Fourth District Court of Appeals heard the case of Gardner v. Paxton, which was originally originally filed in the Washington County Court of Common Pleas.  The plaintiff, Mr. Gardener, argued that his business partner breached an agreement to share in LLC profits and losses equally.  In order to share equally, both parties would have needed to adjust their contributions, but Mr. Paxton only made verbal offers that were never reduced to writing.  Because there was no writing, Mr. Paxton’s statements were not enforceable by his business associate against him.

Ohio legislation on the move:

The Ohio General Assembly has returned from the midterm elections with a potentially busy lame duck session ahead of it.  Already a number of bills that we have been monitoring have seen activity in their respective committees.

• Ohio Senate Agriculture Committee held first hearing on multi-parcel auction bill.  State senators heard testimony on House Bill 480 last Tuesday, November 13th.  The bill would authorize the Ohio Department of Agriculture to regulate multi-parcel auctions, which are currently not specifically addressed in the Ohio Revised Code.  The bill also defines “multi-parcel auction,” saying such an auction is one involving real or personal property in which multiple parcels or lots are offered for sale in part or in whole.  The bill would also establish certain advertising requirements.  The bill’s primary sponsor, Representative Brian Hill of Zanesville, says that he introduced the bill in an effort to recognize by statute what auctioneers are already doing, and to do so without interrupting the industry.  The bill passed the Ohio House of Representatives 93-0 in June.  For more information on the legislation, visit the House Bill 480 page on Ohio General Assembly’s website or view this bill analysis prepared by the Ohio Legislative Service Commission.