transition planning

Sometimes you happen upon a question that you want an answer to, and the answer you find raises more questions.  That’s exactly what happened when we started examining Limited Liability Company (LLC) statutes from across the Midwest.

Originally, we wanted to determine whether there are any significant legal differences between the LLC statutes of different states.  While we may be based in Ohio, we find projects that examine how different states compare to one another on the same legal topic fascinating.  The comparisons allow us to see trends and different ideas, and we had the chance to do this in our recently completed projects on CAUV and agritourism.

Ultimately we found the Midwestern states to have functionally similar LLC statutes, with about half of the Midwest having adopted a uniform statute.  When a state adopts a uniform statute, it intends for its law on a given topic to match those of other states with the same uniform statute.  There are other examples of these like the Uniform Commercial Code, Uniform Probate Code, and more.  Uniform codes are designed to make it easier for people to do business and live their lives across state lines.  For Midwestern LLC statutes, even in states that have not adopted a uniform statute, the key elements are still very similar.  The statutes have filing procedures for creating the entity, default rules for operating agreements, and rules that govern LLCs in general.

When we answered our questions about the state statutes, we became curious about some of the benefits offered by using an LLC instead of some other business form.  We found that LLCs offer great liability protection, with some specific limitations such as the application of piercing the veil from corporate law.  Further, pass through taxation can provide great tax benefits and avoid double taxation.  Since states allow operating agreements to be highly customizable, LLCs also provide a flexible entity structure that may be adapted to suit the needs of a business or family.

That last word led us to another question: what benefits does the LLC structure offer a family farm in its estate and business transition plan?  The previous three benefits are well known and thoroughly discussed; however, this last one, while done a lot in practice, is not commonly mentioned in academic writing.  Ultimately, the benefits in estate and transition planning come from the flexible nature of the operating agreement.

How can LLCs be helpful in an estate and business transition plan for a farm?  Here’s a few ways:

• Restrict the transfer of an ownership interest through rights of first refusal and buy-out provisions
• Restrict membership and voting power of non-family members
• Transition equity ownership more easily than in a corporation
• Transition the business in relative privacy

Once we learned about these benefits, the question arose of how common farming LLCs now are.  Using data from the USDA’s Census of Agriculture, we found that by 2012, there were almost as many farms organized as LLCs as there were farms organized as corporations, while the vast majority of farms remained owned outright by individuals with no formal legal entity.  We are waiting for the next Census of Agriculture to spot any trends, because 2012 was the first year that farms were asked to identify whether they were organized as LLCs.

Throughout the paper, we made some observations and predictions for what we expect to see in the future.  We are also history buffs, so of course there had to be a section on the origins of the LLC, and why Wyoming was the first state to adopt an LLC statute.  It is an interesting and dramatic history that we had not heard about before.

Our project examining farm LLCs is available on our OSU Extension Farm Office website HERE, as well as the National Agricultural Law Center’s website HERE.  This material is based upon work supported by the National Agricultural Library, Agricultural Research Service, U.S. Department of Agriculture.