Getting Down to Business… Organizations
ADAM BIRK
CAPE GIRARDEAU, MISSOURI
Most farmers would probably prefer the government stay out of their business. Most farmers are also the type of people who will do a handshake deal and just get to work rather than filling out paperwork. Trust and a handshake is a great way to do business and I honestly wish it were realistic to conduct business like this all of the time; but this approach is very dangerous in today's world. Specifically, it’s dangerous to conduct business in this way when you don’t know the other parties involved. If you think you don’t ever conduct business without knowing the other party, think again. When you start a business you open yourself up to business with the world because the world is where you have to go to transact and make a profit. You have no idea who may have some trees 5 miles away and thinks your chemicals killed them. You have no idea when a strap or chain may break and causes a major injury to the person driving behind you. You don’t know when your brand new piece of equipment will have a wheel fall off and injures your employee and the other person on the road. In all of these instances, you as the farmer can be held liable. Yes, others may be liable as well but the main concern for you is that you also are liable. The way to protect yourself from these unknown parties is through Business Organizations.
The no government, handshake, and get to work method is called a Sole Proprietor or Partnership. Sole Proprietor is when it’s only 1 person, Partnership is 2 or more persons or entities. The benefits to a Sole Proprietorship and Partnership are that you don’t have to do anything to set them up. You simply begin operating. The downside is that there is absolutely no liability protection.
The other alternative is a Limited Liability Corporation (LLC) or a Corporation. Both of these require registering with the State and other documentation outlining rules for how the company will operate. The act of setting up an LLC or Corporation can be done by anyone but it is highly recommended to hire an attorney. LLC’s are a relatively young operation of law compared to Corporations but LLC’s are generally considered the way to go for small and medium sized businesses. The major benefit to an LLC or Corporation is that they offer liability protection.
The concept of liability protection is simple but it requires intentional focus to keep it practical. At the basic level, liability protection means that the owners assets can’t be touched. Some people will say, very understandably, that the liability protection is useless because I have to give personal guarantees on all my loans anyway. This is true, at the bank when you give a personal guarantee, the liability protection from your LLC just went out the window but that is true only in regard to that bank. The bank and a loan is not the only way to incur liabilities. You know about the bank liabilities, you need to protect from the unknown liabilities.
For example, let’s say that Farmacre, LLC is an operating farm and is owned by Oliver. Farmacre has $200,000 in assets including a tractor, some grain, and a checking account. Oliver personally has $800,000 in assets including his home and his own personal checking account. Now lets say that an employee of Farmacre has a major accident and kills someone on the highway while using Farmacre’s tractor which means Farmacre is now liable for $1 million to the family. Let’s say that Farmacre has $1 million in insurance. That’s great, it’s all settled and we’re done. Now let’s say that Farmacre only has $500,000 in insurance. The insurance pays out $500,000 which is a good start but Farmacre is still liable for another $500,000. At this point they can go after the assets of Farmacre, because that’s who is liable and insurance didn’t cover it all. The assets of Farmacre are only $200,000 though so of course they want to go after Oliver and his $800,000 in assets since that is more than enough to collect. The beauty of an LLC is that they cannot go after Oliver’s personal assets. They will be stopped at the LLC level because the LLC is the one who incurred the liability, not Oliver personally.
As I stated earlier, liability protection must be kept practical. Insurance can go a long way to protect your assets but settlements from major accidents seem to be getting larger and larger. Maintaining extremely large amounts of insurance can be very expensive and is an ongoing cost compared to the one-time relatively low cost of setting up an LLC. On the other hand, if your business is a garden and selling flowers to the local flower shops, the risk of liability is so low that an LLC may not be worth the setup cost and you are better off risking the liability.
The other concern I often hear is that an LLC isn’t actually useful because the liability protection doesn’t hold up in Court. This is called Piercing the Corporate Veil and can be a real concern. If a court looks at both your business and you personally and cannot tell them apart then the Court will “pierce the corporate veil” and hold you personally liable. What this basically means is don’t intermingle your finances. If you only have 1 checking account for both your business and you personally then it becomes very difficult to tell what is a business expense and what’s personal and the Court will essentially see the business as a fraud and deny the liability protection. Simple solution is to do what you should be doing any way as a good and profitable business practice and keep really good and separate records and accounts for you and your business. Keep good records and keep things separate and you won’t have any concerns about Piercing the Corporate Veil.
Stay tuned next week for a continued discussion of how to apply Business Organizations to your farm. If you have questions regarding Business Organizations or other matters, please email me at abirk@birklegal.com. This article and the statements made within are intended for informational purposes only. In no way should this article and the statements made within be construed as legal advice. ∆
ADAM BIRK: Birk Law Firm LC