Your Farm and Government Payment Limitations
ADAM BIRK
CAPE GIRARDEAU, MISSOURI
Last week I discussed the basics of Business Organizations and liability protection. This week’s discussion will be focused more specifically on how this relates to the farm business. The biggest concern in relation to farmers and Business Organizations is the factor of government payment limitations. When it often feels like the government takes so much from us, nobody wants to limit how much money they can get from the government when they finally get in the mood to give some back.
Government payments are in 3 major areas: Commodity programs, Conservation programs, and Disaster Assistance Programs. How the government determines limitations, which will be discussed here, applies in the same way to all of the programs. How each program is paid out is specific to each program. Some examples that most will recognize are PLC and ARC, CRP, and EQIP.
The programs most farmers are concerned about limiting is PLC and ARC. The payout from these programs is totally dependent on how the market does in relation to their reference price for each commodity. It’s also dependent on your base acres, how many acres you have, etc. Obviously, there are a lot of factors here. But no matter how bad the conditions are, they will still observe the payment limitation which is currently $125,000 per person or legal entity. The first consideration for yourself is, is my farm big enough and do I think market conditions could ever get bad enough that my whole farm could ever receive more than $125,000 from ARC or PLC? If the answer is no then the answer gets fairly simple, setup an LLC for your farm and protect yourself. If the answer is yes or you have other programs to consider, then we should look at other options.
Let’s say you have a large farm that could potentially go beyond the payment limitation. If you register with FSA as either you individually or your LLC (or Corporation), in either instance you will be limited to the $125,000 payment limitation because the government only sees 1 entity. You individually are an entity and your LLC is an entity. Even if your LLC has multiple members, the government still only sees one entity and will utilize its payment limitation. But there’s still hope. If you setup your farm as a partnership and register your acres with FSA as a partnership then the government will recognize multiple entities. So for example, let’s say you and your wife are equal members in an LLC that farms 5,000 acres. Because the government sees the one LLC entity, you will be limited to a $125,000 payment. Instead, if you and your wife are equal partners in a partnership, the government will recognize two entities and your 5,000 acre farm will be limited to $250,000. Same people, same acres, just different business organizations and thus different payment limitations.
If you are the astute reader and remember last weeks article, you should be thinking that’s great but the partnership gives up all my liability protection. This is correct, so how do you achieve liability protection and maximize government payments? Partnerships are when 2 or more entities come together, not necessarily individuals. So 2 separate LLC’s coming together to farm as a partnership is perfectly legal. If we go back to our previous example, let’s say you setup FarmerBob, LLC and your wife sets up Goodlookin, LLC and you then create the Farmacre Partnership which is your forward facing operation that actually farms the ground. Each LLC is a 50/50 owner of Farmacre Partnership. So now when the government looks at your operation, they see a Partnership with 2 members and can pay a $250,000 limit on the Farmacre Partnership ground. But if a major liability were to occur by the Farmacre Partnership, the liability wouldn’t be able to move past the LLC protection of FarmerBob, LLC and Goodlookin, LLC to reach your home or other personal assets.
You may be thinking, well let me setup 5 LLC’s and I’ll own all of them and they will all join in a Partnership. The thought here is that you by yourself could reach 5 payment limitations but not have to deal with any other actual partners. This won’t work. Even though they limit the LLC entity to 1 limitation, they will still look into who owns the LLC to make sure the individual behind it doesn’t exceed their payment limitation. As another example of this, if I were to own 25% of 10 different farms, whether it was through LLC’s or me personally, the government would pay me my 25% for each farm until I hit the limit. So if I get paid my 25% for 5 farms and I reach $125,000 in total payment then I get nothing from the other 5 farms. On the 5 farms that I didn’t receive from, my business partners didn’t get it either, the money just doesn’t get paid out.
As you consider business organizations and government payment limits, it’s important to keep in mind that this is simply a consideration to be had. Your main focus should be on making a profit every year from sound business decisions, not on farming for the government. So don’t jeopardize your business fundamentally just to potentially maximize a payment that is not guaranteed. Also, as you setup multiple entities, don’t forget to keep good records and separate bank accounts so that you don’t lose the protection of your LLC’s as discussed in last weeks article.
Each person has a different situation and must analyze their situation individually. Organizing your farm and business properly can be extremely beneficial to protecting your assets and maximizing your profits. Please consult with an attorney to determine the best route for you and your particular investments, partners, and family.
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