One of the questions that comes across my desk from time to time from farm and ranch clients is whether the farm and ranch operation needs to be placed in a formal legal entity, such as a corporation, limited liability company, or limited partnership. Because of the unique nature of farm and ranch businesses, the answer is not the same for every operation.
My friend and colleague James Decker, of the SGDA Law Firm in Stamford, Texas, and I put together this fact sheet outlining the advantages and disadvantages of “incorporating” a farm or ranch operation. This fact sheet was also utilized as part of Mr. Decker’s presentation at the 2017 Texas and Southwestern Cattle Raisers’ Annual Convention, and its School for Successful Ranching – thanks to TSCRA for including this topic in their materials this year.
Should Your Ranch Be Incorporated Or Not?
TSCRA Annual Convention – School for Successful Ranching
Note: for our purposes, the term “incorporated” includes creation of any formal legal entity such as a corporation (S or C), limited liability company, or limited liability partnership. General partnerships are not incorporated.
Advantages
Liability Protection – This term can apply to several contexts.
The creation of a formal legal entity will typically serve as a shield for your personal assets that are not held by the entity, in the event valid claims are made against the entity.
Generally speaking, entity owners are not personally liable for an entity’s debts and obligations
Individuals serving in management of an entity are generally not personally liable for the entity’s debts and obligations, so long as they act pursuant to the law and applicable company regulations.
Insurance Coverage
Practically speaking, an entity’s liability protection extends as far as that entity’s insurance coverage.
Each entity should have appropriate coverage (property, commercial liability, other specific lines); inform your agent periodically of any changes to your operation, to ensure planned activities are covered events
Taxes
In some situations, conveyance of certain assets into an LLC can offer estate tax advantages, by utilizing “discounting” and other rules regarding valuation of assets and assets owned by entities.
Expenses that are related to the business are tax deductible.
Income from S-corporations, limited liability companies and limited liability partnerships is treated as pass-through income and is only taxed once at the individual level.
USDA – “Farm Program” Payments
This can be an advantage to incorporating in some situations.
Each legal entity is deemed to be a “person” and, provided that entity otherwise meets the eligibility determinations that would apply to a natural person, will be eligible to receive farm program payments, up to one “payment limit” for a person in each respective USDA program with a separate payment limit.
Dollars received by an entity are “attributed” to entity owners, such that the natural person owners are allocated a proportionate share of the payments of each entity owned, up to payment limit
Disadvantages
Property Rights Considerations
Once real property is conveyed to an LLC, it comes an asset of the LLC. The prior owner no longer has the right to partition (if it was previously held in co-tenancy) or the right to transfer the property via will or other estate planning instrument. Instead, the owner must transfer an interest in the entity.
The entity must have separate bank accounts and recordkeeping from personal assets. Mixing entity assets with personal assets (including using entity assets as personal collateral) may void liability protection.
Liability/Insurance Coverage
Without a liability shield in place, personal actions can incur liability and personal assets can be at risk.
Umbrella policies must be considered and purchased.
Taxes
Counsel of a CPA should be included in decision-making process to avoid unintended tax problems
Certain entities have specific tax requirements that may complicate entity finances. Ex: C-type corporations must pay separate income tax; partnerships and LLCs may not be able to pay a true “salary” to an owner
USDA – “Farm Program” Payments
This can also be a disadvantage to incorporating in some scenarios.
Each formal legal entity, otherwise eligible for program payments, can only receive dollars up to one “payment limit.” Ex: if entity is owned by husband and wife, or a general partnership, and each party is deemed “actively engaged in farming,” then, after attributing entity’s farm program dollars to the two owners, husband and wife together receive one payment limit, instead of each potentially receiving one payment limit (two total payments)
If you have any questions pertaining to Agricultural law, you can contact Amber Miller at Crenshaw, Dupree & Milam, LLP.
RESPECT. RESPONSE. RESULTS. CRENSHAW, DUPREE & MILAM, L.L.P. P.O. (806) 762-5281 www.cdmlaw.com
[The information provided in this article is for informational and educational purposes only and is not legal advice, nor is it meant to be a substitute for legal advice. If you have any legal, accounting or financial questions, you should consult with an attorney, accountant or other licensed professional, as applicable, in your jurisdiction. We do not accept unsolicited documents or electronic information of any kind, and please do not send us any confidential material whatsoever unless and until an attorney-client relationship has been formalized in writing.]
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