In 1978, the late and great Paul Harvey recited a tribute to American farmers. In his “So God Made a Farmer” narrative, Harvey notes common characteristics and values of our nation’s farmers: caretaker; dedicated; strong; and selfless, among others. In my experience creating estate plans for farming clients, I agree wholeheartedly with Harvey. Farming requires a little luck, immense perseverance, and intelligent business planning. The blood, sweat, and tears that make a family farm set the stage for a client determined to protect and maintain his or her farm for future generations.
Ironically, however, an Iowa State University shows that 50% of farmers do not have an estate plan, and 71% of retiring farmers have not identified an alternate to continue the farming operations. Consistent with these statistics, the Small Business Administration reports less than 33% of family-owned businesses survive the transition from the first to the second generation, and only 16.5% of family-owned businesses successfully survive to the third generation.
I am privileged that my legal profession allows me to help farmers preserve their hard work for future generations. A common technique used to accomplish this is by utilizing a family farm limited liability company (“LLC”). Like a corporation, an LLC is a separate legal entity, is responsible for its own debt, and can act as a legal person. For example, an LLC can buy, hold and sell property. An LLC offers several advantages.
First, a properly organized LLC reduces liability in that a creditor cannot reach the personal assets of the members who own the LLC. Additionally, if an LLC is sued, it can often reimburse an employee or member of the company for costs of the lawsuit due to a work-related incident.
Next, an LLC simplifies business operations. As the farm changes, the controlling members of the LLC may change the ownership and management of the company. An LLC’s Operating Agreement can set forth a fair way to provide for non-farming children, while still equitably compensate farming children for their greater contribution to the family farm. Non-farming children may be paid through distributions of business profits without necessarily sharing in management or control of the farming business.
The company’s Operating Agreement may also spell out a process for resolving family disputes, as well as addressing life events such as births, deaths, and divorces. If not properly planned for, the sudden impact of an unexpected death of a family member can tear a family farm apart. In addition, an LLC generally provides a federal income tax advantage, as the LLC may elect its federal tax classification.
As Harvey eloquently recited, “God said I need somebody … who would bale a family together with the soft, strong bonds of sharing; who would laugh and then sigh, and then reply with smiling eyes when his son says he wants to spend his life doing what his dad does – So God made a Farmer.” Hard work and persistence will get you far in life, but if you want to ensure your children or grandchildren are able to carry on the family business, make sure you have the proper business succession plan in place.
The information contained herein is for informational purposes only, and is not legal advice or a substitute for legal counsel. You should not act or rely on any information herein.