I’m proud to say that after several years of gentle pushing, I finally convinced my parents to take the plunge and incorporate our farm. As of January 1, 2014 we are now an official business. (Actually, we’re a limited liability company (or “LLC”), but for all intents and purposes the distinction is irrelevant. The point is — our farm is now officially a business entity!)
Of course, our farm is also still owned and run by our family, which might cause some confusion. People try to throw the word “corporate” around as though it’s a bad thing. It sounds far removed from family operations and has a negative connotation of industrialized farming.
Despite complaints to the contrary, 96% of American farms are family owned and operated, according to the USDA. So, don’t be fooled — a “corporate” farm can still be, and usually is, a family farm.
Why would a family farm want to incorporate? Here are just a few of the reasons:
Operating as a business entity provides liability protection.
Operating a farm leaves a lot of potential for something to go wrong. Farming is a dangerous profession and not only can the farmers get hurt, but so can the unwary public. Just moving our equipment from one field to the next could potentially be harmful to other drivers on the road — imagine if that trailer overturned!
However, forming a corporation or some other type of limited liability company allows farm families a level of protection from those types of mishaps. Although the farm could still be sued, the injured person should be limited to only getting damages from the farm assets, not personal assets. That means that our farm families won’t be thrown out of our house if something terrible happens, while still compensating the injured person.
Businesses may allow for better tax treatment.
On one hand, forming a business entity could also result in double taxation — the company’s income is taxed and then each person being paid by the company has their income taxed.
Forming an entity can make estate planning easier.
Normally, a farm is just made up of a bunch of assets — equipment, tools, land, seed, buildings, etc. That can be a nightmare for families transitioning from one generation to the next. Valuing each item and figuring out how to distribute it fairly can be tough. Not to mention that there is the potential for the farm to be split up into itty bitty non-profitable pieces.
With a business entity, the estate planning can be simplified, especially with farm and non-farm heirs. Now, shares of the farm can be distributed, rather than actual assets from the farm. That means that a non-farm heir can still inherit something without the farm being divided up.
If you’re a farm family operating as a sole proprietorship, it is definitely in your best interest to consider forming a business entity. I strongly encourage you to find a lawyer that specializes in agriculture law and speak with them about this issue. My family took that step and so should you!
Brigette Leach says
Thanks for this! Totally agree that we should be changing from sole proprietorships to some form of corporation. We are in the process of protecting our personal assets AND facilitating estate planning with two LLC's. It just the way the world works that makes this necessary and you've provided a easy to understand explanation. Good job!