Reduce Liability

February 25, 2014 06:00 PM

Does your business need to create a new entity?

Custom farm work is a great way to diversify a business. It can provide supplemental income but can also add extra risk and exposure to your primary farm.

Todd Janzen, a partner at Plews Shadley Racher & Braun LLP in Indianapolis, Ind., says it makes legal sense to structure any type of custom farm service as a separate business.

"The main reason to set up a new company for your custom work is not to avoid liability," Janzen explains. "It’s to make sure the liability stays connected to the custom business and not your farm."

For example, trucking, excavation and transportation services can hold a high potential for risk, says Kyle Emkes, associate attorney with Dodd & Maatuka in Champaign, Ill. "The odds of getting in an accident are far greater when you are on the road for long periods of time," Emkes says.

If one of your semis is in a major accident that transpires into a lawsuit, Janzen says your farm’s total assets would be subject to pay the settlements, damages and court fees. However, if your trucking company is structured as a limited liability company (LLC), only those assets would be in jeopardy.

Then the worst-case scenario would be bankruptcy for the custom operation, Janzen says. "That’s a lot better than bankruptcy for your entire farm," he adds.

Janzen recommends farmers who have multiple custom services that don’t share many resources set up separate business entities for each custom service.

"From a liability standpoint, it makes sense," he says. "Then, if there is an accident for one, the other companies won’t be affected."

While having multiple business entities can add to your accounting and book work, Janzen believes the extra protection justifies the work.

"Creating a new company for your existing custom farm service requires you to jump a few hurdles, but the end results are worth the effort," Janzen says. 

Make Your Business Official

Once you decide to separate your custom farm service, you need to determine which business structure best fits your needs. Kyle Emkes, associate attorney with Dodd & Maatuka, says LLCs are a natural because of the legal protection they provide.

If your farm is structured as a corporation, ask your attorney and accountant if you should do the same with your custom farm service. Emkes and Todd Janzen, partner at Plews Shadley Racher & Braun LLP, explain the basic steps to setting up a new business entity.

  • Do the basics. With LLCs, farmers must submit the proper paperwork within their state and pay a fee.
  • Respect the corporate formalities. Janzen says this includes working with an attorney to draft bylaws or an operating agreement that will explain how the new business entity will operate. "This is typically not an expensive legal undertaking, but it’s also not a do-it-yourself project," he says.
  • Keep separate checking accounts, records and assets. "Make sure the farm pays the custom business for its work, and vice versa," Janzen says. Do not commingle funds, and keep clear records of the custom business paying employees.
  • Create an annual report. "I tell my clients, an LLC is not for you if you’re not going to file an annual report every year," Emkes says. This document should include an overview of the year and goals for LLC. "It can be a complex and elaborate business plan or very simple," he says. All of these procedures will strengthen the structure and legitimacy of your business.
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