Is a Limited Liability Company right for your farm?

In recent years, more farmers and agribusiness owners are forming Limited Liability Companies (LLCs). This shift is due to the growing complexity of farm operations and the need for increased liability protection. Farmers see that an LLC can shield personal assets from business risks and offer flexible tax options.

What is an LLC

An LLC is a versatile business structure that combines the liability protection of a corporation with the potential tax benefits and flexibility of a partnership or sole proprietorship. Governed by state law, an LLC safeguards business owners' personal assets against business debts or legal obligations. 

"Many sole proprietors and partnerships are transforming their farm businesses into LLCs, seeking better liability protection and a more structured approach," says Steve Hamilton, JD, a consultant with Nationwide Advanced Consulting Group. "An LLC offers a mix of liability protection, ease of management and tax flexibility, making it an ideal choice for many family farms and agribusinesses."

Forming an LLC for your farm or agribusiness has a range of advantages, but it also comes with potential drawbacks. Here’s a closer look at both sides on the coin: 

Benefits of forming an LLC for your farm

• Limited liability protection. The primary benefit of an LLC for your farm is that it separates business and owners’ personal assets. This means if the farm faces a lawsuit or debt, the owners' personal property is generally protected.
• Flexible management structure. LLCs offer more flexibility in management compared to corporations. Family members can choose how they want to manage the farm, whether collectively or by a single designated manager.
• Pass-through taxation. In most cases, LLCs are established as pass-through entities for tax purposes, meaning the farm's profits and losses are reported on the owners' individual tax returns. This helps avoid double taxation.
• Estate planning advantages. LLCs can help with estate planning. They allow for easier transfer to the next generation. And they can potentially reduce estate taxes. It can keep the farm together by preventing it from being broken up and lost.
• Enhanced credibility. Forming an LLC can make the farm appear more professional and credible to lenders, suppliers and customers.
• Termination is simpler. Compared to a C or S corporation, it is typically less complicated to terminate and can often be done without tax consequences.

Downsides to consider

• Set-up and maintenance costs. Establishing and maintaining an LLC involves some additional costs. They include filing fees, legal expenses, accounting fees and annual reporting requirements. (Also note, that beginning in 2024 it is currently required that most companies have to register or file reports with FinCen under the federal government’s “beneficial interest rule”.)
• Recordkeeping requirements. LLCs require more formal recordkeeping than sole proprietorships or partnerships. This includes things like meeting minutes and financial records.
• Self-employment taxes. When an LLC is taxed as a pass-through entity, LLC members are considered self-employed. This makes them responsible for paying self-employment taxes on their shares of the LLC's profits.
• Potential for misunderstandings. If family members are not clear on their roles and responsibilities within the LLC, conflict can arise. Create a written operating agreement to outline everyone's rights and obligations.
• Tax implications. Pass-through taxation is generally beneficial. But there may be specific tax situations where other business structures like corporations offer advantages.
• Liability protection. The additional layer of liability protection that an LLC adds can be eroded by the owners of the LLC, if they treat the business assets like personal assets. Acquiring and maintaining adequate liability insurance is always appropriate, no matter the type of business structure involved. 

The bottom line

As agricultural businesses evolve and face new challenges, the adaptability and protection of an LLC make it a popular choice. But before deciding whether to organize your farm or business as an LLC, talk to an attorney, accountant or other trusted financial adviser who can help you determine if it’s the right move.