LLCs (limited liability companies) can be used to transfer farmland and farm businesses to one or more people over a period of time. LLCs are extremely flexible entities that allow transitioning (senior) farmers to maintain a level of control of their farm operation while simultaneously conducting a gradual transfer of farm ownership to new (junior) farmers. LLCs also allow flexibility for incoming farmers in terms of the amount and type of financing required to transition into farm ownership. Additionally, LLCs can facilitate transfer of some farm ownership rights to non-farming heirs (children not interested in farming) while still allowing control, ownership, and access for farming heirs (children interested in farming) or other new farmers.
However, farmers should note that using an LLC to transfer a farm operation will almost always require a lawyer’s help to make sure the transfer actually happens according to farmers’ wishes. For example, farmers will need a lawyer to draft an effective LLC operating agreement, which is a contract between the LLC members. A clear, legally-effective operating agreement is critical because it will govern ownership of the farm over time. A good operating agreement should also provide an exit path for farmer members that maintains the value and undivided nature of the farm operation in case the LLC-based farm transfer deal falls apart.
The bottom line is that although using an LLC to transfer a farm operation can provide the benefit of a highly-individualized and gradual transition of farm ownership, a successful LLC-based farm transfer must also conform to strict legal rules, requires farmers to create formal legal agreements and complete legal paperwork, and may also demand compliance with certain state laws.
Thus, an LLC-based farm transfer should not be attempted without the help of an experienced attorney.
Monroe, Maine farmers Eric and Alison Rector created an LLC (Windswept Farmstead Cooperative LLC) to help them transition their diversified organic farm operation to a pair of beginning farmers. The Rectors placed their farmland, infrastructure, and other assets into the new LLC and created a thoughtful, detailed LLC agreement with Noami Brautigam and James Gagne that allowed the new farmers (after a two-year trial period) to begin earning percentage ownership interests in the LLC.
All of the LLC members live on the property (in separate residences), and the Rectors are slowly releasing control and ownership over the land while still retaining access to the farm, receiving help maintaining the property and structures, and helping a new farming couple learn the business of farming. To read the full story, click here.
An LLC operating agreement is a private contract among LLC members that governs ownership and control of the business (including the farmland, buildings, equipment, animals, assets, etc.). An operating agreement is a private document entirely separate from the public-facing “Articles of Organization” or other form filed to create an LLC with your state’s Secretary of State’s office. A detailed, thoughtful LLC operating agreement drafted by an experienced attorney is critical to a successful farm transfer.
It is essential that farmers thinking about using an LLC to transfer farmland take the time to think through how to handle the management of the farm while it is in transition. The LLC operating agreement should set forth in writing the decisions that the senior and junior farmers make on a wide variety of topics, including at least the following:
How will the junior farmers pay for their initial percentage interest in the LLC? Will it be a down payment, sweat equity, or a combination? Will the senior farmers gift a percentage interest to the junior farmers (more common in a family transition)?
How will the junior farmers earn their increased percentage of LLC ownership over time? Will an additional percentage interest be tied to hours worked, certain milestones reached, farm profits, pre-set installment payments, or another mechanism? What happens if goals are not met or payments are not made?
How will the value of a percentage interest in the LLC be determined? Will the senior farmers hire an appraiser? Will the value be assessed only at the time the LLC is created, or will it be assessed each year as the transition gradually occurs? Will the value increase or decrease over time according to a formula, or in connection with another figure (inflation, average local land prices, interest rates)?
Will LLC members’ voting rights correspond to percentages of ownership? Will a 50 percent ownership equal a 50 percent voting interest, or will voting rights be separate from ownership of a percentage interest and be allocated separately?
What happens if one or more of the members involved in the farm transition realize that the situation isn’t working for them and they need to exit the LLC? Can the exiting farmer sell a percentage interest? Can they sell it only to a current member, or can they sell it to a third party? How much will their percentage interest be worth, and how and when will it be paid for?
Who is responsible for day-to-day decision making and daily activities on the farm?
Who makes “big” decisions for the farm, and what counts as a “big” decision? When is a vote of all the members required, and what percentage of votes is needed for a decision? Unanimous? Majority? Two-thirds? What happens if there is a disagreement or a deadlock?
If a farm is transitioning to children of the senior farmers, some of whom will run the farm and some who are “non-farming children,” what rights will the farming children have and what rights will the non-farming children have with respect to day-to-day management, profits, rights of access, and ability to sell the land outside the family?
Which assets of the senior farmers will be placed in the LLC, and which assets will remain personally owned by the senior farmers? Will the senior farmers live on the property? How will the existing buildings and equipment be used and/or transitioned to the junior farmers?
Will certain conservation measures or types of farming practices be allowed or required? Will diversification of income streams be allowed (such as creating a corn maze or a pizza farm business in addition to traditional crops or animals)?
If there is a dispute between the LLC members, how should it be handled? What happens if a married couple is involved in the transfer and a divorce occurs? What about the unexpected death of a member? In these situations, is mediation required? Which state’s laws will apply and what court would handle a lawsuit? If senior farmers plan to retire to Arizona while the junior farmers are in Nebraska, the cost of an out-of-state lawsuit could be prohibitive for one side or the other.
The questions above are just a subset of the universe of questions that should be answered by both the senior and junior farmers before embarking on an LLC-based farm transition. The questions that should be asked and the answers to these questions will differ in each individual situation. The answers to these questions should be written down and incorporated as part of the LLC operating agreement (with the help of an experienced attorney). An attorney should also insert operating agreement provisions that make the agreement legally effective and provide any additional protections for LLC members that are available over and above their state law’s baseline requirements.
For example, common business pitfalls (such as exiting members or disputes) should be anticipated and planned for at the outset of the relationship between the LLC members. Even with the best intentions and expectations, life happens.
Remember that without proper planning for common pitfalls, a treasured farm legacy could be lost.
Ultimately, you should consult with an attorney to ensure that your operating agreement suits the needs of all the members of the LLC and is legally effective.
When handled correctly, an LLC-based farm transfer has a number of benefits, including the following:
A farm LLC should always carry business insurance tailored to the specific needs of a farm operation.
Note that the benefits described above will only exist with a properly structured LLC that is governed by a thoughtful, detailed operating agreement and LLC members who manage and run the LLC as a business entity that is entirely separate from personal assets.
This section explains some of the mechanics that could be in involved in an LLC-based farm transfer. Please note that this section is meant to illustrate general concepts and does not include all of the options that might be available to farmers.
A farm transfer balances many nuanced and individualized considerations, and the flexibility of an LLC-based transfer allows an almost infinite array of possibilities. Accordingly, before choosing one or more specific transfer tools for your own farm transfer (LLC, gifting, trusts, etc.), it is important to assess your goals, values, and circumstances. It is equally important to consult with an attorney to ensure that the legal tools you intend to use will actually allow you to make your farm transfer vision a reality.
- Senior farmers create an LLC entity by filing Articles of Organization with the Secretary of State’s office.
- With the help of an attorney, senior farmers and junior farmers negotiate a detailed, written LLC operating agreement with (at least) ownership and transfer provisions and a buy-sell provision for exiting LLC members.
- Senior farmers and junior farmers sign the operating agreement, and senior farmers formally transfer agreed-upon farm assets from individual ownership to LLC ownership.
- Over time, junior farmers contribute sweat equity and/or money or other agreed-upon value to the senior farmers and thereby “purchase” and increase their percentage ownership interest in the LLC. As the junior farmers’ ownership percentage increases, the senior farmers’ percentage of ownership decreases. Transfer of a percentage interest in an LLC could also be done via gifting, wills, or trusts.
- Note that ownership rights can be separated from voting rights, so senior farmers could retain voting rights and some control over the operation without actually owning a corresponding equal percentage interest in the LLC. This option might be valuable for senior farmers who want to retain some say over how the operation is running but want to divest financial assets or allow junior farmers to have a larger share of LLC profits. Senior farmers should also consider how continued ownership via a gradual transition might affect their eligibility for Medical Assistance.
- Over a set period of time, junior farmers generally aim to acquire 100 percent ownership of the LLC and the senior farmers will have completely transferred their farm operation to the junior farmers.
Under an operating agreement, senior farmers may allow junior (incoming) farmers to earn percentage interests in an LLC in a variety of ways, some of which are set forth below. Any of these specific methods could be combined to create an individualized solution tailored to the needs of the farmers involved in the transfer.
An LLC transfer plan can involve one or more LLCs. In many situations, one LLC could effectively transfer the entire operation from the senior farmers to the junior farmers. Sometimes, however, using more than one LLC might make sense if assets (like land, buildings, equipment, etc.) are best served by being held within separate LLCs. An experienced attorney can help farmers make and execute these more complex business decisions.
How and whether to use one or more LLCs for farm transfer is a highly individualized strategic decision that should only be made with the help of an experienced attorney.
It’s not an attorney’s job to make decisions for farmers or to set farm transfer goals. Instead, attorneys can provide information about pros and cons of different options, advice about what is common versus unusual, fair versus unfair, etc. Attorneys can help farmers understand the universe of possible farm transfer goals and help narrow down individual options so that farmers can make final decisions.
1. For example, in New Hampshire, an LLC has to pay a business profits tax if it has a gross income of more than $50,000 before expenses. See http://www.revenue.nh.gov/assistance/tax-overview.htm#profits. Additionally, New Hampshire also imposes a business enterprise tax on LLCs with gross business receipts for more than $200,000, or if the tax base exceeds $100,000. See http://www.revenue.nh.gov/assistance/tax-overview.htm#enterprise. Also, in California, if an LLC makes more the $250,000 per year, the state requires the business to pay income taxes.
The Center for Agriculture and Food Systems is an initiative of Vermont Law School, and this toolkit provides general legal information for educational purposes only. It is not meant to substitute, and should not be relied upon, for legal advice. Each farmer’s circumstances are unique, state laws vary, and the information contained herein is specific to the time of publication. Accordingly, for legal advice, please consult an attorney licensed in your state.