We are interested in liability protection related to our farm operation. I heard a suggestion to form a Limited Liability Corporation. Will that protect us from lawsuits? Thanks
— Andy in Burnsville
Asking for tax or legal advice from another farmer has some risks, but for what it’s worth here is my farmer opinion shaped mainly by information on the web and by operating an LLC for ten years or so. A limited liability corporation (LLC) sounds great and it may be helpful in protecting your assets but it has “limits.” The main limit seems to be that negligent behavior can still result in a claim on the assets of the person who was negligent – either the farmer or an employee of the farm. Most sources recommend incorporation of some sort (such as an LLC) plus liability insurance. Below I will offer information on the benefits of LLCs and then pass on suggestions from a recent ASAP list server conversation on farm liability insurance, including several providers to consider.
LLCs are a great choice for small business owners. As legal matters go, an LLC is easy to form—a two-page form (at the NC Secretary of State website) is filed with the State of North Carolina along with a $150 fee. Running the LLC is not complex, but does require a $200 fee each year to the State of North Carolina. An attorney may be helpful in wording the LLC form and in helping understand how to carry out your business to obtain the greatest benefit from your LLC, but the process of LLC incorporation is not complicated.
Here are some LLC advantages offered by a group called My New Company
- Reduced personal liability — a corporation properly formed and organized can shield the owners (shareholders) from liability for business debt or lawsuits against the company thus protecting their personal assets such as homes, cars, savings, etc.
- Add Credibility to the Business — a corporation communicates permanence, prestige and credibility and also can make it easier to establish credit.
- Reduce Taxes — a corporation is able to deduct many expenses that a sole-proprietorship or partnership cannot, including healthcare, entertainment and travel expenses. Also, pension or retirement plans can be grown more effectively in a corporate structure.
- To raise money easier via the sale of stock and also transfer ownership easily via the transfer or sale of stock.
Other advantages include:
- Single taxation in contrast to double taxation that sometimes occurs with other forms of incorporation (LLC income is not taxed once as the company and then again as personal income.)
- Fewer formalities than other forms of incorporation (e.g. by-laws, minutes, shareholders, directors, officers, etc) http://www.rjmintz.com/limited-liability-company/overview/
- Protection from being individually named in a lawsuit if you serve as an LLC officer and possible avoidance of legal fees. http://www.rjmintz.com/limited-liability-company/overview/ ( but note the negligence comments below.) and
- Protection from employee misconduct or errors. http://www.litigationandtrial.com/2009/05/articles/attorney/automobile-accidents/can-i-set-up-an-llc-to-avoid-personal-liability-in-a-lawsuit/
According to Nolo, forming an LLC will not protect you against personal liability for your own negligence, malpractice, or other personal wrongdoing that you commit related to your business. If both you and your LLC are found liable for an act that you commit, then the LLC’s assets and your personal assets could be taken by creditors to satisfy the judgment. This is why LLCs and their owners should always have liability insurance.
Anyone can file a lawsuit. Even a frivolous lawsuit against your farm that you “win” may result in attorneys fees related to defending yourself in court. An LLC alone will not solve that problem which is one reason that many farms obtain liability insurance. Not only will the insurance company pay any judgment against the farm if the complaint has merit (up to policy limits), but they often provide legal defense to protect both the farm and the insurance company against an unreasonable settlement
Rebekah Smith suggests a separate LLC for each aspect of your business life: “If you are sued personally and you lose the lawsuit, your LLC assets cannot be seized to pay personal judgments. You can insulate each asset separately in different LLCs if you have assets that are particularly valuable. Moving your assets to the LLC makes it difficult to collect on judgments. Personal creditors cannot seize LLC property either.” http://www.ehow.com/about_6563015_llc-asset-protection.html
Not all insurance companies understand farming and some just have a policy not to insure farms. Others companies are eager to work with farmers. Here are some suggestions from a recent ASAP list serve conversation about value added processing insurance for farmers.
Casey McKissick wrote: “We recently moved to a comprehensive commercial policy that covers buildings, autos, home, machinery, livestock, product inventory and meat value added products sold on and off the farm- presumably more risky than dried herbs. The folks at White Insurance in Black Mountain did not have a hard time wrapping their heads around the concept of a farm also functioning as a food business. We’re paying a marginally higher premium now than we were before, but receive loads more coverage and peace of mind. Eight years ago we carried a similar coverage with Morrow Insurance underwritten by Hartford. I also understand Nationwide does a great deal of ag businesses- production and food product. An eastern NC company called Snipes Insurance is owned by a farmer who direct markets beef. His name is Dal Snipes and he is very informed. You might give him a try.
Joe Martin wrote: Our Farm Bureau Insurance agent covers us with a Farm Owners Policy along with a Commercial General Liability, which covers “completed operations”, which is insurance speak for products liability for a “fruits and vegetable dealer”.
Mary Lou Surgi wrote: For the insurance questions, I would try again with Morrow Insurance in Hendersonville. If they do not pan out, there are at least one company in Utah that will cover natural /herbal products: Citadel Insurance Services in American Fork, UT.
In summary, forming an LLC is the most common method for small business incorporation. It is less complex in many ways than other forms of incorporation and provides business advantages beyond just limiting (but not eliminating) liability. An LLC plus liability insurance may be needed to obtain protection for your farm business, according to the specialists quoted above.
In all legal aspects of business, the Organic Growers School recommends readers consult an attorney before making any major decisions.
Tom Elmore is co-owner and operator of Thatchmore Farm in Leicester NC. He has grown certified organic fruits and vegetables for 25 years and serves on the Boards of the NC Greenhouse Vegetable Growers Association and the Organic Growers School.