Every business and situation is unique. However, the law of averages, statistics and/or basic probability leads to a frequently used, basic business structure outline for farms and small businesses in our region.
Often, the default business entity structure for farms and small business enterprises in our region is a structure that uses two LLCs (or corporations in some instances).
The first LLC owns the real estate, often called the “land LLC.” The second LLC owns the business’s personal property, including machinery and equipment, inventory, accounts and contracts with vendors and customers, which LLC is often called the “operating LLC.”
Business enterprises that use a two LLC structure typically conduct all traditional business through the operating LLC that owns the business enterprise. That operating LLC pays rent to the land LLC for use of the real estate.
If the owner of the land LLC is different from the owner of the operating LLC and the owner of the land LLC wants to have the control over operations (particularly in farming situations), the land LLC can pay the operating LLC an amount to “custom farm” for the land LLC’s owner.
Regardless, the biggest value of the two LLC structure is that if liability (beyond what insurance covers) arises for the operation, personal assets of the owners and the real estate used in the enterprise are both protected from that operational liability.
Some attorneys tweak the two LLC structure into a three LLC structure where the third entity owns essentially no assets but is the operating entity that leases machinery and equipment from the second LLC and real estate from the third LLC. This structure is legally dubious if not simply wrong.
The problem with one entity having all liability and no assets is that that entity is not sufficiently “capitalized” (funded). The Ohio Supreme Court has held that every LLC must be properly/sufficiently capitalized if that LLC is to provide its intended liability protection. This does not mean that an LLC must own all of the property that the LLC uses. However, an LLC should own an amount of property that any reasonable business of a similar size in the same field of work would own.
For example, a farm operation that raises a couple thousand head of hogs and farms 1,000 acres of land will likely own at least $100,000 of farm machinery.
Nevertheless, additional LLCs beyond an initial two LLCs used in many enterprises is often advisable if the enterprise undertakes somewhat distinct business activities that have significantly different risk classifications.
For instance, a farmer who has semi-trucks that haul products for others when not being used on the farm may want to create a separate LLC to own and operate the trucking business so that if there is a trucking accident, the farmer will not lose the farmer’s farming machinery and equipment, and vice versa. Similar instances often arise as to residential rentals, livestock operations and other business activities that comprise different risk classifications compared to the enterprise’s primary line of work.
Lee R. Schroeder is an Ohio licensed attorney at Schroeder Law LLC in Putnam County. He limits his practice to business, real estate, estate planning and agriculture issues in northwest Ohio. He can be reached at Lee@LeeSchroeder.com or at 419-659-2058. This article is not intended to serve as legal advice, and specific advice should be sought from the licensed attorney of your choice based upon the specific facts and circumstances that you face.