IF YOUR GOAL is to pass the ranch to subsequent generations, you might consider forming a limited liability structure. Emphasis on the “might.” That's because the more complicated business structures — such as a limited family partnership (LLP) or a limited liability company (LLC) — are not necessarily the answer for every landowner, every family and every situation.
“Business entity selection is a complicated process and there are a number of different criteria people need to weigh,” says Rodney Jones, Kansas State University Extension specialist and professor. “The LLC is going to be the answer for some individuals in some situations and some other entity is going to be more appropriate in other situations.”
Basically, an LLC is a business entity that combines the limited liability of a corporation with the flexible management options of a general partnership. A primary advantage to an LLC is no shareholder, officer or director can typically be held liable for the debts of the corporation, and interests in the business can be transferred.
That's important, especially for livestock operations, says Roger McEowen, Iowa State University (ISU) Leonard Dolezal professor of agricultural law and director of ISU's Center for Agricultural Law and Taxes. The potential for liability is relatively greater for anyone who has livestock, he says.
An LLC puts the burden of liability on the corporation, not the individual landowner. So if one of your cows gets out and gets hit on the highway, it's more difficult for the driver who sues you to take your personal assets, McEowen says.
It also provides liability protection in other areas. Jones says an LLC gives you the ability to pass down shares of stock or shares of ownership in a company over time, rather than passing chunks of physical assets.
“When I can pass 10% of the shares of a company down instead of a tenth of a combine or a tenth of a tractor or a tenth of a cow, it limits the liability that the operation has,” Jones explains.
Robert Forrester agrees. Forrester is involved in a family ranch and is an estate-planning attorney with Peterson Farris Pruitt and Parker law firm in Amarillo, TX.
“Say you give a tenth undivided interest and somebody gets their nose out of joint, that one-tenth owner can go to court and cause the sale of the entire property, which you certainly don't want,” Forrester says. If that person has an interest in an LLC, about the best they can do is demand payment for their shares or threaten to sell those shares to somebody else, he adds.
In addition, Jones says the LLC may make it easier to obtain long-term financing because it provides some legal protection for both the operation and the individuals involved, and it provides more capital to borrow against.
But an LLC is a more complex business structure because you're creating a separate legal entity comprised of shareholders, directors and officers. LLCs can be costly to set up and have ongoing administrative requirements, such as record keeping and report filing, which some landowners may be unaccustomed to.
An LLC might not fit everyone's situation. That's why Forrester says it's important the landowner and spouse, if married, sit down with their accountant and a knowledgeable estate-planning attorney about the goals of their estate-planning efforts.
“It all depends on how the hand fits the glove,” Forrester says, “and it needs to be tailor-made to his and his spouse's desires.”