What do farmers know better than everyone else on the planet? Plans don’t always work out because life sometimes veers in a new direction. While you can’t hold back the forces of fate, you can be well prepared to handle it.
A smart way to prepare is by incorporating your ag business. This ensures the farm passes to your successor with fewer taxes and entanglements with estate court, and virtually no hassle. Consult your tax advisor for all tax advice. If you have a successor in mind, organizing your operation into a limited liability company (LLC) will set up your heirs for a smooth transition, whether it occurs in one year or 10.
Otherwise, continuing as an unincorporated operation complicates the transition for your heirs. If you have no will prepared yet, your plan can be at risk. Transitioning from sole proprietorship to an LLC without delay is one of the smartest decisions — personally and for business — you can make this year.
What's a sole proprietorship and why does it matter?
Sure, it’s possible to keep the sole proprietorship and name a successor in a will. If you have a single heir — or other children who enthusiastically back the plan — this seems like a straightforward way to settle things. But it's important to be aware of the worst-case scenarios so you can weigh your options.
What happens when you pass away?
First, your sole proprietorship dissolves. The ag business dies with you. Everything associated with the business — equipment, land, buildings, livestock, stored grains — is combined with your personal property and becomes a part of your estate.
When settling your estate, your successor may end up having less to take over the ag business after settling taxes and debts. Would they be forced to sell off acres or equipment? Would the lack of working capital force them into an impossible situation? These thorny scenarios have played out all too many times, especially in cases where someone thought they had plenty of time and waited too long to start succession planning.
What’s an LLC and why does it matter with succession planning?
An LLC smooths out many areas of operating and succession planning because it does two things:
- Creates official joint ownership of your ag business.
- Separates business assets from personal assets.
How an LLC protects your personal assets
True, it’s hard for farmers to separate their personal lives from farming because that doesn't happen in daily life. You're on call 24/7/365. But if something goes wrong with the ag business, whether it’s a lawsuit, a loan default or an injury, the LLC shields your home and your retirement accounts.
Even if succession planning isn’t on your radar yet, incorporation is still worthwhile because sole proprietorship exposes you to other risks.
- If an employee has an accident and sues you, your home and other personal assets can be part of the judgment against you.
- Or if your business takes a horrible turn, forcing you to default on an equipment loan, the lender could take out a lien on your home.
That’s why even if you think the transfer is 20 years away, incorporating now is just good business sense.
Can you have an LLC and still be in charge?
Are you hesitating to incorporate? Maybe you're worried about giving up control of your operation too soon because your named successor doesn’t have all the skills and knowledge for successful farming yet. No problem. The LLC's operating agreement can keep you at the helm until they’re ready to take on more responsibility. A good attorney can help you create the terms that meet the needs of your current business.
But the advantage of having an LLC now is the legal structure would be in place to transfer ownership directly to your heirs — without the entanglements of assets in estate court.
Oh, and did we mention that LLCs often come with tax benefits? When shares transfer to your successor, the taxes are often discounted up to 40% of market value. As always, you should consult your tax advisor or tax professional for additional guidance.
What to do if you want to organize into an LLC
Interested in an LLC? Meet an attorney that specializes in succession planning. While succession is a lot of work, establishing an LLC is fairly hassle-free, especially once you have an operating agreement everyone is on board with. Whether the unexpected happens, or you complete the handoff on your timeline, an LLC sets you up for a smooth transition.
Minnwest is the local bank where you can forge a strong relationship with an ag banker you trust. As you work through succession planning, we’ll share our perspective to help you protect working capital. That’s why we recommend that our farmers incorporate with the help of a succession attorney.
Ready to discuss long-term plans for your operation? Connect with an ag banker that lives in your community today.
