If you answered YES to any one or more of the above questions, forming an LLC may be right for your farm. Now the question remains: Are you willing to do what it takes to create and maintain the LLC entity? Here’s the lowdown of what’s required.
Filing paperwork and paying fees
To form an LLC, you must file Articles of Organization accompanied by the appropriate filing fee with your state agency—the Secretary of State in Minnesota and the Department of Financial Institutions in Wisconsin. The Articles of Organization is a pretty simple document that includes names and addresses of the members and some other basic information.
In Minnesota, filing fees are $155 with expedited service for online and in-person submissions and $135 for paper filings submitted by mail. You must also file an annual renewal form every year, which is due by December 31. There is no fee for filing the annual renewal if the entity is active and in good standing.
In Wisconsin, fees are $130 for online filings through the QuickStart LLC platform and $170 for paper filings submitted by mail. You must also file an annual report form every year and submit a fee of $25.
Keeping business and personal financial affairs separate
It is essential that you maintain a clear and distinct level of separateness between the LLC’s business affairs and the individual members’ personal affairs. Primarily, this means maintaining separate bank accounts and accounting records. This also includes not paying personal debts or bills with the business assets.
Allocating assets to the LLC
Any land, equipment, or other asset that a member contributes to the LLC in exchange for ownership interests in the farm business needs to be formally transferred over. Officially allocating assets in this way helps make absolutely clear who owns what.
Creating and following through with the operating agreement
A lot of states do not require an LLC to have an operating agreement; however, just because it isn’t required doesn’t mean you shouldn’t have one. Perhaps most importantly, the operating agreement lets the members create the governing rules and structure of the business. This includes taking advantage of the flexible aspects of the LLC entity. If there’s no operating agreement in place, the state’s default rules apply. For step-by-step guidance on writing an operating agreement for your LLC, use our Farmers’ Workbook for Creating a Governance Document.
Filing and paying taxes
You’ll need to be sure the LLC and each of its members fulfill the annual tax obligations. This includes distributing forms, filing forms, and, of course, paying taxes when due.
What is required depends on what tax designation the LLC entity chooses with the federal IRS. There are three options: S Corporation, C corporation, or pass through (default). If you elect the default status, the farm business will be taxed exactly like a sole proprietorship or general partnership. The LLC itself does not have to file a separate annual income tax return.
So now the final question:
I don’t mind following through with the necessary formalities—including paying fees, filing annual reports, maintaining separate bank accounts, and doing some additional paperwork
□ Yes
□ No
If you answered yes, you may want to consider forming an LLC. For more information and useful tools to get you started—including a checklist for forming an LLC, annotated sample operating agreements, a checklist for creating an operating agreement, and sample annual meeting minutes—check out the chapter on LLCs in Farm Commons’ resource Farmer’s Guide to Business Structures.
Caution:An LLC is not a substitute for insurance
Creating an LLC does nothing to change the landscape of a farm’s potential liability. It only limits the assets available to satisfy that liability, should it materialize, to business assets. All the farm’s assets are entirely available to anyone with a successful claim against an LLC. Farm Commons strongly urges any farm business, no matter what business entity it adopts, to maintain adequate insurance coverage. Bottom line, good liability insurance provides the farm with a defense in court and a source of funds to pay out on a court claim if it is successful. See our free Farm Insurance Basics guide for more guidance.
