What is an LLC?

In today’s law suit oriented economy, an effective tool for protecting personal assets from liabilities resulting from family farming and livestock operations is to form a limited liability company, commonly known as an LLC. Unlike a sole proprietorship (for example, mom and dad’s farm), which is individually owned, and unlike partners in a general farming partnership, the owners of an LLC have limited liability, which provides a means of personal asset protection.

Forming an LLC is relatively simple. A farming business that is currently operated a sole proprietorship can easily change to an LLC business form, with no tax consequences or added tax compliance requirements other than obtaining a separate tax I.D. number. Upon forming an LLC, in exchange for transferring title and ownership of the farms assets to the LLC (such as real estate and equipment), the owners are issued Membership Units, which are the LLC equivalent to shares of stock in a corporation.

By gifting and/or selling portions of the owners Membership Units, the LLC provides a very effective and convenient device for passing ownership of the family farm operation to children and other family members in whatever ownership increments are deemed desirable, depending upon the value of the gifted Membership Units and how much control the original owners wish to transfer.

For example, an owner could gift up to 49% of the value of the Membership Units owned in the LLC without giving up control of the business. With available discounting potential associated with incremental gifting of small interests in the LLC over time, the LLC can provide a means of transferring wealth to children and other family members during the owners lifetime, other than in a lump sum at the time of death, which can result in more negative tax consequences.

LLC | Required Documents & Actions.

In order to enjoy the limited liability protection an LLC can provide, it is essential to follow certain business formalities. The documents and actions required in that process are as follows:

  1. Articles of Organization: This document is what forms the LLC with the State of Minnesota, and contains basic identifying information, such as the name chosen for the LLC, the business address, and the persons who will serve in a management role.
  2. Certificate of Organization: Once the Articles of Organization are filed with the State of Minnesota, a Certificate of Organization will be issued by the state, after which the LLC may apply for a tax I.D. number.
  3. Tax I.D. Number: Upon the State of Minnesota accepting registration of the LLC, a tax I.D. number will be applied for and a bank account will be opened in the name of LLC.
  4. Operating Agreement: This is a document that spells out how the LLC is to be operated, much like a partnership agreement, but it is much simpler and less of a formality.
  5. Organizational Minutes: This document details certain initial LLC actions, such as who the officers will be, what assets will be transferred to the LLC in exchange for Membership Units, and who has authority to act for the LLC.
  6. Subscription Agreement: This document is essentially s short and simple agreement of the owner to transfer the business assets into the name of the LLC in exchange for Membership Units.
  7. Membership Unit Certificate: This document will evidence ownership in the LLC.

Typically, the Family Farm LLC can be formed and the above-described documents drafted:

  • (a) All of the documents referenced above;
  • (b) Application for tax I.D. number;
  • (c) Up to three (3) quit claim deeds for transferring real estate into the LLC;
  • (d) Resolution permitting transfer of Membership Units to a trust, if any;
  • (e) All filing fees to State of Minnesota to form the LLC and deed filings; and
  • (f) Instructions on how to follow LLC legal requirements.

Member Control Agreement

In the event there will be more than one LLC owner who is not the spouse of the original founding owner, such as a child by way of a gift of Membership Units, a Member Control Agreement is recommended, which among other things restricts transfer of the Membership Units outside the family and provides for how the Membership Units will be transferred to a child or others upon the death of an owner.