Legal Tools for a Resilient Farm
Leslie Montee and I recently had the opportunity to meet with Eva Caison from Farm Commons to record an episode for Kansas Rural Center Presents. In the episode, we discuss the many legal protections that farmers, young and old, should consider protecting themselves from “losing the farm.”
Farmers are no strangers to times of uncertainty, and it may be safe to say that in our current climate, there is an uptick in people taking an interest in protecting their assets. A lot goes into taking care of a farm, and having a plan in place during times of stress can be an enormous relief. Unknowns such as lawsuits, loss of life, weather, and market fluctuations keep our farmers up at night. Our discussion largely revolved around land as an asset, however, the information shared can be applied to most businesses. Land is an unrenewable asset for the farmer, their communities, and the generations to come. It is something we hold dear, so it requires plans for resilience. Below you will find a list of the legal tools available for your planning and protection. These are only suggestions, and any advice inferred is hypothetical. We encourage you to seek professional help when creating business plans and plans for succession.
The Land
On the topic of land, Eva suggests that the best practice to protect your farmland is to keep it as a personal asset. This way the land is not exposed to business liabilities. With farms, there is an amplified risk of people getting sick from a product or people getting injured. When you have a business, there are liabilities associated with doing business. If the farmland is kept as a business asset, it will be available to satisfy those business liabilities.
Lease Agreements
A lease agreement is a tool for boosting legal resilience and managing relationships for positive outcomes. If you are a farmland owner who is a non-operator, then it is best practice to have a written lease agreement for your farmer tenant. A lease agreement lays out the expectations of the allowed use of that land. For example, is the land designated solely for vegetable production, or is livestock permitted as well? What are the hours during which the tenant can access the farm property? Who is responsible for maintenance and repairs? How should disputes be resolved? What happens if the landowner sells the land before the lease expires? A lease agreement will alleviate tension by giving guidance in times of question.
Insurance
It’s important to note that entering a lease does not relieve the owner of their liability. Therefore, it is crucial that all parties involved have proper insurance coverage. If someone is injured while on the farm, everyone gets brought into a lawsuit. Each party involved should have their own insurance coverage to provide attorney representation and to pay out any resulting damages.
Sole Proprietors and Partnerships
Sole proprietorships and partnerships are common business entities, particularly for those in business with others. These structures are the default when you start operating a business. If you’re running the business on your own, you have a sole proprietorship. If you’re operating with someone else, you have a partnership.
These business structures are popular because they require minimal setup—you simply begin doing business. Many farm businesses are content to remain as sole proprietorships or partnerships. However, it’s crucial for them to understand the liabilities associated with running their business. They may choose to continue in this manner if they have adequate insurance coverage to protect against potential claims, such as injuries occurring on their property or liabilities arising from their farm operations.
On the other hand, farms with substantial land and significant assets may not feel comfortable remaining as sole proprietorships or partnerships. They often want to safeguard their assets from the risks associated with their farm business. As a result, they may consider forming a limited liability entity, such as a limited liability company (LLC) or a corporation.
LLCs and Corporations
Both types of businesses – corporations and LLCs - require filing formation documents with the state. Corporations have a more rigid structure with greater reporting and record keeping requirements, while LLCs offer more flexibility in management.
LLCs do provide more tax options, allowing taxation as sole proprietorships, partnerships, C corporations, or S corporations. While corporations have more paperwork, transferring shares is easier than transferring ownership in an LLC, making corporations more appealing to outside investors.
Corporations generally require bylaws to govern operations. This agreement clarifies compensation, ownership transfer, exit procedures, and decision-making processes regarding debt or asset sales. It must be pointed out that although not required, a farm business is only stronger for having written an operating agreement, and if you choose to form an LLC, it would still be in your best interest to create an operating agreement.
Cash Flow
To protect yourself from market fluctuations, it is essential to have a solid business plan in place and to avoid spreading yourself too thin. This can be challenging, especially when business owners may be inclined to pursue rapid growth and diversification.
Ensure that you have adequate cash flow and savings to serve as a buffer during tough times when revenue may not meet expectations, risking default on loan payments. Traditional lines of credit with banks are often not negotiable in these situations. However, in these circumstances, communication is key. Talk to your creditor about potential options for a payment plan. Exploring alternatives could provide you with additional options or simply time. Keep in mind that your land might be an asset that the creditor could seize if necessary. If you find yourself in a difficult situation, consider working with an attorney or seeking financial support from your family and community.
Succession
Eva asked several questions that our farmers need to consider. Who owns the asset you’re planning around? Is it a personal asset, owned by you as an individual, you and your spouse, you and your family or the business itself? Now, who do you want to own that asset?
With proper planning and consideration of your goals, as a farmland owner, you can maintain significant control over the future management of your land. See Farm Commons guide titled “Wills, Trusts, and Business Structures for Farm Succession.” It was created to assist farmers and ranchers with this process. This guide helps farmland owners navigate options for achieving their succession goals and addressing concerns such as heirs’ property issues that could lead to liquidation or sale.
What matters most to you? Is it selling your land to fund retirement, or ensuring that a successor maintains your vision for the farm? A trust may be suitable for the former, while a business structure might be ideal if you want the farm business to continue with the next operator. Effective succession planning often involves family, potential heirs, mediators, and financial advisors, considering the implications of each decision. With adequate time and support, these decisions can become much more manageable.
Heirs’ property refers to a forced partition sale. This situation arises when a person owns farmland but does not have a written will or trust to dictate how their assets will be distributed after their death. Development speculators exploit this lack of legal guidance. They identify and track all heirs related to the property owner. If just one heir agrees to sell their percentage interest in the property, it can force the entire sale of the land to that speculator. This happens because the speculator can leverage their decision-making power to make it impossible for the others to carry out the business of landownership, often holding them in litigation until they can no longer afford to fight and are compelled to sell the land. Unfortunately, this results in the loss of agricultural land to development in what feels to be targeted exploitation.
Wills and Trusts
A will specifies how a person’s assets are distributed after their death and typically goes through probate court, but it does not manage the assets. In contrast, a trust is a legal entity that holds assets, like farmland or a farm business, and can take effect immediately or upon the creator’s death.
Trusts help align land ownership with the creator’s goals. There are three key roles: the titleholder (landowner), the trustee (who manages the land), and the beneficiaries (those who benefit from the trust). A major advantage of a trust is that it allows assets to be transferred without probate, granting the creator control over future use and distribution instructions and affecting how the assets may be taxed.
Conclusion
Legal risk management can be challenging for farmers and ranchers, as it involves anticipating potential problems. Many may shy away from this process, but the risks remain even if they are unaddressed. Recognizing legal risks, whether from food safety issues, employee injuries, or personal relationship challenges, is essential for safeguarding assets.
The best antidote for anxiety is action. Taking steps to protect investments, both financially and emotionally, can be incredibly empowering. Creating a plan for potential adverse events, even in small steps like updating insurance, meeting with an attorney or forming an LLC, can be reassuring. When it comes to business planning and protecting our assets, we hope that this article and partnering podcast episode will encourage farmers both young and old to think critically about how to protect the land they have spent their lives tending into the future. If you have questions, please feel free to reach out to Eva Caison with Farm Commons or Leslie Montee, Farm Business Navigator here at the Kansas Rural Center.
Resources:
About Farm Commons: Farm Commons is a national nonprofit organization specializing in legal education for farmers. Our mission is to empower farmers to resolve their own business law issues within an ecosystem of support. Through education, leadership development and community-based problem solving around business law, agricultural communities become stronger and more resilient. The result is a legacy of sustainable farms and a community-based food system for everyone. At Farm Commons, paperwork is powerful.
Guest Bio: Eva Caison (she/her) is the Education Program Director at Farm Commons and leads the development of educational curriculum, ensuring that the workshops empower the agricultural community with critical knowledge and skills. Eva has ancestral farming roots stretching from the island of Samoa to Southern Appalachia. She holds a Master’s degree in Food and Agriculture Law and Policy from Vermont Law School and a Bachelor’s degree in Anthropology from Sewanee: The University of the South. She has taught food policy courses at Guilford College for the Sustainable Food Systems department and has operated her own small farm business in central North Carolina. She is passionate about guiding farmers and ranchers nationwide through our programming, connecting them with knowledge and tools that cultivate healthy farm business relationships.
Website – www.farmcommons.org
Instagram - @farm.commons
Facebook - facebook.com/FarmCommons
Farm Commons Resource Librairies: farmcommons.org/library/
Kansas Specific Resources Contact Leslie Montee, KRC’s Farm Business Navigator: leslie.montee@kansasruralcenter.org