An LLC is reasonably easy for a farmer to establish without a lot of assistance- there’s just a few key words to understand. In return, the farmer gets liability protection for his or her personal assets and a flexible business entity that can accommodate a variety of farmers and their partners.
What’s the situation?
Say we have a friend and his name is Espen. Espen has years of intern experience on local farms, plus enough savings to make it through the first season so he’s starting his own farm. Since he’s been reading these blog posts and recognizes the risks of a sole proprietorship, Espen’s looking at setting up an LLC (a Limited Liability Company) to protect his personal assets. So, how does he set up one of those?
Where does the law come in?
Espen forms an LLC by filing “articles of organization” with the state agency responsible for such documents. Usually, that duty is assigned to the Secretary of State’s office. The specific requirements of an LLC are described in each state’s laws. Many states make form articles of organization available to residents. Although forms are generally self-explanatory, they do have a few key words you should know.
Details, please:
First, I’ve got an opinion to express. I think the name “articles of organization” is a good example of the elaborate, sometimes useless, formalities that many people associate with lawyers and legal stuff. Articles of organization sound like a far more elaborate document than it actually is. In my humble opinion, articles of organization should really be called an “LLC Registration Form.” Then, we’d all know what it is! But until then, please bear with me.
Filing articles of organization is a pretty simple process. Many states have form articles of organization available on their websites. Lets go back to Espen. First, he should check his state’s Secretary of State office and poke around for a form. If he comes up empty handed, he should go down to the local library ask the librarians. If they don’t have a form on file, they certainly know where to download one. Espen’s form should be specific to his state because the articles should follow the requirements of his state’s laws.
After checking out the form, the first thing Espen is probably going to do is write in his business name. Sounds easy, right? Well, there are a few things to think about. First, most states will require that the business name describe it’s LLC status. So Espen better write in “Puddle Duck Farm, LLC”. Also, Espen should be careful about using names that are commonly reserved for other businesses. Generally, if you aren’t a bank, you can’t have any words in your name that suggest a bank- such as deposit or trust. The same goes for words like “architecture” or “engineer.” Fortunately, this isn’t a problem for Espen but it can dampen the creative spirit of some farmers. Espen will also include himself as a member of the LLC, along with his business partners or investors who wish to be members. All states will allow only one member in an LLC so Espen may fly solo as well.
Next, the form will probably ask Espen if Puddle Duck Farm is “member managed” or “manager managed.” What’s that? Well, first lets start with what “managed” is. (Here we go again with the unintuitive legalese!) Contrary to what the name sounds like, this question does not ask if a manager “manages” the farm. It asks: “Who has the authority to enter into commitments on behalf of the farm?” There’s a big difference. Espen might own the farm and hire a manager. That doesn’t make the business manager-managed. Espen still maintains the authority to commit the farm, legally. For example, Espen’s manager couldn’t sign lease papers or take out a mortgage on the property because he can’t commit the farm, legally.
Let’s say Espen is going into business with his mother. She has a great head for business and she’s willing to invest in Espen’s farm. Mom can be included as a member of the LLC to establish her involvement and share of the profits. If Mom is made a member and Espen chooses “member management” then both Espen and Mom can make commitments for Puddle Duck Farm. Of course, Mom might not want that responsibility. Then, Espen would choose “manager managed” and write in himself as the manager. Mom might still receive some of the profits, but she wouldn’t be making commitments for the farm.
Does that make sense? I hope so! Many people really like the LLC because it allows the owners more flexibility than a corporation provides (more on that later). The example of Mom and Espen illustrates how you can arrange an LLC to meet different goals. On the downside, it’s not so simple to explain all of these options when the law offers such annoying titles as “manager-managed”!
There’s always a few more things to fill out like mailing addresses and agents, but the articles of organization are generally pretty short. Don’t hesitate to ask at your public library, state law library, or local law school for help understanding the different options. Next time, we’ll talk about the appropriately named “operating agreement.” This document outlines how Espen’s LLC will be operated, and it’s an important document for any farmer with an LLC
The Farm Commons blog is written by me, Rachel Armstrong. Local food system development is my passion and my career. From working on farms, to managing a community garden, to starting a catering company that used local foods, and running a nonprofit local foods consulting program, I’ve been involved with food and farms for years. Now, I’m a law school student, and I spend my time learning about the legal issues facing the noncommodity farmer.
I care deeply about farms, their profitability, and their role in our community. I hope this website, and my future practice, empowers farmers and food business owners to understand the legal context of their work. Through strong farms and food businesses, we have strong communities.
If you are a direct-market or noncommodity farmer, what legal needs do you experience? I am especially interested in your day-to-day experiences – how does the law help or hinder your work? For local food advocates, what do you notice as you work to develop local food systems? I would love to hear your thoughts.
But first, the disclaimer:
This blog does not provide legal advice. Please do not act on the information contained here without consulting an attorney about your specific situation. In the interest of space, my blog posts leave out important additional information and context. This blog is meant as background information only, not as a recommendation for specific action.
I recommend several excellent resources for more information about the legal aspects of agriculture, sustainable agriculture, and local food system development:
