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

What’s the situation?

After pondering how risky a farm business can be, and the debt she’ll take on to get it started, Farmer Jamie decides she wants to protect her personal stuff, like her car and savings account, from the liabilities her CSA farm might incur. So, she steers clear of a sole proprietorship and decides to form an LLC or a corporation.

Where does the law come in?

Forming a farm business as an LLC or a corporation isn’t the end of the day when it comes to liability protection. To be sure a Jamie gets the liability benefits of an LLC or corporation, she needs to operate the farm as if it is distinct from Jamie personally. Since a farm is often an extension of the farmer, this can be tricky.

Details, please:

Many young people (and older people) are getting into farming these days. For reasons that vary from enjoying outdoors work to the pleasures of good food, it’s a very personal lifestyle choice that attracts all kinds of folks. The intense seasonality and physicality of the work make it an especially intimate kind of work. And, well, it’s food! That’s a very personal thing.

For a lot of farmers, there’s no distinction between personal life and work life. The home is the farm. The food in the field is the food on the dinner table. When market ends and you’ve got a pile of beets, you trade it for your neighbor’s leftover cheese. If you want a quarter of beef, you might do a little custom field work for it. It’s this lifestyle of companionship with neighbors and earth that makes farming so attractive.

In a way, state lawmakers have given business owners a choice. We can choose to merge business and personal, and be personally liable for our businesses. Or, we can choose to make them separate and protect our personal assets. It’s a bargain, more or less. The laws that grant an individual the right to protect their personal assets from business liabilities also require that the person recognize that distinction in how they run their business.

What does this mean? What behavior shows a distinction between person and business? Well, in Jamie’s example, she shows a distinction between herself and her business by never mixing personal and business accounts. When Jamie takes in CSA sales, that money gets posted to her farm business account, not her personal checking account. When Jamie wants to buy some personal groceries or new clothes,  she pays from her personal account. Jamie pays herself or gives herself a distribution of the farm’s profits in a distinct transaction so she knows what’s hers and what’s the farm’s.

For a farmer used to paying with whatever credit card is handy, the obligation to distinguish between farm and personal assets can be a hassle. It might dissuade some farmers from choosing an LLC or a corporation. But, there is a plus side for the farmer that chooses the extra time and attention that an LLC or corporation might require. An accounting system that distinguishes between person and farm is also very helpful in analyzing your revenues and expenses or in considering a new crop or food venture.  It also might make it easier for the farmer’s accountant to help optimize the taxes.

In legalize, this distinction between person and business is called the “corporate veil.” If a court chooses to go around the corporate veil and take personal assets anyways, the veil is said to be “pierced.” Exactly what kind of behavior will motivate a court to reach around and get your personal stuff anyways? Well, that depends on your state’s case law. Good accounting is a big part of it. And fortunately, good accounting has a lot of other benefits as well.

So that’s a birds-eye view of the major benefits, and obligations, of getting liability protection from an LLC or corporation. There’s plenty of other distinctions between an LLC or a corporation, but we’ll get to those shortly.

What’s the situation?

Farmer Chad is starting up a little vegetable operation this spring. Since he’s not confident in his growing skills just yet, he’s growing veggies for his friend Nell. Nell wants to take it easy this season so Chad is responsible for half the veggie production for Nell’s Ruddy Duck Farm CSA. Chad thinks his risk is low- nobody will visit his farm and hurt themselves, he won’t go into debt and all because he’s working through Nell- so he decides to form his business the quick and easy way: a sole proprietorship. But, is that all Farmer Chad needs to think about?

Where does the law come in?

Although Farmer Chad might have made a reasonable decision for himself personally, he might be forming a partnership with Nell. This could make him liable for all of Nell’s business obligations as well.

Details, please:

My post a couple of weeks ago introduced how a “business entity” is the legal structure under which a business forms. The sole proprietorship is the easiest business entity to form, but it’s also the riskiest because the owner is personally liable for all the debts of the business. This post delves into a very similar entity: partnerships.

A “general partnership” is similar to a sole proprietorship owned by two or more people.  It’s easy to form a partnership- the owners file their trade name with the state so people can figure out who owns the business. It also makes it relatively easy (or should I say, less difficult) to handle income taxes since the business’s income passes straight through to the owners. The business itself doesn’t file to pay income taxes on its profit.  Only the owners file income taxes on the business’s profit.

It might be easy to start a general partnership but like the sole proprietorship, the general partnership has a dark side.  Each partner is jointly and severally liable for the debts of the business. Like I explained before, if a school group tours the farm and a kiddo trips on a tool that was negligently left in the field and is hurt, the farm might end up paying for that. Or, say one farmer takes out a loan to get going in the spring. If the bank needs to collect on over-due payments, it can go after the farmers’ personal assets like a savings account.

Lets say Nell and Chad agree to start a farm together. They file as a general partnership and the farm is off and running. But then, lets say Nell decides not to make Ruddy Duck Farm’s payments anymore. Both Nell and Chad are liable for that debt. The bank or company can choose whose assets they want to go after, or go after both. If Nell only has $100 for a $500 loan, Chad might have to make up the $400 difference. It doesn’t matter if Chad receives a smaller proportion of the profits or isn’t as involved in Ruddy Duck Farm; he is also liable for the entire obligations of the farm if he’s in a partnership. That’s the meaning of “joint and several” liability. Clearly, if a couple of farmers are considering a general partnership, they both need to think long and hard about whether they really want to accept this kind of liability.

The tricky thing is that a couple of farmers might be jointly and severally liable even though they didn’t formally agree to do business together. It’s possible to enter into a partnership without even signing an agreement or without the partners even realizing they’ve formed a partnership. I lead with the story of Farmer Chad growing half the veggies for Farmer Nell’s Ruddy Duck CSA. Is that a partnership? Are Farmer Chad’s personal assets potentially on the line for Farmer Nell’s business debts? The answer lies in the details of their operation- Are Chad and Nell acting like they co-own a business for profit? Who makes what decisions, where does income go? Their actions, not necessarily a formal agreement, will determine if they have a partnership. Say Chad has more money and property than Nell. If someone is trying to collect on a debt, they will try and convince the court that Chad and Nell are in a partnership so they can reach Chad’s assets.

This all sounds risky. Who wants to try and evaluate a partner’s risk exposure along with their own? Who wants to worry about whether they’ve formed a partnership and if they might be liable? Farmers have better things to do. Fortunately, forming a business entity that offers a lot more protection than sole proprietorships or general partnerships is easy. We’ll get to those soon.

What’s the situation?

Nell has just decided to become Farmer Nell. She’s looking at land, she’s circling things in her chicken catalog, she’s filling out farmers’ market applications. That’s exciting. Then, there’s the not exciting stuff: Nell has to choose how she wants to organize her farm, legally speaking. She has to choose a business entity.

Where does the law come in?

Nell can choose from a few different legal structures for her business. Each of the options offers benefits and limitations. Choosing the right business entity isn’t going to be difficult for Nell, necessarily. But she will have to closely consider what she wants to prioritize, both now and in the future. The easiest business entity Nell could launch, the sole proprietorship, comes with some very important trade offs.

Details, please:

First, let me apologize. I tried really hard to write a thrilling opener that would make every farmer say, “Wow, I totally want to know more about business entities!!” I tried scare tactics, I tried humor, I tried puns. I failed. This stuff just isn’t very exciting or scary and “sole proprietorship” puns are lame. That’s often the way it goes for us lawyer types. So, all I can offer is the facts. Choosing the right business entity can help a farm hum along smoothly, protect the farmer’s assets, and contribute to the farm’s overall profitability. We all got into this farming thing to make a difference, and the right business entity can help a farmer do just that.

Lets get back to Nell. For a busy new farmer like herself, the sole proprietorship offers a very important benefit. It’s simple to establish. Unlike a limited liability company or corporation (more on those later), one measly piece of paperwork is required for the sole proprietorship. Nell just needs to register her trade name. Her trade name is whatever title she’s going to do business under. The point of registering the name is so that the general public can figure out “Muddy Bird Farm” is owned by Nell. (Note that the trade name is not the same as a trademark. We’ll get into that later, too.) Filing a trade name is a cinch. This task is generally handled by the state’s secretary of state office and most offices now allow (or require) business owners to fill out an online form. There isn’t actually any paperwork!

A distinguishing feature of a sole proprietorship is this: there isn’t any difference between the business owner and the business. That’s why Nell might fill out her farmers’ market application as “Nell Smith, dba Muddy Bird Farm.” DBA stands for “doing business as.” In essence, the phrase means that the business is Nell herself, but she calls it Muddy Bird Farm. This lack of distinction carries through to tax time. Since there’s no distinction between Nell as a person and Nell’s business, the income of the business is passed through to Nell. When Nell completes her annual Form 1040, she’ll attach a schedules to account for her income from Muddy Bird. That is why sole proprietorships are referred to as “pass-through entities.”

But, this lack of distinction between Nell and her farm comes with a problematic side. If someone has a legal claim against Nell, then there’s no distinction between the farm assets and Nell’s personal assets either. Let’s say Nell takes out a loan in her first season. In the second season, things get pretty rough and she can’t pay the loan back. If the bank goes to court and gets a judgment against Nell, the bank could get a lien on whatever Nell owns personally, like a savings account or vacation cabin in the woods. It’s not only debt that can work against Nell. If she hosts a school tour on her farm and one of the kiddos breaks a leg, she could end up with a liability judgment that’s good against the farm and Nell’s personal property.

Back in the day I started a little catering business making box lunches out of local foods. I chose a sole proprietorship because I figured, hey, all I own is a bicycle, a bunch of student loan debt, two pans, and a couch- let em have it! Now, of course, I understand I can still be liable even if I have no ability to pay. If my lunches made someone sick, it’s possible they wouldn’t pursue poor little me, but they’d have the right to do so. A sole proprietorship comes with risk. Of course, all that isn’t to say sole proprietorships are bad. That risk is acceptable in some circumstances and unacceptable in others. Nell needs to look closely at her exposure to and her tolerance for risk. If those are low and the value of convenience is high, the sole proprietorship might be a great choice to get Nell off and running.

What do you think?

• Did you choose a sole proprietorship even with its risks? What motivated that decision? Have you looked to insurance to cover accidents instead?
• If you started as a sole proprietorship and then you switched to another entity, what motivated that switch? Was it the risk or something else?

What’s the situation?

Farmer Andrew is ready. He’s got two acres of land that leased from his uncle, a spot at a local farmers market, and a friend from college to help him out for the summer. Andrew’s finances are tight- he only wants to buy the essentials so he’s choosing only basic tools. To reduce costs, he’ll wait on a wash station, a market display, and insurance.

Where does the law come in?

Andrew might not have much of a choice in choosing to buy workers’ comp insurance. Depending on Andrew’s state laws, workers’ comp might be a required purchase for a beginning farmer that plans on hiring any employees, even part-timers. How is a guy to determine the law if he doesn’t want to call an attorney? Well, calling an attorney really is the quickest way to get the answer. If you can’t do that, this post is a quick guide to legal research avenues.

Details, please:

So, you want to know if workers’ compensation is required in your state for a farming operation of your size?  I wish I could post a simple spreadsheet that has each state indexed to the farm-related rule. But such a spreadsheet wouldn’t be very simple at all. Usually workers compensation rules will cover all employees. Because agriculture is special, it often has an exception allowing some farms, based on the size of the farm, as defined by number of employees, the duration of their employment, and/or the amount of wages paid, to avoid the insurance requirement.

Thus, farmers will have to do a little digging to find the law in their state. The first thing to do is call the workers compensation office. The state may have an information hotline that provides quick answers. However, it’s quite possible the department staff won’t be able to answer your question, especially if some interpretation of the law is necessary to apply it to your farm specifically. A second option is to call an insurance agent who sells workers comp insurance. He or she might have a customer in your situation. But again, if he or she doesn’t work with many farmers or is uncomfortable interpreting the law for you, you might not find your answer.

Finding no help from the agents, farmers (being the DIY sort) might blaze a path forward and determine for themselves if it’s required. Where would such a brave soul begin? Try the workers compensation office’s website- it might have a guide that addresses farm employers specifically. Or, you might try the state’s insurance commissioners office for publications.

Finding resources on various websites can be time consuming and distracting.  Are you lucky enough to live in Wisconsin? The Wisconsin Law Library collects information from agencies and even produces its own guides to legal topics. Look to see if your state has a similar library service. Your local law school may compile information as well. Law school libraries are often available for individual guidance – stop by or call the reference desk and ask a librarian where to find answers.

If all else fails, you might try reading the law yourself. Most states publish their laws on public websites; you just have to find them. In Colorado, search for the “Office of Legislative Legal Services.” In Michigan, look for the “Michigan Legislature.” You get the idea. Once you find an index of your state laws, browse or search for the workers’ compensation title.

Perusing the workers’ comp statute might be overwhelming at first. If you can’t find anything about farming or agriculture, check the definition of “employer.” You might find that farms aren’t actually considered employers. Then, consult the definitions to figure out what a “farm” is. After that, you might have to crunch some numbers to see if you are a “farm.” Statutes can be so disorienting that in the end you still aren’t certain if you have the answer. At this point especially, your local reference librarian may provide assistance.

I know this blog post doesn’t do much to answer the very simple question of which farms are required by law to purchase workers’ comp insurance. For that, I apologize. However, I do hope this post gives you a few resources to learn your legal obligations, whether it’s workers’ comp or not.

What’s the situation?

Say you own a grocery store in Maine and you’re considering a name change- something that suggests an abundance of fresh foods and captures some of that loose consumer dollar for all things local. … Maybe “Bill’s Farmers Market” sounds good? Or, the director of a local hospital want a vegetable processor to set up a stand with fresh carrot sticks, celery and apples in the lobby- she’ll call it the “St. Mary’s Farmers Market.”

Where does the law come in?

In a few states, not just any old vegetable seller can use the name “farmers market.” State legislators can define the term and regulate it through their agriculture or consumer protection bureaus. States can also set up “certified farmers markets” that adhere to standards, which may be verified through farmer inspections.

Details, please:

If you’ve traveled around the country a bit, you know that one person’s farmers market is another person’s craft fair, terminal market, or grocery store. Several years ago I asked directions to a farmers market in Georgia, and was surprised to arrive at a warehouse surrounded by refrigerated semi trucks! It wasn’t exactly a leisurely affair with neat piles of freshly picked peas hawked by the farmer’s 12 year-old son- an image I’d much sooner recognize as a farmers market.

Usually, the farmers market itself sets the rules that bind vendors- a market can permit or prohibit a range of activities from reselling local produce, wholesaling, vending crafts and nonfood items, or selling prepared foods. Today, more and more people are seeking out the farmers market as a source for healthier foods that return more money to the farmer’s wallet. These shoppers value information and transparency- they want to know who grew the food and how. With such variety in farmers markets, especially where grocery stores and resellers use the term, the consumer may be misled. In response, a few states have set restrictions on the use of “farmers market.”

Maine passed a law in 2002 defining the phrase as a place used by farmers to sell food products they produced themselves. Up to 25% of the product can come from a different farmer, but it must be labeled with that farmer’s name and location. If you are in Maine and you see a farmers market, you know that the farmer herself grew most everything for sale. That’s great assurance for the consumer.

California and Connecticut have taken a different approach. These states allow farmers a market to become certified, which lets consumers know that the market adheres to certain standards in terms of product sourcing and labeling.

California requires that all vendors sell exclusively product grown on their farms. In addition, both certification programs require the manager to actually visit the farm to verify that the product is indeed grown by the vendor. Connecticut, on the other hand, only requires that at least two vendors sell Connecticut grown farm products and uses the certification as a way to coordinate various markets. Their definition also specifies that a cooperative or nonprofit association operate the farmers market.

As you can see, the state certifications are quite different. We travelers will still have to do a little investigating to find out just how much local flavor we’re enjoying on our vacations.

What do you think?

• Defining marketing terms, from organic to farmers markets, does raise some hackles amongst those who prefer to trust the consumer to decide and determine if a product meets their needs. Is the consumer perfectly capable of determining if they’d like to shop at a farmers market by its appearance?
• As soon as consumers demand a product, for whatever reason, imposters are sure to follow. Is there other ways we can protect the ideals the local food movement represents- information and transparency about our food sources- without regulating terms?

What’s the situation?

June, a young farmer, returns home to her family’s conventional farm in the Midwest ready to shake things up. She’s going to grow vegetables, not corn. She’s going to sell food to neighbors, not to anonymous commodity buyers. At first June’s family is suspicious, wondering who in the world eats kohlrabi. But soon, they agree there’s a market for locally grown vegetables, and the financial return is much better than corn and soybeans. June is awarded 5 acres of her father’s farm to turn into multicolored rows of tomatoes, kale, carrots and beets.

Where does the law come in?

The terms of farm income support such as the Direct and Counter-Cyclical Program prohibit the farmer from growing any fruit or vegetables on enrolled croplands. Stiff penalties can result from egregious violations. [1]

Details, please:

It’s tough to make a living growing commodity crops like corn, soybeans, wheat, cotton and rice. Prices are so low, the federal government steps in to ensure farmers receive income support. The Farm Bill, passed every 5 years (or longer), authorizes the various payment programs along with accompanying restrictions, caps and terms. Commodity farmers are the recipients of over 4.8 billion dollars in subsidies for crops that are fed to livestock, or turned into starches, oils, fibers and sweeteners- not exactly the diet that will feed a healthy nation. Aside from the obvious health implications of supporting the production of unhealthy foods, these support programs hinder local production of fruits and vegetables.

One program example is the Direct and Counter-Cyclical Program (DCP). A farmer who grows commodities like corn, soybeans, wheat, or canola can enroll in DCP to receive a fixed, annual support payment, regardless of which commodity he grows or the market price for his product- that’s the “direct” part of the program. (The “counter-cyclical” part of the program kicks in an additional payment if the commodity price drops below a certain level- but we’ll save that for another day.) Instead of paying the farmer according to his actual production, DCP makes payments based on his planting history. If he usually plants 800 acres of field corn, he qualifies for a support payment on 800 acres, which was a little over $20 per acre of corn in 2008 and 2009.

But there’s a catch. If the farmer grows fruits, vegetables or wild rice on any of his acreage enrolled in the DCP program, he looses his entire support payment for that year and has to pay back the market value of the vegetables he grew. If his violation is bad enough, he may have to give back payments he received in years past. Since each farmer is capped at a total payment of $40,000 per crop year, he may owe a lot of money.

Why would such a restriction exist? The federal government gives billions of dollars to commodity farmers, but it doesn’t spend a dime supporting the income of vegetable or fruit farmers. Vegetable farmers are completely depended on the market for their income. So, if you have a bunch of commodity farmers enrolled in income support programs and then they all decide to grow cauliflower, they flood the cauliflower market and the price crashes. Traditional cauliflower growers suffer while the commodity farmers continue to cash government checks. (Or so the story goes. The FLAG publication cited at the bottom explores research that predicts only a slight impact.)

I’ve seen how this policy hurts vegetable and commodity farmers in my Midwestern community. One farmer I worked with lost acres of vegetables after the owner realized he’d loose his support payments from the government and acted fast to kick the vegetable farmer out. Farmers may not be aware of this restriction, and the consequences are dire for both the vegetable and the commodity grower.

The consequences are steep for the community too. All those acres of corn, soybeans and more… we imagine how much local food we could produce if those fields held spring peas, broccoli and kale. It’s possible, but we need to change some things first. The Farm Bill is up again for renewal, and your voice will help change things.

What do you think?

• As more farmers move into the local market for fruits and vegetables, price competition is a concern. We can’t afford a race to the bottom that leaves all the local veggie growers unable to make a living of their product, just like their commodity-growing brethren. How can we protect decent prices for good food?
• Changing support payment programs is difficult. We’re in deep in terms of subsidizing unhealthy foods, but it’s hard to extract ourselves without causing pain to so may of the nations farmers. Converting farm production to healthy, locally marketed foods is an excellent solution, but it needs to be done carefully. Which programs can pull us out of this situation?

[1] This posting relied extensively on the Farmers’ Legal Action Group report, “Planting the Seeds for Public Health: How the farm bill can help farmers produce and distribute healthy foods.” Find the article here. Thank you FLAG!