This was no ordinary Southeast strawberry farm; start-up costs reached nearly nine million dollars, and the farm covered 250 acres. Successful even during the pandemic, locals swarmed to savor the farm store’s ice cream after picking berries on a hot afternoon. Though still operational, the farm is no longer a family venture–that dream collapsed in late 2021 when the farm manager’s uncle and primary funder sued his nephew for a slew of issues, all of which could have easily been thwarted if the two had hammered out an Operating Agreement before opening their doors.
The farm was dreamt up as a school project by the nephew in this case. Acres of strawberries and tulips allowed for a bustling COVID-era pick-your-own business in conjunction with local wholesale sales. The farm was a popular destination and seemed to be doing well.
Beneath the surface, though, trouble was brewing. It was late 2021 when the funder and uncle of the operation hired an accountant after noticing some discrepancies and realized that the nephew, who had been managing the farm, had taken payments in his name rather than the farm’s and used some business funds for personal expenses.
At Farm Commons, we often say that farm disputes don’t end up in court, but they certainly can! In this case, the nephew and uncle team hadn’t taken the time to fully hash out each family member’s roles in the farm business and write their agreement down. Seemingly innocuous, this oversight led to the uncle’s lawsuit and the nephew, who designed and ran the farm for nearly two years, being ousted from the business altogether.
Without an Operating Agreement explaining the family member’s roles in the farm business, there was inevitable disagreement about who was an employee and a partner, who could take owner’s draws, and who was in charge of the accounting. In North Carolina Business court, the two argued over whether the venture was a partnership or if the nephew was a mere employee. The nephew did receive W-2s but was also provided housing as part of his ’employee package.’
This initial misunderstanding of roles and responsibilities snowballed into huge misunderstandings a few years later. The nephew took what he likely considered the owner’s draws from the business accounts to cover personal expenses. At some point, the uncle reviewed the business finances and was shocked to see what the nephew had done.
Farmers always ask themselves as they start joint business ventures: who is an employee, and who is an owner? Who gets a salary, and who receives an owner’s draw? Often, these questions occur in a spousal relationship. The closeness of familial relationships can get in the way of establishing clear rules and boundaries.
As Triangle Business Journal reports, in his affidavit, the nephew says, “we agreed to decide later whether our partnership would take the form of a new LLC to be formed when [the] Farm was operational. We loved each other, we had mutual respect for each other, and we trusted each other.”
This love and trust can blind us to potential pitfalls. These discussions aren’t optional for a resilient farm business, even in family businesses. Governance discussions must happen early in the process, and everyone involved must agree on roles, responsibilities, and limitations. Importantly, the parties need to write the agreements down! In this case, a written agreement might have kept these family members out of court because the answer to the question of who has what rights would have been in clear text in their governance document.
We can learn from others’ mistakes—if you need help getting started on your governance document for your LLC, see our new resource, Farmers’ Workbook for Creating a Governance Document.