Harvesting Legal Knowledge: How to structure your farm for success

Straight Talk with NDFB, the Harvesting Legal Knowledge series with NDFB Executive Vice President and CEO Jeffrey Missling and attorneys from Ohnstad Twichell Law Firm addresses real-life situations you face on your farm or ranch. 

Today's conversation features Casey Drege and Marshall McCullough of Ohnstad Twichell, and focuses on how to set your farm up for long-term success through a proper business structure. From choosing the right entity to understanding how structure affects land values, risk, and future planning, the discussion breaks down what farmers and ranchers should consider when organizing their operations.

The episode also explores how intentional planning today can support both day-to-day management and long-term goals such as growth and succession.

Links 

Harvesting Legal Knowledge

Contact us at emmery@ndfb.org

The statements made and information provided in this podcast are for educational and informational purposes only. The statements do not constitute legal advice, nor are they intended to create an attorney-client relationship. Every situation is unique, so you should not rely on any statements in this podcast as a substitute for personalized legal counsel. Before taking action or making any decisions which may affect your legal rights and obligations, you should consult with an attorney licensed in your jurisdiction.

Transcript

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[Straight Talk theme]

[00:11] Emmery: How can you structure your farming operation for success, today and tomorrow? Welcome to Straight Talk with NDFB. I am your host, Emmery Mehlhoff. Farming and ranching are tough businesses and legal issues can just complicate things. That's why this season features Harvesting Legal Knowledge, a conversation between NDFB and the Ohnstad Twichell Law Firm. NDFB CEO Jeff Missling and the attorneys at Ohnstad Twichell break down key legal topics impacting farmers, ranchers and ag businesses every day. Today we're talking about how to set up your farm the right way, what to consider when forming a business entity, and why it matters. From structure to land values and planning for the future, we break down what you need to know. As always, if you have a specific legal question, be sure to consult an attorney who can address your situation. Let's get into the episode.

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[01:11] Jeff: Welcome to a series that we're calling Harvesting Legal Knowledge. I'm your host, Jeff Missling, Executive Vice President and CEO from North Dakota Farm Bureau. And this is kind of a collaboration between NDFB and Ohnstad Twichell Law Firm. So with us today we have Casey Drege and Marshall McCullough. So welcome, gentlemen. 

[01:29] Marshall: Well, thank you.

[01:30] Casey: Thanks.

[01:30] Jeff: We've got some great information to share with you, and I'll just turn it over to Marshall to describe kind of what we're going to talk about here today.

[01:39] Marshall: Well, Ohnstad Twichell has been in the process of working with farm entities and farm families since 1939. And I personally have been working in the agri-business with farm families and entities for, we'll just say over 30 years at this point. So as a firm and personally, we have a lot of experience in this area. 

We're going to be looking at a variety of entities. What's the appropriate entity maybe for an operation? What are the options available to use? We'll touch a little bit just on the estate planning side because we're looking at the entity. Is that going to go on for the next generation, future generations? Anything with agribusiness that involves real estate. With the rapid appreciation in values over the last years, we need to address some real estate issues and then kind of the corporate and contractor leases issue issues that go with it. So we'll kind of focus on just the entity side, sort of advantages and disadvantages and some tax issues to look out for, whether you're a sole proprietorship, a partnership, a limited partnership, an LLC or a corporate status. So those are what we're hoping to cover in today's session.

[02:52] Jeff: Sounds good, Marshall. So to start it off here what are some things farmers should be considering in regard to forming a new entity? And why does it matter?

[03:01] Marshall: I'll start first. You know, the entity type makes a big difference. One, we're often looking at a type of limited liability, some liability protection. If you're a sole proprietor, all your personal assets would be at risk. So if something happened on the farm and you were sued, you could be chased all the way to personal bankruptcy. So one issue would be the liability protection. We'll see that often if someone has their rolling stock, put the semis over the road, vehicles, maybe in a separate LLC, add some liability protection. 

We're seeing a lot of employee workforce issues, some from foreign countries coming in for harvesting or planting season. We just want to make sure that there's some liability protection whenever you have employees working for you. 

A second thing to consider when you're looking at it is, are there future generations? Is this an entity that you're hoping to pass on to a son and a daughter, grandson, granddaughter, or is this something that it's really just you and kind of the time you reach retirement stage, you're thinking this would be liquidated. There are a lot of tax consequences that go with liquidating some of the entities. And it would be very difficult to just wind one down in one year. 

Kind of passing it on to future generation. We have issues with the value of farmland. How are you going to get the value of that farmland? How are you going to control it? Maybe it cannot go all to the one farming heir, but has to be split among the members and we want to tie that up. We'll also look at gifting over time. If it's something you slowly want to get someone involved. How do you give part of the entity? Well, if it's a corporation or partnership, you can get those interests over time. 

Again, the estate planning, kind of the fairness side, reducing a taxable estate even with the larger unified credit amounts. I do have clients that are facing an estate tax problem, so we're trying to get that under control. There's also wanting to tie the land up for the future generation. So how can we do that? With some rental agreements or options. 

And probably the last reason is to raise capital. And I think Kasey will get into some of the, the corporate farming rules, who you can have. But with land where it is or even where machinery and equipment that the values right now, sometimes you just need to be able to raise some additional funding or some additional capital to help you through some tough periods. And what type of entity you choose can make a difference.

[05:44] Casey: So kind of piggybacking off of, of what Marshall said: Liability is really one of those things we're looking to give farm farmers, but also just business owners that protection, that liability protection. So the one kind of unique aspect we see, especially in North Dakota being such, you know, an agriculture business area, is that families are involved often. And that's not always the case with, you know, general businesses or, or general ownership issues. We don't, we don't always have those same issues. But because families are so involved, we do kind of blend over into estate planning issues. And as Marshall brought up estate, estate planning issues that come up. The, the liability protections, again, it depends on kind of the, the unique circumstances of, of that family or of that operation. You know, we don't, we don't often see partnerships in just general corporate, the general corporate world, but we see it a lot more in the farming, the farming world. 

If you grow sugar beets, you are more than likely going to need to be very intentional about how you set up your operation and specifically to that legal entity side. How, how are you set up as far as the state goes, as far as the, how the state views your operation. 

Another thing we do that is really specific to farming operations is we might need to create multiple entities and kind of stack those on top of each other. The North Dakota Legislature has passed specific statutes that relate to farming entities and we'll get into that a little more as we talk through it. But if you have some outside individuals who are not a part of the family, we might have to get creative and help create a structure that allows for exactly what you're looking for. And if you're looking to include non-family members in, in whatever operations you're doing. So there's a lot, there's a lot that goes into all of that.

[07:46] Emmery: Can you form your own entity by yourself or using AI? Let's find out.

[07:53] Jeff: Talking about creating an entity initially and then dealing with filings and continued compliance after you've, you've created the entity. Can our members go out and create an entity themselves? It sounds like a, it would be easy. Or nowadays with, with artificial intelligence maybe the perception is that oh, it's easy to form an entity like this, but is that the case?

[08:16] Casey: The legal answer is yes, they can. The practical answer is I would be careful about doing that. And specifically AI. It's not there today, but we do run into issues with individuals trying to set up their own entities. And again, when we talk about how the Secretary of State views farming entities. The filing is actually, I don't want to say more difficult, but it does require a lot more information. If we're going to file a simple LLC, it requires some basic information as far as a principal address, registered agent, some very basic information. 

When we are looking at a farming entity, the Secretary of State is actually going to require those individual members be named, their address, land that is held by the entity. You're going to have to describe that, including the acres, including the county. There's a lot more that goes into that. So the short answer, yes, your members can file, but we're always happy to help with something like that because it can, it can cause a lot of issues, and we've seen issues come up. 

I recently had a client, he was reaching out to us for a simple contracting issue and, you know, we had followed up. Okay. Do you have your entity set up? Yep, I do. Well, when we went back and looked on the Secretary of State site, he did in fact fill out some forms, but they weren't the correct forms. And he filled out a DBA form, basically a trade name form. So he was left completely exposed to that liability. You know, to his credit, he was trying to do it. He was filling out the correct information on the form. He had just selected the incorrect form. So, you know, we run into that on occasion, and that's, that's something we want to avoid. Something really simple to avoid as well.

[10:09] Jeff: I'll put a plug in for, for Ohnstad Twichell. My wife and I formed multiple LLCs and we worked through your office here to form those. And it was. The nice thing about the one in particular was that you included bio provisions in that initially. And I'd have never thought to do that. Cause you're thinking, well, we're just forming it. What could possibly go wrong or what could possibly change? And we utilize those bio provisions. And so it is handy to have, you know, go through a reputable law firm like Ohnstad Twichell to help get you started down that path. And so just want to want to mention that.

[10:45] Marshall: Yeah, that's one of the things kind of on, on my list is really when you're deciding what type of business entity you want, you have to look at the exit strategy as well. We talked about it maybe a little from the estate planning standpoint, is that going to be passed down? But what if another issue comes up? What if there's a divorce? What if someone passed away prematurely, or maybe you just don't get along anymore? It's easier to address those issues up front when you're getting along than to wait till the problem arises and then not have anything written down. 

So most of the buy-sell agreements would discuss a transfer during lifetime. Maybe one of the two partners or one of the two shareholders wants to move to Minneapolis. They don't want to be involved anymore. How are you going to buy them out? What are the terms? What are the price? Let's address those upfront while everyone's in agreement, not down the road once the issues arise. 

So the other is when you're looking at the type of entity again we talked about, is it for one generation? Maybe a corporation is not the right answer if you're going to do something for one generation. So again, what's that exit strategy down the road? If it's going to pass on for future generations, then maybe the corporation is the right approach. So again, looking at that exit strategy, kind of head off those problems in the future if something comes up. 

Death, divorce and disability are the three big ones we like to address there. So others we look at. When you're creating it, you know, artificial intelligence can help you a lot way through it, but you again have to make the right decisions. 

As a sole proprietorship, there's really no filing with the Secretary of State. But yet if you want any type of limited liability, that limited liability protection, you have to file through the Secretary of State. So again, whether it's a part or a limited partnership, an LLC, a corporation, all those require that filing with the Secretary of State. And it can make a big difference. Like Casey was saying, if you check the wrong box or use the wrong form, you can go from a sole proprietorship tax free into a partnership, you can go tax free into an LLC, you can go tax free into a corporation, or your partnership or your LLC can grow into that corporation as long as you're going in that direction. Sole proprietorship, partnership, LLC, corporation, it's tax free on formation, but you can't go the other way. 

If you make a mistake and create a corporation and put your assets into it and you decide that was a mistake and you want to dissolve that corporation, you just triggered some income tax issues on dissolution of that corporation. It's not just one layer of tax, it's two layers of tax. On dissolution of a corporation, there's double taxation. So you have to be very careful if you pick the wrong entity. 

There are also timing issues if you're a corporation but you've met with your tax advisor and you want to be what's called an S corporation that's taxed differently than a C corporation. You have to file that election within 90 days. If you miss the 90 day window, you're a regular corporation for the rest of that year. And that can really cause issues with your tax planning and any distributions going forward. 

I had a client, we set up an LLC to hold the rolling stock. Well, you have to transfer title to the vehicles to the new entity within I believe it was six months. If you don't, there's a 5% titling fee. Well, the 5% was a significant dollar amount with several semis and trailers. So we ended up setting up a second LLC so we could avoid the sales tax basically on retitling the vehicle. So you can do things through artificial intelligence and you can do this yourself. But there are so many issues that without meeting with a legal advisor and actually have your CPA in the same room just to go over all the different options that are available.

[14:54] Jeff: Yeah, great points. It makes me think about all the compliance related challenges that come in, the filings that have to be done. But so once you're up and running with this entity, whatever you decide to create, you do have to stay in compliance through annual filings, I believe, and through the Secretary of State's office. So Kasey, if you could just walk us through kind of how that works.

[15:15] Casey: Sure. Yep. When you, you initially file, it's one time fee of $135 just to get going. And then each year you'll have to keep up and file again. And I believe that's about $50 to file each year. That's something we see a lot. People just end up missing that. And that's something we can always help out with. But really that's what your registered agent is for. So we, we try to be intentional when, when telling people, pick someone who's going to check the mail and make sure you're filing because you don't want to fall out of compliance for a variety of reasons, including, you know, some of those tax penalties if you fall out. 

So yeah, there's a lot of filing issues, but not only that specifically with farming entities, because there are those additional restrictions. The state requires that only 15 family members be a part of that entity. So if you are about to go over that, you need to start having conversations of how are we going to handle this moving forward? Not only do we need to make sure we're filing our compliance in that way, but we need to remain compliant as far as state code goes. We've also seen where families decide to sell a piece of land. Well, the statute also requires that the farming entity either own or lease land. So again, there's a lot of compliance that that can be triggered or if you fall out of compliance, a lot of issues that can be triggered with that as well that are unique to farming entities.

[16:50] Jeff: So Casey, Marshall, thank you so much for your time. How do people get in touch with you? I guess if they want to follow up with you on some of this information?

[16:58] Marshall: Yeah, but they're... would be our names on the website at Ohnsteadlaw.com and then the telephone number is 701-282-3249. So you can reach all of us at that number.

[17:08] Jeff: Sounds great. Thank you.

[Straight Talk stinger]

[17:12] Emmery: You've been listening to Straight Talk with NDFB our Harvesting Legal Knowledge season. To watch the entire interview with Jeff and Ohnstad Twichell, please click the link below. If you have any questions, contact us at emmery@ndfb.org.

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