FARMING AS A SOLE PROPRIETOR PUTS YOUR FARM AT RISK

From time to time, non-farm friends of mine will invite me to a casino.   Casinos really are not my cup of tea, and I remind them that my gambling each year is putting seed in the planter, and I have far more money at stake than I could ever take to the casino.
               If you think about it, we as farmers each year have, just to name a few, the following risks:  weather, weeds, prices, plant disease, etc.   These are referred to as “production risks” and, simply stated, each year we take on these risks that we accept are just part of farming.   As to these risks, farming as a sole proprietor, S-corp, C-corp, or other entity, has no bearing on these risks.
               Now, let’s consider other risks that are what I would call “operational” risks.   These risks exist as part of a secondary layer of risk.   For example, injury or death to an employee, accidents occurring on roads that cause injury or death, chemical/fertilizer spills or drift, on farm accidents to third parties, etc. Whether we are farming as a sole proprietor or legal entity will indeed have bearing on these risks.
               To begin, we generally rely on liability insurance to come to rescue should we faced with a claim stemming from operational risks.   However, I have seen three glaring drawbacks that cause me to advise clients to not put all their eggs in the insurance basket.  First, farmers are generally under insured.  Most farmers I have worked with over the years have 1 million dollars, or less, liability coverage.  Sadly, 1 million dollars does not buy a whole lot these days.   A severe accident can generate more than a million in medical bills.   As for a death, in practically every state a life, via jury verdicts, is worth over a million dollars, likely several million dollars.   Second, a farmer generally should be insured for the amount the farm operation is worth.  If your farm operation is worth 4 million dollars, you should consider having a 4 million dollar liability policy.   Lastly, keep in mind that if an insurance provider can deny a claim, they surely will.   I’ve been to court many times representing clients against their own insurance carriers because the carrier denies or limits coverage.  
               Another response I have heard from clients over the years is the fact they have farmed for X number of years and never have been sued.   I tell them great, but is there a guarantee that such streak will continue?   After all, let’s consider a few things.   First, a person’s driving does not improve with age.   Farmers driving semi trucks or farm machinery out on the roads in their 70s are surely not as good drivers as they were at younger ages.  Second, farm operations generally get bigger, more complicated, and more widespread as time goes by.   All this increases our likelihood of having a claim or lawsuit lodged against our farm.
               Further, don’t forget we live in an ever litigious society.   Some people have no qualms in playing our court system like the lottery.   Things that would not have generated a lawsuit years ago could generate a lawsuit in today’s times.   So, the fact you may never have been sued really does not carry much weight. 
               The main drawback with a sole proprietorship is that a farmer is taking on unlimited liability.  For example, if your semi truck wipes out a school bus, the driver is found negligent, and you’re sued for millions or tens of millions of dollars, you are likely losing everything.   So, each year you farm as a sole proprietor, you are literally needlessly betting the entire farm.  Without a doubt, you are only one accident/incident away from losing everything.
On the flip side, establishing your farm as a legal entity generally caps your liability.   Take the LLC for example.   With an LLC, with is a “Limited Liability Company” you are “limiting your liability” to the value of the company.   So, if you establish your farm operation as an LLC, and the LLC owns no machinery or land, you liability is capped at the value of the operating LLC.  Thus, you have drastically reduced your liability and are no longer betting the farm year in and year out.
In closing, there is no reason to put your livelihood and assets at risk each year.   Simply moving away from farming as a sole proprietor will reduce, or eliminate, such risk.  I tell clients setting your operation up as a legal entity in the cheapest insurance you will ever buy, but likely the best.   You’ll hope you never have to rely on it, but if you do, you will be glad you had it.


John J. Schwarz, II, is a lifelong farmer and has been an agricultural law attorney for 12 years. He can be reached at 260-351-4440, john@schwarzlawoffice.com, or visit him at www.farmlegacy.com.
  These articles are for general informational purposes only and do not constitute an attorney-client relationship.   

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