Liability Insurance May Not Save Your Farm, but an LLC Can

Using multiple LLC's can drastically increase the liability protection for a farm.  This article discusses the layout of doing so. 

First though:  I generally hate disclaimers, but I find it necessary to state a few.   First, this article is for general information only and is written for the benefit of fellow farmers to consider in structuring their farms.  Second, state laws vary, and this article is not state specific.  Third, if you feel the need to comment on whether you disagree or that I’m wrong, please first go to:  https://www.extension.purdue.edu/extmedia/ppp/ppp-91.pdf.   It is an excellent publication from Purdue that is in line with what I am writing about in this article and gives some real life examples.  

In the last article, I wrote about how liability insurance is a necessity, but with the trends in jury verdicts, it may not be enough to save the farm.   In other words, you could get a judgment against your farm for more than the policy limits of the insurance.  Structuring the farm in the right format can provide you additional “insurance”.   

1    The Farm Operation:  The “farm operation” should be established as an LLC, but the LLC owns very little in the way of hard assets.  In other words, the LLC does not own land, machinery, trucks, or other hard assets.  Essentially, growing crops, stored grain, and other minor assets are all that this company should own.  In all reality, from a liability perspective, the greatest "asset" this company may own is the liability insurance.  In other words, it is the highest value item a plaintiff stands to gain by bringing a lawsuit.  By keeping the value of hard assets in the operating LLC low, it dissuades a plaintiff from wanting to seek a payout beyond the insurance coverage.  After all, why go to trial and try and get a judgment beyond the insurance coverage if the amount to recover from the company is small?

    

      Because this entity is the operational part of the farm, this will be the entity that will bear the brunt of any lawsuit that comes from accidents or otherwise.  For example, if this entity is the operator of farm machinery that is involved in an accident, this is the entity that will be liable and most likely be sued. 

2    The Real Estate:   Farm real estate should be placed in its own LLC.   No other type of assets should be owned by this LLC.  This is because it is difficult for land to cause accidents.  Many states have passed laws that landowners are not responsible or make no guarantees of safety regarding real estate.  The days of someone tripping over a rock in a field and suing the farmer for not picking the rock have eroded.  So, by keeping just land in the LLC, the liability generated by the land, and likelihood the LLC is ever sued for injury, death, or otherwise, is relatively low.  If we were to commingle with machinery or trucks, we would add liability producing assets to the LLC.  

       The Machinery:  Machinery should be placed in a separate LLC as well.  Machinery are assets that can be more liability causing because of travel on roads and so forth.  However, if the machinery is rented by the farm operation LLC, and there is an accident, most often it is the farm operation that will be sued, and not the machinery LLC.   Think of it this way:  if you rented a tractor from the local John Deere dealer and were involved in an accident, who is liable?  Well, generally it is due to operator error, so the person/entity operating the tractor is liable.  Unless it can be proven that the dealer negligently maintained the tractor and that is what caused the accident, the dealer is generally insulated from liability.  Same goes with us setting up the farm where the farm operation LLC rents the farm equipment from the farm equipment LLC.  Because the farm operation LLC is operating the tractor, it is the farm operation LLC that is most likely subjected to the lawsuit, and the machinery LLC is kept from being sued.

4   Semi Trucking LLC:  Semi trucks are their own liability generating animal.  We know that in most states farm semi trucks do not need to be DOT inspected and drivers do not need to have a CDL.  Unfortunately, not being DOT inspected or having a CDL can, and will, be used against the semi owner in cases of an accident.  However, if the farm operation LLC rents the semi truck from the semi trucking LLC, this is similar to renting a truck from, say, Ryder.  Liability likely stays with the farm operation LLC, unless it could be shown the semi trucking LLC was negligent in maintaining the truck and such negligence caused the accident. 

Here is visual of how a farm should be structured:  

Another benefit of an LLC is that even if a creditor gets a judgment against a member of an LLC, the creditor normally is not allowed to step into the shoes of the member.  The creditor does not get the right to vote with the member's membership interest.  Rather, the creditor obtains a "charging order", which allows the creditor to only receive distributions, if any are made, that the member would receive.

Having the farm set up using multiple LLC’s is relatively simple and inexpensive, especially in light of the amount or “insurance” it affords a farming operation.  As stated in the previous article, judgments can be rendered against a farm that are above the amount of liability coverage of the farm.  In these instances, farm assets will have to be sold.  However, with the proper setup, the amount of liability can essentially be capped to the value of the farming operation, which as shown above, excludes land, machinery, and semi trucks. 

Few would disagree we live in a litigious society.  Simply put, there are individuals that have no qualms playing the court system like the lottery.   All that is needed is a sympathetic jury and a plaintiff can walk out having been awarded tens of millions of dollars. Less and less will liability insurance save the day.  To be fully protected, it now takes a strong level of liability coverage and having the farm set up in the proper structure.   

        In closing, remember there are no guarantees that a lawsuit could tie up all the LLCs that consist of the farm or liability could not be found on one of the asset holding LLCs.  All of that will be fact specific and depend on the circumstances.  However, when properly structured and utilized, having multiple LLC's does add a significant amount of protection.