Liability. It's unavoidable when things go wrong. And as anyone who grew up on a farm knows, there are multitude of things that can go wrong on a good day. The main reason to set up a new company for your custom farming operation is not to avoid liability, but to make sure the liability stays connected to the custom farming business and not your farm. That way, the worst case scenario (if your insurer does not resolve a liability claim) is bankruptcy for the custom farming operation. That's a lot better than bankruptcy for your entire farm.
There are some things to keep in mind when setting up a custom farming operation as a limited liability company, corporation, or other business entity. It's easy to take the initial step and form the company by filing the correct form with your state agency (in Indiana, with the Secretary of State) and tendering the initial fee. But you should also take the next step, which involves working with an attorney to draft "bylaws" or an "operating agreement" that sets forth the rules for how corporation or LLC will operate. This is typically not an expensive legal undertaking, but its also not a do-it-yourself project.
You also must, as we say, respect the corporate formalities. That means creating a separate checking account, creating separate books, obtaining insurance, and making sure your farm pays the custom farming company for work it does, and vice versa, if the custom farming company borrows equipment from your farm. Employees working for the custom farming operation should be paid by it, not the farm. And do not commingle funds.
Creating a new company for your existing custom farming operation requires you to jump over a few hurdles, but end result is worth the effort.
By Todd J. Janzen
To read about the benefits of a corporation, click here.
To read about the benefits of a LLC, click here.
This articles is intended for informational purposes only and not as specific legal advice for your farm or custom farming operation. You should consult an attorney if you desire to properly set up a corporation or limited liability company (LLC).