Limiting Liability for farms by using an LLC
by
John Jacob Schwarz on May. 09, 2018
Business Business Organization
Summary: Farms and businesses can limit their liability by using a Limited Liability Company.
Limiting liability: It’s all in the name for an LLC.
This article continues the series on Limited Liability
Companies (LLC) and the benefits that a farm can obtain from utilizing one or
more LLCs.
Two hundred years ago, let’s say a farmer bought a herd of
cattle. If the cows escaped and caused
damage, the farmer could not only lose the value of the cows, but the farmer
was also personally liable for the value of the damage the cows caused. Simply stated, there was no mechanism for a
farmer to detach from liability that an asset could cause. This unlimited liability no doubt caused
people to be afraid to take risks, start businesses, and so forth.
After the founding of our country, our courts began to
establish the principle of limited liability.
The term "limited liability" has
existed since the formation of corporations. Corporations were formed in part
because the owners of the corporation didn't want to be held liable for actions
of the business. Corporations are considered separate entities from their
owners and shareholders. This in turn
means that the liability of the corporation is separate. As the name implies, this "limited liability" has been
extended to LLC’s.
But to what extent is liability limited when it comes to an
LLC? Generally, the financial liability of
an owner of an LLC is limited to a set amount.
Most commonly, this amount is the amount the owner has invested in the LLC,
or in a sense, what the value of the LLC is.
If an LLC is sued, the plaintiffs are suing the company, and not the
owners, so it is the assets of the LLC that are at stake, not the entire assets
of the owners. Owners of an LLC are also not generally liable for the debts of
the LLC, so again, there is a limit as to how much an owner of an LLC is on the
hook for.
Compare the limited liability benefit of an LLC with the
unlimited liability of a sole proprietorship.
Quite the opposite of an LLC, a sole proprietorship essentially has unlimited liability. This means farmers operating as a sole proprietor
essentially have no limits to their liability.
So, when bad weather blows in, a farmer operating as a sole proprietor
will likely have all their assets at risk.
Meaning, a farmer operating as a sole proprietor is one lawsuit away
from potentially losing everything the famer owns, being farm and non-farm
assets.
Over the years, I have noticed that farmers take the position
that liability insurance is the way they will limit their liability. Of course, liability insurance is important
and necessary for a farm. However, what
happens if your insurance company denies your claim? What happens if you are sued for more than
your policy limits and the plaintiffs obtain a judgment for more than your
policy limits? Ideally, the amount of
liability coverage on a farm would be equal to the total value of the farm’s
assets. However, that may not always be
feasible. It is important to remember that insurance does not limit your
liability. Rather, it is just there to
pay a liability that may arise.
Generally my advice to clients is not to put all their eggs
in the insurance basket. My farm carries
liability insurance, as likely does everyone reading this article. However, I’d prefer to not put the life of my
farm solely in the hands of an insurance policy. That’s why utilizing one or more LLC’s in a
farm operation is so useful.
Essentially, you are afforded another insurance policy by way of the
very nature of the LLC in that it will set a cap on the value of the assets
that are at risk. Quite frankly, I
believe the LLC is one of the best insurance policies a farm can take out. Better
yet, whereas an insurance policy comes with a yearly premium payment, setting
up an LLC does not.
In closing, we live in a litigious society and farming is a
very dangerous occupation. Farms are
only one accident away from the possibility of being subjected to a lawsuit for
millions of dollars. Utilizing one or
more LLC’s in a farm operation greatly reduces the risk of a farm being wiped
out.
John J. Schwarz,
II, is a lifelong farmer and has been an agricultural law attorney. 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.
