Keep Your Shields Up
Originally published by Michigan Farm News on April 1, 2015; republished with permission.
If you conduct your farm business through a corporation, limited liability company, or limited partnership, it is important to operate your business in a way that maintains the limited liability shield provided by these entities.
This limited liability shield is what protects you, as an owner of the entity, from the acts or obligations of the entity. The structure for your family farm may involve an operating entity and one or more real estate owning entities. It is important that each of these entities be operated in a manner that maintains the separate identity of each entity, including such things as maintaining proper entity records and not comingling assets between entities.
For example, if you have an operating entity and a real estate entity, you should have written leases between the entities and you should maintain a separate checking account for each entity.
For the operating entity, clients typically understand the importance of opening a separate checking account. Where I start getting grumblings from farm clients is when I talk about having a separate checking account for each real estate entity. In this regard, the real estate entity might only receive two or three deposits a year for such things as rent, a USDA payment, and perhaps a patronage check. There may be an equally small number of checks out of the account for such things as property taxes, a mortgage payment or an owner distribution.
Because of the small number of transactions for a real estate entity, farm clients sometimes ask whether a separate checking account is really needed or whether it is just an exercise that we lawyers dream up on sleepless nights.
While having a separate checking account and generally keeping the business and affairs of each entity separate and distinct may seem unimportant, a personal injury attorney or the attorney for a judgment creditor may attempt to argue that you are not entitled to the protection of the liability shield in a process known as "piercing the corporate veil."
While there are a number of ways to pierce the corporate veil, some common defects include: (1) failing to follow sufficient corporate formalities, (2) failing to properly document transactions between the individual owners and the entity, and (3) failing to keep financial transactions of the entity separate from the individual owners or other entities. If successful in piercing the liability shield, your individual assets and those of your other entities may be at risk.
So, if you have never had a serious accident on your farm or have never been involved in litigation relating to your farm, consider yourself extremely fortunate.
However, do not consider yourself immune from these matters. If your farm includes more than one entity, operating your farm in a manner that respects the separate legal status of each entity, including things that you may consider to be trivial such as not commingling assets or properly documenting transactions, are important activities in protecting what you have worked so hard to acquire.