- Mending Your Fence: Business Procedures to Protect the Farm and Your Family
- December 12, 2014 | Authors: William H. Franks; Jeffrey R. Wonacott
- Law Firms: Smith Haughey Rice & Roegge, P.C. - Grand Rapids Office ; Smith Haughey Rice & Roegge, P.C. - Traverse City Office
- There are a variety of reasons that you may choose or have chosen to operate your farming business through a legal entity (generally a corporation or limited liability company (LLC)). One of the most important benefits from operating your business through a legal entity is the limited liability protection afforded to the owners of the company. Once the company is formed, it becomes a legal entity, separate and distinct from the company owners.
If done correctly, the legal separation between the company and the individuals who own it insulates and protects the owners from the liabilities of the business. The company must follow and maintain certain corporate formalities to ensure that the owners remain protected from the liabilities of the company and that the corporate veil withstands scrutiny. Failing to comply with these formalities may result in the loss of the liability protection, leaving the company’s owners personally liable for the company’s liabilities and obligations.
When analyzing whether a business owner should be held liable for a business’ liabilities and obligations, a court will consider whether the company followed and maintained the corporate formalities. In other words, have the company’s owners treated the company as a separate and distinct legal entity? While not exhaustive, the list below contains certain actions that business owners and the company should take to maintain the corporate veil and the liability protection it offers to the business owners:
Make sure that the business has sufficient assets to operate and meet foreseeable business requirements and debts.
In the context of a corporation, at a minimum, conduct an annual meeting as required under Michigan law. Minutes, preferably written, should be maintained for any meeting of the shareholders and the board of directors. The corporation’s bylaws should govern notice requirements, what constitutes a quorum, and the frequency of meetings for shareholders and the board of directors. Additionally, the Michigan Business Corporation Act and the bylaws should provide that action may be taken with the written consent of the shareholders or the board of directors. It is important, however, to make sure that appropriate business matters and actions taken by the company are considered and approved by the shareholders and board of directors as appropriate, by written consent or meetings of the shareholders and/or the board of directors.
LLCs are not required to hold annual meetings of the members or managers. However, LLCs should observe regular membership and manager meetings on appropriate business matters, and minutes should be kept reflecting the actions taken by the company. Similar to corporations, LLCs may also approve company actions by the written consent of the members or managers as appropriate, as provided for by the Michigan Limited Liability Company Act or as detailed in the LLC’s operating agreement.
The company should have bank accounts separate and distinct from any of its owners. No owner or individual should be an account holder on a corporate bank account. Corporate and limited liability funds and operations should be segregated from those of its individual owners. The company should also maintain separate financial and record books and keep such records up to date and accurate. In no event should the assets or funds of the company and its individual owners be commingled.
Company funds or assets should not be used for non-company or personal uses or purposes. For example, an individual owner should not pay his/her home or car payment from the corporate accounts.
Maintain an "arm’s length" relationship between the company and its owners. If the company intends to use real property owned by an individual owner, there should be a formal lease agreement reflecting fair market terms between the company and the real property owner. If the company loans money to an individual owner or borrows money from the owners, that should be memorialized through appropriate loan documents. In any case, transactions between the company and any of its individual members should also be approved by disinterested members or managers (in the case of an LLC) or shareholders or directors (in the case of a corporation).
Deal with third parties in a manner designed to support the separate existence of the LLC or corporation, such as signing contracts, agreements and other important business documents in the name of the LLC or corporation, as appropriate. An individual owner should never sign a document on behalf of the company in his or her individual capacity. Company contracts and agreements should be signed in a manner similar to the following:
XYZ, Inc. (or LLC)
[Printed name of signer]
Its: Officer, Authorized Agent, Member or Manager
Obtain any and all appropriate licenses, permits, assumed names and/or trade names in the name of the company. Insurance and loans should be obtained in the company’s separate name.
Efforts should be taken to segregate the business operations of the company from the business operations of any individual owner or related entity. Avoid the use of the same office or business location, contact information, or employment of the same employees by the company and any of its individual owners or related business entities.
Business records should be kept, evidencing the separate and distinct nature of your farm. In addition to preserving the corporation’s liability "shield," recordkeeping and proper documentation of corporate action can promote communication among the owners and those who are operating the business; minimize misunderstandings; address conflicts of interest; give guidance to directors, officers and others in discharging their responsibilities; and protect owners from claims of minority oppression or breaches of fiduciary obligations by explaining the business reasons for decisions. Sometimes the act of describing an action in writing can encourage more careful thought and assist in the overall operation of the business.
Recordkeeping is also important from an operational standpoint. Often times financial institutions, insurance companies, landlords, among others, will require organizational or financial documents of the company. It may raise some "red flags" for those entities if separate and distinct corporate records are not available.
Creating and maintaining a separate legal entity (LLC or corporation) for the operation of a farm is important to protect the individual owners from potential liability from the farm business operations. At the end of the day, the best way to maintain the "corporate veil" and protect individual owners from the debts and obligations of the company is to treat that company as a separate and distinct legal entity and to maintain the appropriate company books and records to support the farm as a separate, distinct and independent legal entity.