What is a family farm? Definitions vary, depending on the person answering, but one thing is for sure—it shouldn’t be based on the farm name.
“I think most people don’t realize that every business they interact with on a daily basis is in a legal entity of some kind,” said John Kragt, an attorney with McGuire, DeWulf, Kragt & Johnson P.S. in Ritzville, Wash. “But when people think of farmers, they think of the Johnson family, and when they see Johnson Farms Inc. or Johnson Family Landholding LLC, there’s a disconnect. There’s the concept that a family farmer shouldn’t be an entity. That doesn’t make any sense.”
Organizing a farm into multiple legal entities provides owners and operators legal protections and tax advantages. When dealing with farmers, Kragt says he strongly suggests the family forms a family corporation for the operation of the farm and even more strongly suggests forming a limited liability corporation (LLC) as a landholding entity. He called an LLC the best tool for keeping a family farm actually in the family.
“I think people see an entity name and think big business. I think it’s the opposite. I think the entity helps keep it a small family business, puts the family in a position where they have the ability to afford, at today’s prices, to keep the family farm in the family,” he explained. “Everybody thinks it’s protection from the outside world, but it’s protection from inside.”
An LLC generally sets out the expectations and legal requirements for a family on who can have ownership in the operation and puts a process in place in the event an owner wants to sell their units. Generally, an LLC gives an advantage to the other owners to buy out the family member; advantages often include a lower interest rate or a longer loan term. Kragt said he’s set up many family farms this way, and people always ask him why they need an LLC. He explained that problems generally start with the second generation of nonfarming heirs. This group didn’t grow up on the farm and likely doesn’t have the same emotional attachment that preceding generations did. They may get frustrated at the complexity of farming and feel like the investment isn’t worth the hassle.
“If you and I each have half an interest in farm ground, you could sell that to whoever you want, and I would have no say,” Kragt said. “But if it’s in an LLC, I may have the ability, depending on how the agreement is structured, to say no and buy you out at this interest rate, etc.”
The advantages of operating a farm under a corporation, usually a C corporation, are twofold: tax benefits and liability protection. There are also advantages to operating as a C corporation when dealing with Farm Service Agency programs.
The Washington State Department of Agriculture (WSDA) estimates there are 35,900 farms in the state, and that about 95 percent of them are family owned. At the national level, the U.S. Department of Agriculture classifies family farms as “any farm organized as a sole proprietorship, partnership or family corporation. Family farms exclude farms organized as nonfamily corporations or cooperatives, as well as farms with hired managers.”
For Kragt, a family farm is one that is farmed at the local level by operators that are part of the local community, regardless of where the actual landowners reside. See sidebar to hear how other Washington farmers define a family farm.
“Any daily interactions that somebody has with any type of business, that business is going to be legally put in an entity, because there are too many attorneys in the world,” he said. “The idea that you are okay with everybody you interact with being in an entity, but a family farm that provides income and way of life shouldn’t be in a legal organized entity and is no longer a family business? That’s not a realistic situation for the world we live in.”