Episode 52: From DBAs to Corporations: Decoding Farm Business Structures with Ryan Conklin
In this episode of AgCredit Said It, host Libby Wixtead interviews attorney Ryan Conklin about the different types of entities farmers can use to structure their farms. They discuss sole proprietorships, partnerships, LLCs, and corporations, and the benefits and drawbacks of each. They also touch on the importance of having an operating agreement or partnership agreement in place, as well as the role of entities in succession planning. They emphasize the need for farmers to communicate with their lenders and other advisors when setting up entities and making changes to their business structure. They also conclude with advice for young and beginning farmers to start early when it comes to setting up an entity.
- Show Notes
Navigating the realm of business structures for your farming operation involves crucial decisions that can impact your farm’s financial, legal, and operational aspects. In this blog post, we dive into the intricacies of different types of business entities with insights from Ryan Conklin, an agricultural attorney with Wright & Moore Law Firm. From the simplicity of sole proprietorships to the complexity of multiple entity plans, we explore the nuances of each entity type and the considerations for farmers in making informed choices for their businesses.
DBA stands for “doing business as”. An individual or farm can choose to conduct business under a name that is different from their legal name by filing a DBA. However, registering a DBA is not the same as registering your farm as a business. “If you’ve got a DBA set up, all that really does is signal to the public the name under which you’re operating,” explains Ryan. “It doesn’t do anything in the way of taxes or legal protections afforded by business entities.”If you register a DBA without first forming an LLC, corporation, or some other legal entity type, this is where sole proprietorship comes into play.
With a DBA, you’ll be recognized as a sole proprietor. As a sole proprietor, you can legally conduct business, but you won’t have any liability protection. This means you are responsible for your farm business debts and obligations. According to Ryan, a lot of farms still operate today as sole proprietorships.
“When you’re operating as a sole proprietorship, this might be just “Wixtead Farm” for example, that’s it. There’s no co-owner. You buy all the equipment in your name, you sell all the grain in your name, and all that income and expense is reported on your Schedule F.
Limited Liability Companies are, in Ryan’s words, “the gold standard in business entities today.” They are the most common entities set up for farms.
“An LLC is the merger of the best parts of two business entity options—we get all the tax benefits of a partnership with flow-through taxation, but we get the liability shielding of a corporation.”
Ryan also notes that LLCs can be set up as single-member LLCs or multi-member LLCs. The difference is their treatment on the tax side. "Single-member LLCs don’t have to file a separate tax return,” explains Ryan. “But if you’ve got a multi-member LLC, it does have to have its own tax return.
And because of the relationship between multiple business owners, you want to make sure the business is structured legally in the correct way to manage decision making.” When the unexpected occurs, Ryan says there is one crucial document that all entities should have, and that’s an operating agreement.
“The operating agreement is such an important part of the LLC setup because it’s the rulebook that you’re playing by as co-owners.”
Attorneys, lenders, and other professional advisors will want to see more than a Secretary of State’s certificate and a tax ID number. Documentation on things like who is authorized to borrow money, pledge company assets as collateral, or facilitate the day-to-day operations, are all important to have in writing.
Another traditional entity structure is a partnership. Partnerships are common for farm families doing business together. “For example, you have a brother and a sister who are operating a farm together, they split grain checks, they share in the expenses of equipment, and they depreciate assets together. Under Ohio law, they are actually operating a partnership.”
Ryan explains that even if you haven’t taken the steps to set one up, this operating structure is still considered a partnership because of shared income and shared expense. The shared income and expense make partnerships easier to manage on the tax side, but according to Ryan, partnerships lack liability protections for personal assets.
“So if you have a farm accident, and even if you weren’t involved in that accident whatsoever, by virtue of being a partner in that business, the liability would actually trace back to your personal assets.”
Another type of partnership to note is a general partnership. “General partnerships are set up for one reason and one reason only, and that is FSA payments,” says Ryan. “While LLCs and corporations only receive one FSA payment limitation… a general partnership adds some benefit in allowing you to have as many payment limitations as there are full-time farmers.”
For example, in a general partnership with four 25% equal partners, the FSA will give you four payment limitations. But Ryan says the drawback here is the poor liability protections partnerships afford.
To solve the liability issue with partnerships, this is where corporations come into play. On the flip side, however, Ryan relates that the challenge with corporations is taxes. “You miss out on some of those big tax benefits that an LLC or a partnership would offer.” From a succession planning perspective, Ryan explains that landholding businesses are most commonly put into corporations.
“They’re no longer operating, they’re no longer buying equipment, they’re no longer trying to be the primary business that’s driving the farm. If we can get those corporations down to where they’re just land with a landlord, we can make them easy to operate.” In Ryan’s opinion, “corporations produce the most heartburn in succession planning.”
Multiple Entity Plans
“We can put folks in a real mental pretzel with the type of business entities that we set up,” explains Ryan. Some farms may have multiple entities with LLCs, partnerships, and a corporation all in one. “It might sound like it’s too much, but there’s always a good reason why they may be set up that way.
Many farmers have side businesses in addition to their farming operations. When thinking about setting up multiple entities, Ryan says the important thing to remember here is protecting each business.
“Think of those different entities, those side businesses as kind of like a Venn diagram. If you’ve got a landholding business, a farm operating business, and an agritourism business all operating under the same roof, do you want that agritourism business to overlap in any way to where if there’s an accident or issue, it interferes with the farm operation?”
Start early. “The side businesses or the main farming business that you're working on as a young or beginning farmer, it's something you'll probably carry with you the rest of your career. So get that entity set up sooner rather than later.”
Here’s a glance at this episode:
- [01:25] Ryan introduces himself, his background in agriculture, and his career path in agricultural law.
- [02:33] Ryan discusses whether or not a farm must operate under an entity.
- [04:25] Ryan introduces some traditional structures like sole proprietorships, partnerships, and DBAs.
- [06:54] Ryan explains what a Limited Liability Company (LLC) is and its benefits.
- [09:27] Ryan explains the tax implications of a single-member versus multi-member LLC.
- [11:18] Ryan gives an example of how a farm operation might have a multi-entity setup.
- [17:19] Ryan explains the importance of an operating agreement to serve as a rulebook for company owner(s).
- [19:50] Discussing LLCs, Ryan shares what it means to be either a member of an LLC or a manager.
- [22:01] Discussing partnerships, Ryan discusses the benefits of general partnerships, especially with farm size, and why they are common tools in succession planning.
- [27:08] Discussing corporations, Ryan shares some of the challenges corporations present.
- [32:43] Ryan shares why it’s crucial to have a team of professional advisors to assist with farm decisions.
- [37:13] For farmers with side businesses, Ryan explains the liability implications of multiple businesses operating as one.
Resources mentioned in this episode:
Share questions and topic ideas with us: Email email@example.com
Voiceover (00:08): Welcome to AgCredit Said It. In each episode, our hosts sit down with experts from all parts of the agriculture industry to bring you insights and must-have information on all things from farming to finances and everything in between.
Libby Wixtead (00:27): Welcome back to season three of AgCredit Said It, and today we are going to be talking about entities and the best way to structure your farm as the sole proprietor, or if you're going to go through succession planning. Today, we have Ryan Conklin with us again, who is the owner and attorney for Wright & Moore Law firm located here in Delaware. Welcome, Ryan. We're happy to have you again.
Ryan Conklin (00:53): Yeah. Great to be back. Libby, is there some sort of repeat guest t-shirt or a swag that I get?
Libby Wixtead (01:00): There was a talk last season from Phil that if you get on here five times, like Saturday Night Live, you get a jacket or something maybe. So I think Kayla needs to work on that. So you got to come on here a couple more times.
Ryan Conklin (01:13): Okay. Just let me know the topics. I'll be there and I'll probably make my own punch card so I can track my episode progress here. So really want to see this jacket come to fruition.
Libby Wixtead (01:25): Yes, me too. All right, Ryan, could you tell us a little bit about yourself again and how you came to this path of being one of the top law firms in Ohio for agriculture?
Ryan Conklin (01:38): Yeah, absolutely. So I grew up about 20 minutes down the road here from Delaware. So in between Plain City and Delaware, in Southern Union County. My family had a dairy farm, which was set up as a corporation that will come into play later, so hold onto that nugget of information. But our farm, we've got a lot of development pressure around our area because Columbus keeps coming out to us. But I'm really happy to have that farm upbringing and then continue with my education at Ohio State University, Florida, and Michigan State with law practice. I only have ever worked for one place. I probably will only work for one place, with Wright and Moore. So our firm focus continues to be on assisting farm families with their agricultural legal needs.
Libby Wixtead (02:33): Yes, and my husband and I have personally used Ryan and his firm, and they do a fantastic job and we highly recommend them if you guys are looking for succession planning or need any legal advice. And AgCredit also has had them do some articles in the Leader. So you'll have to look for Ryan and his partners here for those Leader articles. So we're talking about entities. Is it truly necessary for a farm to operate under an entity? I know that's kind of a buzzword and everyone's like, "Oh, succession planning, you have to have an entity." But is that absolutely right that you have to do that?
Ryan Conklin (03:15): I'm going to give you the most lawyerly answer I can give. Can you guess what it is?
Libby Wixtead (03:18): It depends.
Ryan Conklin (03:19): That is right. That is exactly right.
Libby Wixtead (03:22): I love that answer.
Ryan Conklin (03:23): It all depends. Do you ever give that to member borrowers with AgCredit?
Libby Wixtead (03:29): Yes.
Ryan Conklin (03:30): Okay.
Libby Wixtead (03:30): So I guess you could say attorney and lender.
Ryan Conklin (03:32): Yeah, I mean, just being able to say it depends. That's one-third of the way to being a lawyer. So if you want to complete your legal education, I'd be happy to offer you a position, but something tells me you're pretty comfortable with the AgCredit gig there. So is it necessary to operate under an entity? It isn't totally necessary. I think we have plenty of farms that still operate as sole proprietorships operating today. So when you're operating as a sole proprietorship, this might be just Libby Wixtead Farms, that's it. There's no co-owner. You buy all the equipment in your name, you sell all the grain in your name and all that income and expense is reported on your Schedule F. That's a very traditional sole proprietorship structure.
(04:25): Another traditional structure, but one that is technically an entity even if you haven't taken steps to set one up. But we see this very often. This is an informal partnership. So you have a brother and sister that farm together, they split grain checks, they share in the expenses for equipment, and they depreciate assets together. Under Ohio law, they are actually operating a partnership and they've done no extra steps to set that up. No additional liability protection, and no real formal naming, but Ohio law is still going to view them as a partnership. But for many farm families, they have gone the direction of setting up a business entity and there've been a lot of great reasons for doing that and why it's helped their own businesses. And I'm sure we're going to get into some of those reasons here in our discussion.
Libby Wixtead (05:21): So you have that, you talked about that partnership. What about people doing a DBA? How does that play into it? If you have somebody who has, let's say it's father, son, and father. Okay, how about we say father, son and mom, and mom and dad have 50%, son has 50%, is that still operate as a partnership or how does that play into a legal entity or not?
Ryan Conklin (05:49): Yeah. Let's say mom and dad and son are operating that partnership together doing business as Wixtead Farms. Ohio Law is still going to view them as having a partnership relationship. And one of the defining characteristics there really goes back to that shared income and shared expense. And you might go a little deeper and say, okay, how are they splitting up management responsibilities? Are they sharing decision-making power with one another? But really probably the hallmark characteristic of that informal partnership is the sharing of income and expenses. So even with a sole proprietor, if you've got a DBA set up, all that really does is signal to the public the name under which you're operating. It doesn't do anything in the way of taxes or legal protections afforded by business entities.
Libby Wixtead (06:45): So you're just still acting as an individual essentially.
Ryan Conklin (06:47): That's right. And that's going to be really important coming in later when we talk about liability.
Libby Wixtead (06:54): So why don't we just move on then to, can you describe what an LLC or a Limited Liability Company is?
Ryan Conklin (07:00): An LLC is our gold standard in business entities today. This is by far the most common entity that attorneys will set up today. I would even go so far as to say if you are setting up any other entity, you're bordering on legal malpractice. How's that for a very hot take in the legal profession here? It's just that the LLC is the merger of the best parts of our two previous business entity options. So before you could set up an LLC, you would either have to choose from a partnership, which often was much better on the tax side, flow through taxation, and easier to manage your income and expenses there, but it was non-existent on liability protections for personal assets. So if you have a farm accident, and even if you weren't involved in that accident whatsoever, by virtue of being a partner in that business, the liability would actually trace back to your personal assets.
(08:05): So for a lot of farm families, that's very concerning because one accident could wipe out the whole family. So that's on the partnership side and we solve the liability issue with having a corporation. So a corporation provides that shield for your personal assets, and as long as you're operating it correctly, your personal assets get protected from accidents that occur within that corporation. But corporations have a trade-off on the tax side because, with an S corp or a C corp structure, you have heavy restrictions on moving assets in and out. They're not as ideal for succession planning because they have so many limitations. So here comes the LLC, which is the merger of those two entities, we get all the tax benefits of a partnership with flow-through taxation, but we get the liability shielding of a corporation and it's really, those combinations have allowed us to make the LLC into the premier farm business entity today.
Libby Wixtead (09:09):
So on an LLC, you can be an LLC as an individual owner, a sole owner, or you could have as many owners or members, I guess that's probably the better word, members of an LLC. Is that correct?
Ryan Conklin (09:26): That's right.
Libby Wixtead (09:27): So with that on the tax side, you could still, as a sole member, you could still file that with your individual tax return, but if you had other members, that would be a separate tax return too. So that's just an additional step.
Ryan Conklin (09:42): Correct. So single member LLCs are possible to set up, but they get some unique treatment on the tax side. So single member LLCs don't have to file a separate tax return. The IRS treats them as a disregarded entity, so they don't need to do their own return. But if you've got a multi-member LLC, like let's say Libby, me and Kayla all in business together, that's a business where it does have to have its own tax return. It does have to have its own tax ID number. And really because of the relationship between those three business owners, you want to have them really structured legally in the correct way to manage decision making, manage what happens if the unexpected occurs, buyouts, buy sells, areas like that.
Libby Wixtead (10:36): So even on the sole member LLC, FSA still wants them to have an EIN number, right?
Ryan Conklin (10:44): Mm-hmm.
Libby Wixtead (10:44): To operate under that LLC.
Ryan Conklin (10:46): And so will many banks and many lenders.
Libby Wixtead (10:48): So you're just better off just to get that EIN number from the start just to be, I guess, compliant with everybody else and how they view your business.
Ryan Conklin (10:59): Right.
Libby Wixtead (11:00): So like you said, this seems to be the most popular entity for farm families, is that... I know you're going to say this depends, but-
Ryan Conklin (11:13): Am I really that predictable, Libby, where you can start reading my answers ahead of time?
Libby Wixtead (11:18): Yeah. But it's just this is such a popular entity structure and how does it play? Can you have multiple LLCs? Is that why it's so attractive to farm families because you can have them own different things and have you operate differently? Can you kind of paint the picture of how that works with a large operation or even, I guess it could even fall into a small operation as well?
Ryan Conklin (11:48): It could, but most often if we're using multiple entity plans, it's coming with large or maybe medium farm families. So for multiple entity plans, the thing we have to watch out for is the administrative burden that comes with running multiple entities. So is the family comfortable enough with having multiple sets of books, multiple tax returns, tracking money, moving across those businesses, tracking the distributions that would go out to members, and tracking debt? Are they comfortable working in all of those different areas together and all at the same time? Or are we just creating an administrative and bookkeeping nightmare for that family?
(12:36): Let's take for example a pretty typical multi-entity setup. We'll have a farming operation as one LLC, so maybe mom, dad, son and daughter altogether operating, putting the crop out, bringing the crop in or raising livestock. But its only job is to get that crop in, raise that livestock, sell it, make purchases of equipment or trucks or supplies, things like that. That's one LLC over here on its own. Then another LLC is on the other side where it's just land. It's often its own business. It's protected from the high-risk activities in the farm business and for transition planning purposes, that's usually just mom and dad in that business.
(13:30): They have the land paid off or they've got all the land holdings accumulated, so they want to hold onto that until they pass away. So it's often its own business and that way if again, anything happens in the farm business side, we've still got the land that we can protect, we can replace grain, we can replace equipment, we can replace livestock. But if you have farm gets sold due to a farm accident or another issue, then it's very hard to get that back.
Libby Wixtead (14:00): So that land LLC then, mom and dad are going to receive cash rent from that operating entity then, and it could be their retirement plan.
Ryan Conklin (14:13): Libby, I think you're really getting onto something here, your future in agricultural law or you've just read too many Wright & Moore plans here where you know our tricks of the trade. In a meeting with a farm family, this is one of those head-turning moments. They kind of look at me like, "What are you talking about, man?" This idea of paying rent from yourself to yourself, taking money from your left hand and putting it in your right hand. This is a common thing that we advocate for in farm succession planning because it's a tax management tool. I'd be shocked if you have any listeners on here who are not concerned with taxes and not worried about trying to pay less in taxes.
(14:58): Well, that land rent from the farm business to the land business is one way to do that. Because when you make that payment from the farm LLC to the land LLC, you're getting to treat that as passive income with no self-employment tax attached. But we also use it regularly as a retirement tool for mom and dad because they've sunk all their money into the farm, their entire careers, their entire lives. They're there at 65 or 70 ready to farm retire, which just means going into tractor driver mode and getting to have a little free time, but they're very low on liquidity and that land rent payment is one way we can prop up their bank account.
Libby Wixtead (15:43): So this is a good setup for the transition plan. This is what you mostly are seeing coming through in your practice today.
Ryan Conklin (15:54): Yes, it's a very common setup. If we're looking at multiple entity plans, that is a very, very typical plan and it is just so effective on so many fronts. It can meet so many client goals. Even if you've got mom and dad having off-farm children, in that case, at the very least, by having a land LLC set up, we've got a framework where a farming heir in a non-farming heir can coexist within a business together without a lot of fighting or a lot of risk to the land being sold.
Libby Wixtead (16:31): So with talking about that scenario too, with LLCs, you have an operating agreement. Can you explain what the operating agreement is and how you can piece that together to what best fits your farm?
Ryan Conklin (16:54): Yeah, it's gotten so bad, Libby, and please don't judge me for this, but I can pretty much, I can picture every page and every article of our operating agreement in my head where I can basically explain it to you blind. So if you wanted to do a two-hour podcast with a reading of the operating agreement, I think I could do it by memory, but something tells me that won't make the cut.
Libby Wixtead (17:18): Might be a little dry.
Ryan Conklin (17:19): Yeah, I think the AgCredit Said It episodes can do a lot better than that two-hour episode. But the operating agreement is such an important part of the LLC setup because it's the rulebook that you're playing by as co-owners. It's the bylaws that you're having to live by. So sometimes when we see LLCs set up, whether it would be outside of our office because we don't like to do LLCs this way, but we'll see a registration with the Secretary of State and a tax ID number and that's it. Nothing else.
Libby Wixtead (17:54): Yeah, we don't like to see just that either.
Ryan Conklin (17:56): Yeah, and again, don't take it from me, I'm just the attorney here. The lender, the people that you have to go talk to get your money, whether it's an operating line or a term loan, they are going to want to see that documentation and you will need more than a Secretary of State's certificate and a tax ID number. So that operating agreement comes in to fill in the blanks. It says things like, your authorized to borrow money and to pledge company assets as collateral. That's an approved use of the company. Here's who can make those decisions.
(18:35): If you want to sell your units or your shares outside the company, here are the restrictions. It's got to be offered to the family first. It's got to be offered at a discount. They have years to pay for it. If you run into a death or divorce issue, know that this is one that we get all the time. We're concerned about in-laws. I'm a son-in-law to my wife's family farm, and they'll be darn sure that the Yankee from Ohio isn't going to get his greasy paws on any of their family farm ground. That same mindset really is common throughout agriculture and wanting to ensure family land stays in the family, but if you don't have that rulebook in place to govern those decisions, to provide those protections, your options become more limited to be able to achieve that goal.
Libby Wixtead (19:26): Yeah. So that's really important and at AgCredit, we depend a lot on that operating agreement, just like Ryan said, who is authorized to do what, who can sign for what. And some that I've seen, and I think even in our personal one, we have a member, but then we also have a manager. Can you speak a little bit on what that means as well?
Ryan Conklin (19:50): Yes, yes. It's actually possible to have both, have somebody serve in both roles, both a member and a manager, and also somebody who is a manager but not a member. So Ohio LLC law allows you to have both. So a member, when we're referring to a member, when you're talking with your lender about members of an LLC, these are the shareholders, these are the owners of the business. They're the ones that have the ultimate control over what direction that enterprise takes. The managers on the other hand are there to facilitate the day-to-day operations. They are buying parts, they are buying feed, they are marketing grain. They're doing all those day-to-day functions.
(20:35): Again, bringing the operating agreement into play once again, it can be really important to have restrictions on the scope of authority for each one. So if you don't want managing members or managers to be able to sell land or pledge equipment as collateral, your operating agreement has to say that. And those are areas that we traditionally reserve for the members to make those decisions. But again, it's important to have those rules in place in writing.
Libby Wixtead (21:06): Yeah. And I think that's really critical for succession planning, especially if mom and dad are owners and son or daughter is taking over the farm and can have that management role within the LLC, but they're also not a member. With that, we're going to take a quick break and we'll see you guys on the other side.
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Libby Wixtead (22:01): All right, welcome back. So we are going to talk about another popular entity, which seems to be a general partnership or a limited partnership. Could you describe each of these entities?
Ryan Conklin (22:15): Of course. I think it was very strategic, Libby, on your part that coming out of the break, you asked me a question that I couldn't answer with, "It depends." Now I think our question/asking is evolving here. So let's talk about partnerships. We mentioned them earlier in the show talking about informal partnerships, but there are such things as actual formal, registered with the state tax ID number, actual independent partnerships. Let's say in eight years of practice, I have never set up a limited partnership because if you're going to set up a limited partnership, I would say just set up an LLC. They're better for lots of reasons. So limited partnerships I think have kind of gone the way of the dinosaur. We don't really set them up much anymore. But a general partnership is the only other entity that I've set up besides an LLC. And it's set up for one reason and one reason only, and that is FSA payments.
Libby Wixtead (23:16): I could have guessed that one.
Ryan Conklin (23:19): Yes. See, I should have asked you the questions. So yes, the FSA issue does come into play when we're talking about general partnerships. So with LLCs, which we talked about extensively earlier, or even corporations, which I know we'll get to as well. LLCs and corporations only receive one FSA payment limitation. So rewind about five years with the trade wars, with lots of FSA money coming through, we actually saw farmers maxing out on their FSA payments with just that one limitation. But where a general partnership adds some benefit is you can have as many payment limitations as there are full-time farmers.
(24:04): So if you have four 25% equal partners in a general partnership, FSA is going to give you four payment limitations. Now, there are still some drawbacks there with liability protections because partnerships are very poor for liability protections. But it's hard for me to say, "No farmer, I'm not going to make you eligible for half a million dollars in FSA money." And nor do I think their lender would want me to say, "Ryan, go ahead and do something that makes them ineligible for that FSA money." I think that depending on the farm size, we really want to look at general partnerships sometimes if we're going to ever have a risk of brushing up against the payment limitation money.
Libby Wixtead (24:50): When would this be a good choice for a farming operation?
Ryan Conklin (24:54): It is all size dependent on when they need a general partnership versus being able to get by on an LLC. So the threshold with farmers on maybe the livestock side, we would want to see probably something approaching like a confined animal feeding operation. But again, on the livestock side, those programs are administered differently. On the row crop side, that's when we're most worried about FSA payment limitations.
Libby Wixtead (25:23): So on partnerships, are they good for succession planning? When you create a partnership and you can have more than two partners to a partnership, but does that partnership end when you create another entity or can you switch out partners or how does that work if you're trying to do succession planning on that?
Ryan Conklin (25:42): Yeah. You can transition a partnership the same way that you would transition shares or membership units shares in a company or membership units in an LLC. So you transition one partner out of the business and you transition the next partner into the business. So they are common tools in succession planning, but again, we're looking to use them as ways, if we're relying on FSA money, ways to inject liquidity into family farms.
Libby Wixtead (26:13): So with partnerships then too, do they have a partnership agreement that kind of governs how that transition would work?
Ryan Conklin (26:20): Mm-hmm. Recycling some of our conversations earlier from LLCs and operating agreements, we want to use some of the same principles with partnerships in those areas. But the same with LLCs and corporations, partnerships have a set of laws on the books in Ohio where if you don't have a specified partnership agreement or operating agreement, then state law is going to come in and fill in the blanks. You'll be relying on state law. And I can tell you after having read it is not as favorable as the rules that you can put in place by being proactive with your legal counsel.
Libby Wixtead (27:00): And getting exactly what you want for your operation and totally catered to exactly your operation.
Ryan Conklin (27:07): Right.
Libby Wixtead (27:08): Okay. So let's talk about corporations. When is there a place for corporations or we can look at it, you have a corporation that was set up years ago and is still in place and now it's transitioning down to maybe the second or third generation?
Ryan Conklin (27:29): Yep. Corporations produce the most heartburn in succession planning for me. If a client walks in with a corporation binder or I know they have a corporation ahead of time, I'm just going to bring the TUMS with me to the meeting to manage the heartburn because everywhere you look at corporations, there is some sort of consequence related to taxes. So again, I have not set up a corporation, but my own family farm is in a corporation, and the challenge that corporations present is that they are really bad on taxes.
(28:06): So let's say we've got Conklin Dairy Farms, it's got land parked in there. If it were parked in an LLC, that land would receive a new tax basis when somebody passes away, which is really important if you're in a heavily urbanizing area. With a corporation, the only asset that receives a new tax basis at death are the shares themselves. So if I own half the shares, my shares would get a new tax basis and it's based on the underlying assets, but the land that is parked in that business would not get a new basis. And the same thing happens with equipment that's parked in corporations as well. No new tax basis, no ability to re-depreciate it. You miss out on some of those big tax benefits that an LLC or a partnership would offer.
(29:03): And then from the transitioning or succession planning standpoint, what we target or we look to do with corporations is get them to where they're just landholding businesses. They're no longer operating, they're no longer buying equipment, they're no longer trying to be the primary business that's driving the farm. If we can get those corporations down to where they're just land, we can live with them being a landlord, and those make them easy to operate, but then we would look for another business like an LLC or a partnership to be the operator going forward.
Libby Wixtead (29:38): And you just led me to my next question. In a succession plan, can you take all of the different structures of these entities and create a plan for a farm family? Does it have to just be all LLCs or can you have a partnership that's owned by LLCs and how do you integrate all of these different options that we have into a succession plan for a family?
Ryan Conklin (30:07): Yeah, we can put folks in a real mental pretzel with the type of business entities that we set up, but that's why I made the point earlier that the family being able to operate it and understand it when they walk out of their lawyer's offices should be paramount and on the list of their concerns. So you've probably run into that on the lender side where you'll get plans or you'll get documents from members, and you're looking at it and say, "What the heck did this attorney do here?"
Libby Wixtead (30:35): That's when I call Ryan.
Ryan Conklin (30:35): Oh, I was going to say none of them would be our plans, of course. Which you have firm knowledge of those at this point with how many come across your desk. But we actually have some farm families even AgCredit members that have really all three entity structures that we've talked about, and then adding a fourth structure in there, trust, which we haven't touched on too much. You'll see some families with LLCs, partnerships and corporations all in one. And it might sound daunting and it might sound like it's too much, but there's always a good reason why we have those set up that way.
(31:17): Our philosophy in the office is don't set up businesses for the sake of setting up businesses. You might run into some attorneys that would say each farm needs to be its own LLC or each rental house needs to be its own LLC, and then you need to have cross ownership, one LLC owning another. There are ways to get the same legal effect, the same goals accomplished without ramping up the complexity too much.
Libby Wixtead (31:45): I think that just creates confusion when you do that instead of really truly setting it up for what the farm family actually needs.
Ryan Conklin (31:54): Right.
Libby Wixtead (31:55): When I have a farm family that's going through a transition or succession plan and I'm not involved in that conversation and it comes across my desk, sometimes it's like, "Okay, why did you set it up this way?" And then they look at me like, "I don't know." And that's really difficult because then when they're trying to explain it to me of why they set it up a certain way, sometimes it doesn't make sense.
Ryan Conklin (32:23): Right.
Libby Wixtead (32:26): I know you guys, when you guys want everybody to understand when they walk out the door, what's in what entity and I think that's really important. And I also want to bring up a good point too, when we've talked about all of these different types of entities and structures is you've brought up taxes.
Ryan Conklin (32:42): Yes.
Libby Wixtead (32:43): So it's so important and crucial. Again, I think we talked about this a couple of months ago, to have that board of directors and to have them work together to create that plan for you for the succession plan and if an entity is right for your operation.
Ryan Conklin (33:00): Right. It's a professional team decision across all advisors that could be assisting with your farm because each one of them is bringing a different angle to the table. So for example, if I was really getting out of my lane and talking about lending decisions and borrowing structures and how debt should be managed, if I was getting into those decisions, Libby would probably not be sitting across the table from me right now trying to do this because she would say, "This guy gets out of his lane in trying to tell a lender what to do." I wouldn't think of this as trying to find one person that's necessarily do-it-all. Have a good group around you, each of them bringing a specialized knowledge to the table and then have them work together to be able to achieve those succession planning goals.
Libby Wixtead (33:58): Yeah. Because I think we all need to know what does the lender need, what does the CPA need or the accountant, what does the attorney think is the best idea. And sometimes on my end it's like, well, I just need to know what is in the operating entity, what's coming in and out of there, is the equipment in there or not. Because when you do go through succession planning and you create these entities, it creates a huge impact on, or it can create a huge impact on how you do your banking, how your loans are set up with your lender. Because we may need to move things around, we may need to put new security instruments out there. And please, please, please, and I know Ryan tells his clients this, if you create a trust, if you create an LLC or a partnership or whatever, please tell your lender, please tell your crop insurance advisors, please tell your insurance agent.
(34:57): You need to make sure that you're telling all of these people that you've made these changes because you may not be insured, your crop insurance may not come into play if you are still operating with them as an individual when you created this LLC and sold your grain in this LLC. So those are very crucial to make sure that you communicate that to what I think I referred to before as your board of directors.
Ryan Conklin (35:23): And this is not because AgCredit's paying me a handsome sum to be on this podcast. I don't know what you've paid the other guests on AgCredit.
Libby Wixtead (35:31): Stickers.
Ryan Conklin (35:33): Stickers? Okay. Well, I haven't deposited that check you gave me yet, so we'll see if that clears. But I really mean this in saying that the lender is probably the most important party at the table there, and at least in the legal profession, this is where we can separate who just works with farmers versus who is a farm succession planner. Because the cashflow concerns and the concerns of the lender should always be at the top because so many of the farms are dependent on their lender relationship to be able to keep the operation going. Those need to be at the top of the list.
Libby Wixtead (36:11): So it's also good to have a good relationship with your lender. I know we have kind of said that over and over and over again on our podcast. Just as Ryan has said, again, make sure you have your leases written and if they're over three years, filed. I'll put that plug in for you, Ryan.
Ryan Conklin (36:25): Oh, thanks. Thanks, Libby. Hey, this is great. Free legal advice for the people here.
Libby Wixtead (36:33): That's why we come to you. No, I'm just kidding. So I want to also ask, so we talked about farms and farm transition and succession planning. Many of our farmers also have a side business or a side gig too that maybe not be related to the farming operation. I know several guys that have trucking operations or they have, I don't know, some agritourism that goes along with it. How does that flow into the operation and how do you protect those businesses as well from the farming operation?
Ryan Conklin (37:13): Yeah, think of those different entities, those side businesses as kind of like a Venn diagram. If you've got a landholding business, farm operating business and agritourism business all operating in the same family here, do you want that agritourism business or that trucking business or the house rental business to overlap in any way to where if there's an accident or there's an issue, it interferes with the farm operation? I think most listeners would say, no, we want those to be off on their own, where if there is a problem with the agritourism or trucking or rental business, we can kind of amputate that part of the family empire and let it die off. Because oftentimes what we're seeing, and I'm sure AgCredit sees this as well, those side businesses are there in support of the larger farming operation. That's important and it's probably helpful in a lot of ways financially. We don't want there to be any way to connect an accident in that side business into the two farming enterprises.
Libby Wixtead (38:29): So with thinking of high liability with agritourism and trucking companies, what kind of entity can they set up to help protect them?
Ryan Conklin (38:36): Yeah, LLCs are what we'll go back to on that front. Those are very classic candidates for a strong LLC plan. But again, the legal structure is one piece, operating it on the other side is another. If you have a trucking business, and that trucking business is also making itself available to haul grain during harvest, you need to have some sort of exchange of money between the farm operation business and the trucking business. Because if you don't, then that Venn diagram starts to compact a little bit and they start to overlap more. But if you can keep the money moving from the farm operation to the trucking business, that's one way to say, "Look, it's a totally separate entity. It's its own LLC. We're operating it separately," if there's an issue.
Libby Wixtead (39:30): And on that, with that comment that Ryan made with the grain hauling in that, I will refer you back to our podcast in season two with the state highway patrol and just watching yourself from hauling grain individually for yourself, also for a neighbor, but then also hauling for hire as well. So we'll put that plug in there because that creates a lot of different liability and overlapping on rules there. Lastly, Ryan, what is your advice that you would give to a young beginning farmer in terms of setting up an entity?
Ryan Conklin (40:08): Yeah, start early on this front. The side businesses or the main farming business that you're working on as a young or beginning farmer, it's something you'll probably carry with you the rest of your career. So get that entity set up sooner rather than later. Make your lender happy because you will be going to ask them for more money over and over, and it's good to have those documents ready to go. So start early on the entity planning front just for your own pieces, but there's probably another podcast, I'm not going to volunteer myself for this here, but probably another podcast in the future, talking about how that relates to business entities owned by the veteran generation, owned by mom and dad or grandma and grandpa. How do you get into those businesses? That is a pretty loaded topic, one we talk about all the time, but those have very different steps and they take buy-in from more people to accomplish.
Libby Wixtead (41:10): Yes, no, that's another great topic that we get questions about all the time. So thank you, Ryan.
Ryan Conklin (41:15): Thank you.
Libby Wixtead (41:16): We are happy to have you today. And this will do it for another episode of AgCredit Said It. Again, we will have all of our resources in the show notes and we will see you guys next time.
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