You would never wish a lawsuit upon any business.
The chance of being sued is likely rare, but the thought of it is stressful.
I recently sat down with a farming couple to go over the risks they face outside of their operations. The conversation quickly turned to the farm facing a lawsuit.
The question was, “what would happen if the farm was sued?”
The best way to approach this is to walk through a scenario of a farmer facing a lawsuit.
In this scenario, the farmer had all of his land, buildings, equipment and inventory in one corporation.
For discussion purposes, we imagined that one of the farmer’s combines gets into an accident on the highway with another vehicle, and the occupants of the other vehicle are severely injured.
These third parties have now filed a lawsuit against the farm for $5 million. Therefore, the assets in the farm corporation are at risk.
I went over the layers of protection the farmer should have to protect his assets from the lawsuit.
Layer 1: Liability insurance
This is the first layer of protection that comes to mind for most. Proper insurance protects the farm from the devastation of a lawsuit, but it is important to consider the following:
What name is the insurance in? Who owns the farmland? Who operates the farm? Some may forget to change their insurance policy to the corporate name when changing to a corporate structure. It is important to have the proper names on your policies.
Does the farm have enough liability insurance? You may be a little nervous in our scenario if the insurance covers only $2 million. It is important to talk to your insurance provider and know the additional cost of higher coverage. It may be cheap compared to the other possibilities.
Layer 2: Corporate structure
All the assets in the corporation are exposed in the lawsuit. This farmer may feel a lot more comfortable if he had set up another corporation to hold all of his land.
Farmers who have their land and farming operations under personal ownership or in the same corporation should seriously consider putting the land into a separate corporation.
Layer 3: Directors of corporation
Husbands and wives who are both directors of a farming corporation are personally exposed to more liabilities than if they were only shareholders.
They should consider making only one of them a director of the farming corporation. The other one could hold more of the personal assets as an extra layer of protection.
It is important for farmers to consider their risk tolerance and consult with a professional to consider these potential risks and structure their operations accordingly.
Riley Honess of KPMG helped write this article. Colin Miller is a chartered accountant and partner with KPMG’s tax practice in Lethbridge. Contact: firstname.lastname@example.org.