The structure of your farming business could be exposing you to unnecessary risk.
Here are some suggestions to help limit asset exposure and protect yourself against claims for debt, damages, accidents or injury.
Being proactive is key because steps taken to protect your assets must be done before concerns develop with creditors.
Proprietorship
There are three ways to organize a farming operation: a proprietorship, a partnership and a corporation. Each has a different level of creditor risk and its own protection strategies.
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As a proprietor, you are completely exposed to creditors. All of your property, including personal and business assets, are up for grabs by creditors and there is only limited protection under bankruptcy law.
Some protection may be available by having your spouse own some assets, such as the family home. The spouse must not be otherwise liable for any farm debts.
Partnership
A partnership also has the potential for liability risk. Indeed, not only are you liable for your own debts, but in most cases a creditor can pursue any partner for all of the partnership debt rather than just their share.
You may want to consider incorporating your partnership interest to help protect your personally owned assets from creditors.
Corporation
Shareholders in a corporation have limited liability. This means a creditor of the corporation should be able to only look to the assets of the corporation to satisfy corporate debts.
However, your assets may not be as well protected as you think.
If you gave personal guarantees to any creditor, such as a bank, fertilizer dealer or machinery finance company, you have exposed your personal property to the creditors on top of the corporate assets. It is best to avoid signing personal guarantees if possible.
An alternative would be to provide only limited guarantees in-stead of the unlimited ones that are often requested.
Methods of organizing corporate affairs are available to protect a farm’s assets.
A farm corporation often has active businesses, assets and accumulated earnings, which are not protected from corporate creditor or litigation claims.
The corporate structure can be changed to protect these assets. A second company can be incorporated to hold assets separately from farming operation and thus provide protection from creditors of the farm.
A lawsuit from an injured em-ployee is one example of how this type of arrangement can help protect a farm and its personal assets.
The assets would be safely held in the holding company, and the claimant would be able to seek damages only from the operating company that carried on the business.
This reduces the assets at risk to only those held in the operating company.
Professional advice is critical to implementing this type of reorganization without tax consequences. Contact a professional to make sure your plan is right for you.
