Draft and file the articles of organization

Each state requires that an LLC file a document titled “articles of organization.” Legally speaking, the articles of organization are defined by state law, which specifies exactly what information must or may be included. To make it easier on business owners and the government agency processing the articles, many states provide fillable form articles of organization. Some states will require that the business use the form, while others will allow self-drafted articles. Some agencies don’t provide forms at all, and in that case, farmers should simply create a document with the information requested in the statute. Filing is generally handled by the state’s secretary of state office. An internet search should bring up a form and more information for your state.

The articles of organization will likely require you to list the business’s “registered agent.” A registered agent is appointed by the owners of the corporation to receive important legal and tax documents on behalf of the business before the business is officially incorporated, or recognized by the state. Most articles of organization also require listing the business’s street address and may require a listing of “members” and their contact information. Finally, the form may ask whether the entity is “member-managed” or “manager-managed.” Which one is your farm? It depends on who you determine has the authority to make day-to-day management decisions for the business (e.g., decisions related to managing employees, making small purchases, marketing, handling customer relations and so forth). If you want all members to make day-to-day decisions, you should designate membermanaged. If you want only specific people to make those decisions, the farm must be manager-managed.

An LLC does not exist until the date its articles of organization are filed and then approved by the state agency. Approval can take anywhere from one day to one week from the time of filing. The form can generally be submitted online, along with the required fee. Each state charges different fees, which vary from $25 to $1,000. In addition, most states require an annual fee to maintain the LLC, which is generally less than the fee to create an LLC. Note that the information on the articles of organization may be changed at any time by filing amended articles.

Get an Employer Identification Number (EIN) if you need one

An EIN is the number that the IRS uses to identify the tax accounts of employers and certain other business entities. Not all LLCs need an EIN. Again, this is because the IRS does not formally recognize LLCs as a separate entity for tax purposes and instead allows LLCs to choose how they wish to be taxed. LLCs can select to be taxed as corporations (C corporations or S corporations, as we’ll discuss in the upcoming chapters), general partnerships or sole proprietorships if there is only one member. LLCs choosing to be taxed as corporations or general partnerships need an EIN. Single-member LLCs need an EIN only if they have employees or if they choose a corporation tax treatment. Otherwise, a singlemember LLC will handle all of the LLC’s tax issues by filing an individual tax return using his or her Social Security Number. So basically, you’ll need an EIN unless you are a single-member LLC that has no employees.

You can get an EIN immediately by applying online through the IRS website. If you prefer, you can download the Form SS-4 on the IRS website and fax your completed form to the service center for your state, and they will respond with a return fax in about one week. Some banks will refuse to issue bank accounts without an EIN, even if the IRS does not require the business to have one. In those cases, it can be easier to simply get the EIN than to argue with the bank about the necessity of the EIN.

1. Draft and sign an operating agreement

   Although not required by most state laws, an operating agreement is highly recommended. The operating agreement lays out exactly who makes decisions for the farm. It outlines how members can enter the business, leave the business and receive distributions of profits. The agreement also allocates business profits and losses for tax purposes. If a farm does not have its own operating agreement, state law provides default rules. However, those rules may not be best for your particular farm business. The operating agreement is your chance to establish rules and procedures that work best for the farm operation’s individual situation.

   Writing an operating agreement can be a very valuable process for farm operation owners, even if the state’s default rules will work perfectly well. The operating agreement is a chance to think through some very important contingencies. What happens if a farm partner dies? What if one partner wants to leave the business? What if you want to bring another partner on? These problems can cause massive disruption if people haven’t thought them through. The discussion process puts everyone on the same page and can serve to prevent disputes that often lead to crises.

   Don’t forget to have all members sign the operating agreement and keep the signed copy in a safe place for your records.

2. Follow the operating agreement

   If you go through the work of outlining how the business should handle important matters like decisions, taxes and the departure of a member, it’s very important to follow the document. This gives the business legitimacy in court. And if you went to all that effort you should make it work for you.

3. Allocate assets between personal and business ownership

   As discussed above, a farm business needs to follow through on creating an LLC by making the division between business and personal. If the farm doesn’t already have a separate bank account, set one up. Farm expenses and payments should move through the farm account, only. Of course, if you forget the farm checkbook and use your personal bank card instead, you may pay yourself back.

   Next, determine which assets are farm and which are personal. If there are multiple members and each has promised to make a capital contribution or investment in the LLC, each member needs to follow through with his or her promise. For example, if one member promised to invest $35,000 in cash, then that money needs to be deposited into the LLC’s bank account. If a member promised to invest his or her farm property, then the title of the property needs to be transferred to the LLC.

   Overall, a common-sense allocation is probably the best route. This process can be quite simple–there’s no need to detail every feed scoop, hand weeder or trash bin. Making your best guess as to the value of the farm’s various assets and placing them on the farm’s balance sheet is a simple way to document the transfer. There is no need to get creative. If a farm tried to keep all assets personal and leave the farm with nothing, a court would likely not respect the LLC at all. The allocation must be based in reality and the farm must have enough assets to capitalize the operation.

4. Document relationships for personal assets used for farm purposes

   If you choose to hold ownership of the land with yourself personally, you should document the new relationship with the LLC. If the farm business uses your property, the farm business has a lease with you, whether one is written or not. Written documents are generally the better choice, and it can be a very simple one-page outline of basic terms such as rental rate, lease term and renewal procedures. Many individuals choose to lease the farmland for a rate equal to the value of the annual property taxes, but each farm has unique needs.

   Now is a good time to discuss our objectives in allocating assets and writing leases. At any point in time, a court should be able to determine which assets are the farm’s and which are personal. This is because the farm’s creditors can go after business assets. Thus, we need to know what they are. The court should also be able to determine exactly how and why assets are used for both personal and business reasons. Your documentation can go a long way towards creating an efficient process. If records are a mess and there is no documentation, a court may decide for itself which assets are personal or business, in which case the farm loses an opportunity to influence the process.

5. Update websites, brochures, invoices, order forms with the LLC designation

   State statutes require that a limited liability company use the LLC designation in the name of the business. This signals to potential creditors that only business assets are available to satisfy potential judgments against the business. If you don’t like the look of the words or you’ve already invested in marketing materials, check with your secretary of state’s office about registering a trade name without the letters. In some states, the county register of deeds handles registration of trade names, so you may need to make a couple phone calls. For invoices and other official business, it’s best to include the letters after your name.

6. Keep accurate and up-to-date accounting records for tax purposes

   This includes maintaining an accurate profit and loss statement. While the LLC does not have to pay income taxes itself (unless it elects to be taxed as a C corporation or S corporation), each member will need to report his or her share of profits and losses on their individual tax returns. Keeping good accounting records throughout the year will help streamline this process for everyone and help the LLC manage its finances overall.

7. Make note of and follow any annual obligations such as when, where and how to file your annual report or fee with the state

   Your state will likely require you to file an annual report and pay an annual fee to maintain your LLC. If you neglect these duties, the state may dissolve your LLC. The IRS will also expect additional filings, even if you do not need to file a separate income tax return for the LLC. The actual filings will depend on whether you are a single-member LLC, have employees and have elected to be taxed as either a C corporation or S corporation. Talk with your accountant or tax preparer, or your secretary of state’s office and the IRS for more information on filing LLC taxes.

Elect S corporation tax status with the federal government

Electing S corporation tax status for an LLC is quite simple. You’ll first need to fill out and file IRS Form 8832, “Entity Classification Election.” Here, you’ll elect your preference to be taxed as a corporation. Once you do this, you will be taxed as a C corporation and unless you follow the next step, you’ll face the double taxation dilemma. Next, you will need to fill out and file with the IRS tax Form 2553, “Election by a Small Business Corporation.” The form should be completed up to two months and 15 days after the beginning of the tax year the election is going to take effect, or at any time during the tax year preceding the tax year it is to take effect. This sounds complicated but the IRS provides examples of how the timing works in the instruction sheet for Form 2553.

Make note of and follow any annual obligations to maintain the S corporation tax status

These include filing annual tax documents with the IRS and holding annual meetings. As an S corporation, you’ll have to file the annual Form 1120S with the IRS. This is an informational tax document used to report the LLC’s income and losses and any profits given to its members (i.e., distributions). In addition, you will have to provide each of the LLC’s members with a Schedule K-1. The Schedule K-1 is similar to a W-2, the end-of-year wage statement that employees receive from their employers. The Schedule K-1 shows the self-employment income each of the owners receives from the company. The LLC must also submit a copy of Schedule K-1 to the IRS for each LLC member.

While many states don’t require LLCs to do so, the IRS requires that an S corporation hold an annual meeting. You’ll need to follow the parameters for holding the annual meeting as set forth in your operating agreement (i.e., holding it during the month or season stated and providing the required notice to members). Be sure to also take minutes to record what happens at the meetings.