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Which Corporate Entity is Best for Off-Farm Partners?
By Dr. Donald J. Jonovic
SUBMITTED BY J.G., VIA EMAIL
My daughter, Meghan, is the only one of my five children who's ever been interested in farming as a career. I'm thrilled she wants to continue the farm. She's talented and capable, without question.
My wife and I will have enough retirement income independent of the farm, but I don't know how to make it work for the next generation with 80% of the heirs off-farm.
Most of our business value is in soil and iron. We're farmers who have good years and bad years. Cash flow has always been unpredictable.
Our off-farm kids love the farm, want to keep it in the family, and enjoy bringing their children to visit. They say they don't want anything else from Meghan or the farm. I believe they mean it now, but needs change with time, and I know Meghan feels a duty to provide some return to her siblings after my wife and I are gone. What we need is advice on choosing an entity structure that would work best for a family farm with off-farm owners.
Generally, for situations like this, many choose a structure that separates the land from the operating business. An example, in J.G.'s case, would be putting the farmland in an LLC owned equally by the five heirs, with Meghan leasing acreage from the LLC (and maybe from other landowners) and farming via her own entity.
This isn't his most important question. Instead, it's this: Should J.G. be encouraging his daughter to pursue the family farm as her career?
Bear with me. Consider the following three questions most parents inevitably raise when their children are making business career choices.
- Does my son/daughter have the talent and drive this career demands?
- Is the particular employer financially sound, with real potential for growth?
- Will this choice allow for other career options if it doesn't work out?
J.G. believes Meghan has the ability, so he's answered Question #1 positively. Good.
The answer to Question #2 could be more troublesome. He has doubts about the farm's financial stability – this is agriculture, after all. More importantly, he's worried that Meghan's potential partners, her siblings, may not turn out to be as supportive and loyal as they are now in the highly probable event that the cash flow stumbles.
The answer to Question #3 is even more concerning. Can – and should – Meghan take on the responsibility for providing financial return for five families (something the farm's only demonstrated it's able to do for two)? If the farm fails, will Meghan be able to change careers when she's in her 40s or older?
It is possible to design tax-efficient ownership structures that separate asset ownership from asset management. These structures must also succeed as businesses to be good career choices for the working heir(s).
J.G.'s decision is best founded on reasonable confidence that all future owners can get an acceptable return AND that the heirs who manage the assets have a real potential to build careers that can provide them both security and a good career.
J.G.'s dream – to leave the farm in the form of a sibling partnership for his heirs – is possible, yes. But ultimately, it's improbable unless he and his family treat succession as more of a business planning challenge than a transition entity choice.
A succession dream can easily turn into a nightmare without a business plan that realistically anticipates profitability and growth.
Your Transition Team Members
Don Jonovic is founder of Family Business Management Services in Cleveland, Ohio. He focuses on management, growth, and ownership transition issues. His farm partnership planning tool, "Ag-Planner/IV" ($68.45); a two-DVD set on farm management and succession ($48.95); and other books are available at familybusinessmgt.com.
Jolene Brown is a speaker, author, and family business consultant. Her tested business tools provide leadership and management solutions for people who feed, clothe, and fuel the world. jolenebrown.com
Myron Friesen is co-owner of Farm Financial Strategies in Osage, Iowa. During the past 15 years, he has worked exclusively with farm families across the Midwest to develop farm transition strategies. farmestate.com