Use an LLP, Not an LLC

Written by Michael Baron on . Posted in Farm versus Non-Farm, LLC's & LLP's, Transferring Ownership

Michael: We read your article about using an LLC for ownership of land so if the farming child does not have any farming children themselves, then all of our children can share in the wealth. Like the other couple you talked about, we want our son to farm and enjoy the farm, but if he doesn’t have any children interested in farming, then why should his family enjoy all of our estate while our other children get nothing? Tell us more about how the LLC might work for us? No Grandchildren Farming

Dear No Grandchildren Farming: As happens sometimes, I should check my facts a little more closely before I go on about something.

This LLC might work in Montana, South Dakota, or Minnesota, but North Dakota has farming laws which do not allow land to be incorporated unless there is an active farm participant and at least sixty-five percent of the income derived comes from farming.

I was envisioning farmland ownership by children under an LLC where farm and non-farm children could own actual shares – paper shares – in the ownership of farmland and income would be derived from rents to the non-farming children. But I was wrong about the LLC being the vehicle to use – in this state, at least. I’m not certain of the laws in the other states mentioned.

However, the close cousin of the LLC is the Limited Liability Partnership or LLP – which is allowed for this purpose in North Dakota.

Rather than having shares issued – as in an LLC – the LLP would have partnership interests or fractional ownership. In other words, each of your children would own a percentage of the business rather than actual shares in the business.

This makes transferring interests a little more challenging than having shares, but it can be managed. With the shares, if a non-farming child needed cash for a short term need, s/he could cash in a few shares without giving up entire ownership of the land. We also dictated that only so many shares could be sold at any time so the farming child could purchase them without being overwhelmed if one or more of their siblings decided to cash out everything all at one time.

You can use the same terms and conditions under the LLP only you would use a percentage instead of actual shares. At any given time, a non-farm child could decide they want to sell their percentage of their percentage ownership – again limited by a maximum amount over any given period of time – to raise capital.

Or the farming child could use income to purchase percentages from his siblings over time if s/he wanted a large share of the farm business long-term – regardless if they have farming children or not.

They may end up over time with odd percentages – sometimes out beyond two or three decimal points – but as long as we can convert the farmland value to a dollar value (either by appraisal or another method) the percentages can be converted to dollars for sale purposes.

Again, you’d still want to have a will that directs this LLP be set up upon your death with your farmland assets and each child would have to sign on to the business agreement defined in your will as to how the LLP will do buy sells, transfers, loans, etc.

This is just one solution for people who have children farming but no grandchildren interested in farming who want to control how this wealth is handled in the third generation when no one farms. It’s not a great solution if you have a generational farm – where grandkids are involved – and you need to keep the family farm together.

Every solution has two sides to the coin and it’s important you understand – or have someone teach you – all the different options you have to choose from and which one suits your family situation the best.

“Keeping the Family Farm in the Family”
Great Plains Diversified Services, Inc.
1424 W. Century Ave., Suite 208
Bismarck, ND 58503-0917
Telephone: 701-255-4079
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Michael Baron is not an attorney. Information given through written, verbal, or electronic means by Michael Baron or Great Plains Diversified Services, Inc. is not to be construed as legal advice. An attorney, tax advisor, or other registered advisor is needed for the completion of the estate planning process. An attorney must be consulted for legal advice and the drafting of legal documents.