Farmers are notorious for preferring to farm while leaving business dealings to trust, fate or chance. Afterall, there are only so many hours in a day, and when farm families work near each other all day, it is tempting to believe that assumptions or verbal communication may replace written text. Farmers must remember, however, that every business entity carries legal and tax implications, and the written operating agreement may save a lot of headaches and heartaches when legal and tax issues arise.
Registering as a business
Corporations and limited liability corporations (LLC) register their business with the Wisconsin Department of Financial Institutions by filing their articles of cooperation or as in the case of an LLC, articles of organization, and paying a fee (visit https://www.wdfi.org/ to learn more). It’s within these articles that the business names itself, defines its purpose and legally identifies its members.
The business’s articles of corporation/organization are different from its organizing document. An organizing document is a contract between business owners (legally referred to as ‘members’ in an LLC or ‘shareholders’ in a corporation) that details control and management of the business. Depending on the business entity, organizing documents are known as partnership agreements, bylaws, or operating agreements. Partnerships use partnership agreements, while corporations (S-, C-, B-, cooperative and nonprofit) and nonprofits use bylaws. The organizing document for an LLC is known as an operating agreement.
Although writing an operating agreement is not required in Wisconsin, members have much more legal protection when they have written one. The operating agreement guides the relationship between the people managing the LLC. Members write the operating agreement to prepare for worst-case scenarios affecting their business relationships.
Every member of the potential LLC should take time to consider what they want included in the operating agreement. Skeletal operating agreement templates for agricultural LLCs are available in textbooks and from the internet. Multiple conversations between the members are needed to draft farm-specific content into these templates. Worksheets and checklists are available to guide those conversations. Once you have a basic understanding of the points addressed in the worksheets or checklists, you can take your responses to the attorney for them to write the operating agreement specific to your farm’s LLC. If you choose to write it yourself, as it is a legally binding document, an attorney should review your draft and write the final document for correct legalese set forth by Wisconsin statutes. Coming prepared to the attorney’s office will save in billable hours.
Worksheets to use while drafting an LCC operating agreement are available in the UW-Madison Division of Extension’s Cultivating Your Farm’s Future Workbook for Farm Succession Planning in Wisconsin. Checklists are available in the Farmer’s Guide to Business Structures by Rachel Armstrong, et.al. (published 2017, SARE Outreach Publications). Contact your county Extension agriculture educator for access to these resources.
The complexity of the operating agreement evolves during the members’ drafting conversations. Content included within in the LLC operating agreement is organized into articles (or categories) that
- List the capital contributions of the members that in turn determine the percentage interest of each member. Capital contributions are assets (cash, equipment, services, etc.) transferred to the LLC. The management of the LLC’s contributed capital is detailed in this article.
- Detail allocation of profits and losses, and distributions from the LCC to its members.
- Outline the management of the business: defining which members have a say in the business’s management, who has voting privileges, the voting process and how meetings of the members occur.
- Set the members’ limitation of liability, independent activities and indemnification.
- Detail how a member may exit the business.
- Describe the recordkeeping and accounting system that will be used.
- Detail dissolution and liquidation of the business assets.
- Provide amendments, general provisions and investment representations for the business.
Reviewing the operating agreement
Don’t forget about the operating agreement once it’s been written. It should be taken out of the drawer and reviewed with all the members at least annually. The agreement is a living document, shaped to match the ongoing needs of the business.a