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Establishing A Strong “Corporate Veil” To  Shield Business Owners And Assets Image

Establishing A Strong “Corporate Veil” To Shield Business Owners And Assets

Posted by: Matthew C. Berger

Many businesses, including many farm businesses, organize and operate their businesses through separate business entities (e.g., corporations or limited liability companies).  When properly structured, these entities can provide numerous management, succession, and liability protection benefits for farmers and other business owners.

But merely creating a generic corporation or limited liability company is not enough to ensure that these benefits will be available when needed.  Instead, business owners should obtain professional advice to ensure that the entity is properly formed and tailored to the unique needs of the business and that all on-going requirements for the business are properly maintained.  The following summarizes key factors that farmers and owners of agricultural businesses should consider in organizing their business operations.

  1. Formation and Initial Organization. Although corporations and limited liability companies are formed by filing Articles of Incorporation or Articles of Organization, respectively, with the Minnesota Secretary of State, these documents are generally not sufficient for the proper operation of the business.  Rather, the business entity and its owners should also create and adopt business-specific Bylaws or an Operating Agreement that, among other things, (a) define the rights, responsibilities, and obligations of officers or managers, directors or governors, and shareholders or members; (b) specify the timing, location, and notice requirements for meetings and procedures for actions by the entity; and (c) impose restrictions (if any) on the admission of new members or transfer of shares or membership interests.
  2. Identify and Satisfy Unique Legal and Regulatory Requirements. Agricultural operations are increasingly subject to unique legal and regulatory requirements that do not apply to many other businesses.  For example, Minnesota has enacted a corporate farm law that limits the types of business entities that may engage in farming or own agricultural land.  Entities engaged in these activities must file a corporate farm report with the Minnesota Department of Agriculture each year.  Further, livestock farming operations may be required to obtain construction or operating permits from the Minnesota Pollution Control Agency, counties, and townships where facilities are located, and farms (whether crop or livestock operations) that use significant amounts of water may require a water appropriation permit from the Minnesota Department of Natural Resources.  If a new entity is formed, these permits may need to be transferred from the prior owner to the new entity.
  3. Maintain Business Records and Follow Business Formalities. Once the business entity is formed, owners must follow the management procedures that they have established in their Bylaws or Operating Agreement.  The entity should maintain a corporate record book that is updated to include important documents (such as the Articles of Incorporation or Organization and the Bylaws or Operating Agreement).  The persons charged with management of the business must follow the procedures established for the entity and hold regular meetings (for which minutes should be prepared and kept in the record book) or adopt written resolutions to document important business decisions.
  4. Maintain Separate Financial Records and Accounts. The finances of a business entity must be maintained separately from the personal finances of its owners and officers.  Thus, a business entity should maintain separate bank accounts and avoid intermingling personal funds and paying personal expenses of the owners and officers.  The owners must also ensure that the entity is appropriately capitalized for its business operations and liabilities.
  5. File Annual Renewals. A business entity is required to file an annual renewal every year with the Minnesota Secretary of State.  If an entity fails to do so, it may be administratively dissolved.

These steps are important to ensure that business owners reap the full benefits available from forming business entities and cannot be ignored.

This information is general in nature and should not be construed as tax or legal advice.