By Robert Moore, Attorney, OSU Agricultural & Resource Law Program
A common business strategy for farming operations is to place their machinery in a separate, stand-alone LLC. The idea behind this strategy is that by putting the high-liability machinery in its own LLC the other farm assets are protected. Unfortunately, the liability protection of a machinery LLC is sometimes overstated and may not provide as much protection as intended.
The compromised liability protection of a machinery LLC is not due to a defect in LLCs, but rather it is a result of who is operating the machinery. Typically, the persons operating the machinery are the owners or employees of the farming operation. Many liability incidents involving farm machinery are the result of operator error which pulls the liability back to the farming operation.
Consider the following example. XYZ Farms is a grain operation. To mitigate the liability of having large machinery traveling on roadways, XYZ Farms establishes Machinery LLC and transfers all machinery to the LLC. An employee of XYZ Farms causes an accident while driving machinery on a roadway. Because employers are liable for the actions of employees, XYZ Farms is liable for the accident even though the machinery was held in Machinery LLC.
A machinery LLC does provide some liability protection. If the liability incident is caused solely by an issue with the machine and not the operator, the LLC may prevent liability from transferring to other assets. Again, most accidents are caused by operator error so relying on this liability protection is planning against the odds.
As seen in the example, machinery LLCs do not completely insulate owners and other assets from liability. In fact, no entity used in a farming operation is guaranteed to prevent liability exposure for the owner. Therefore, liability insurance should always be the primary liability management plan for farm operations. Business entities should be used as the backup plan if liability insurance fails to cover liability exposure.
Machinery LLCs do have other beneficial uses. One of the more common uses is to consolidate various machinery ownership among family members. Having one entity own, buy, and sell all machinery is often a simpler plan than multi-ownership. For example:
Mom and Dad, Son, and Daughter each own some machinery. Each time they need to buy a new piece of equipment, it is a challenge to determine how the trade-in is handled and who should be the new owner. Instead, they establish a machinery LLC and put all their machinery in the LLC. They each receive ownership in the LLC in proportion to the ownership in the machinery. For all future purchases, the LLC provides the trade-in and buys the new machine.
The liability protection provided by machinery LLCs may not be as thorough as sometimes expected but they can still be a valuable component of a business structure plan. They do provide some liability protection and are useful in other ways such as consolidating ownership. Before establishing a machinery LLC, be sure to have a thorough discussion with legal counsel to fully understand it’s benefits and limitations.