Business Arrangements

exiting farmers can use business entities, leases, installment sales, and other contractual arrangements to transfer the farm business to entering farmers.  Parties to the arrangement should consider the effect of the arrangement on several issues such as: who will have control of management decisions; how will a growth in equity be shared among the parties; and the income, estate, and gift tax consequences of the arrangement.

Entities

Farmers can choose from a variety of business arrangements to organize their farming business, including sole proprietorships, general partnerships, limited partnerships, limited liability companies (LLCs), limited liability partnerships (LLPs), corporations, and trusts.  More than one entity may be used to separate the ownership of assets from the operation of the business and to provide tax advantages for the owners who work in the business.

AgVentures Chapter 5: Farm Business Arrangement Alternatives PDF Business Arrangements and Farm Transfers This chapter discusses the legal and tax consequences of farm business arrangement options, including sole proprietorships, partnerships, corporations and LLCs. There is a discussion of planning to use farm business arrangements that includes formation and operation of the entity.

Two Generation Farming Step 2: Selecting a Business Arrangement  PDF This publication discusses different types of business agreements followed by a detailed discussion of wage and incentive agreements, enterprise operating agreements, farm business operating agreements, and labor and machinery sharing agreements.  Partnerships and corporations are also reviewed in the publication.

Leasing

Leasing is a way to acquire the use of resources that are needed for operating a farm business without the need to raise capital to buy those resources.  Leases can include an option to buy or other plan to allow entering farmers to build equity and become owners of some or all of those resources.

NCR 75 and NCR 76 Fixed and Flexible Cash Rental Arrangements for Your Farm PDF NCR 75 provides guidelines to both tenants and landlords that result in more equitable cash-rent arrangements for farms based on a fair evaluation of resources.  Topics covered include benefits and limitations of cash rental agreements, methods to establish a fair cash rental rate and how to write an agreement.  Example worksheets are provided.

NCR 76 is the lease form only.

NCR – 149 and NCR – 109 Pasture Rental Arrangements for Your Farm PDF NCR – 149 is designed to help tenants and landlords make sound decisions and develop fair pasture rental arrangements.  It provided background information on animal units and stocking rate and addresses the establishment of lease rates on a per head or per acre basis.  The importance of using a written lease is outlined and an example lease form is included.

NCR – 109 is the lease form only

NCR – 105 and NCR – 77 Crop-Share or Crop-Share/Cash Rental Arrangements for Your Farm PDF The purpose of NCR – 105 is to help tenants and/or landowners make informed decisions about fair crop share rental arrangements.  It outlines basic crop share principles and includes example farm leases and the considerations which should be included

NCR – 77 is the lease form only

NCR – 214 and NCR – 215 Rental Agreements for Farm Buildings and Livestock Facilities PDF NCR – 214 examines agricultural building and facility rental agreements from the viewpoints of both the owner and renter.  It addresses repairs, water, manure disposal, insurance, payment time, and other provisions.  A worksheet is included that estimates owner costs.  Readers can develop their own customized agreement using a model lease form that is included.

NCR – 215 is the lease form only

Transferring Assets

Exiting farmers can transfer assets to entering farmers by sale (including installment sales), gift, transfer at death, and through business entities.  The method of transferring assets affects management control and ownership of growth in equity.  The transfer also has income, estate, and gift tax consequences.

Long-term Installment Contracts – NCR-56 The installment land contract is both an instrument of transfer and a method of financing sales of land. This publication addresses the benefits and limitations of using installment land contracts from both the buyer’s and seller’s perspectives.  It outlines the key items that need to be considered in preparing such an agreement.

Additional Resources

AgVentures Chapter 4: Beginning Farm Business Arrangements PDF Business Arrangements and Farm Transfers This chapter discusses alternatives for beginning farm business arrangements including employment agreements, operating agreements and leases.  It includes a SWOT analysis of the parties farming resources.