LLC Does Not Provide Legal Protection (if you mess up)

Many farmers have created limited liability companies (LLC) to hold equipment, especially semi tractors and trailers.  The assumption is that by putting these assets into a LLC, the farmer is shielded from any legal liability in case of an accident.  The answer, like most questions I get, is it depends.

If the farmer runs the LLC like a business, then the court will normally find that there is legal protection and only the assets of the LLC are at risk (usually just the trucks).  However, if the LLC simply holds the title to the equipment, it is likely that the court may allow creditors to pierce the legal protection and go after the farmer’s other assets.  Here are some of the items that the court will normally look at:

• Does the LLC have a bank account?  If not, the court will likely assume that there is no business since a business need a checking account.
• Does the LLC bill the farm for all of its trucking services?  If not, the court may assume it is not a business.
• Does the LLC rent the semi to the farm?  If so, the farm is now in the business of providing trucking services and is open to risk.
• Does the LLC provide these services to other farmers or customers?  If not, the court may try to tie both the farm and the LLC together.

For me, the most fatal flaw is not having a checking account.  Too many times I see LLC’s with Semi’s that all of the accounting including the checking account is still done out of the farm account since it is easier.  It may be easier, but if you have an accident, be ready to pay out a substantial amount.

Also, having a LLC provides an extra layer of protection.  The best protection continues to remain have the proper amount of liability insurance.  Remember, if the LLC does not have insurance and it gets sued, they will also sue the farmer and all of those legal fees will be out of pocket, even if you win.  Having proper liability insurance and naming the farm as an additional insured is paramount.

Paul Neiffer, CPA

CliftonLarsonAllen, LLP