Prepared By
Richard Prim - Attorney - Gislason, Dosland, Hunter & Malecki
Douglas Spanier - Legal Analyst, MDA
Harold Stanislawski - Dairy Development Specialist, MDA

Dairy farming today is taking on various forms of business structures to help manage the day-to-day activities of the business. Dairy farms are becoming larger and more complex, as multiple family owners, active and passive investors, and joint ventures spring up among the neighboring crop and livestock operations. This document addresses the many questions that Minnesota dairy farmers have regarding business structures and farming operations.

Challenges of Building a Dairy Business

Today's dairy entrepreneurs are experiencing situations that dairy farmers have not had to face in the past. These include the increased use of hired labor, environmental regulations, and the need for large sums of capital in growing dairy operations. To find capital and build equity, business partners are often needed to secure appropriate financing. In addition, the Minnesota Corporate Farm Law is often misunderstood or misinterpreted. In this regard, this paper should help guide you in deciding if your current business organization is meeting your needs, or if you need to choose a different form of business structure.

Definitions of Legal Structures in Minnesota

**This is only a very basic, brief summary of the law. Before you choose any business form, it is very important that you contact an attorney as to the legality and/or an accountant as to the tax and economic consequences.**

Sole Proprietorship - Owned by one person who has full control and responsibility for the business.

General Partnership - A partnership that has two or more owners who carry on a business and who share in the profits or losses. Each partner is held liable for the full debts of the partnership if the partnership is not able to pay its debts. The partners can all participate in the management and each partner can bind the partnership to contractual obligations.

Limited Partnerships - The limited partnership has at least one general partner and at least one limited partner. The general partner are liable for the full debts of the partnership. The limited partners are not liable for the debts of the partnership unless they have personally guaranteed the partnership debt or are liable as a result of individual action other than being a limited partner. Limited partners are not allowed to participate in the management of the partnership business.

Limited Liability Partnership - This entity has an unlimited number of shareholders, but only natural persons, partnerships and other entities certified under the corporate farm law can participate. Partners may elect to have some of the partners have less than joint and several liability.

Family Farm Corporations - These entities have an unlimited number of shareholders, but the majority of the interest and the majority of the shareholders must be related within the 3rd degree of kindred. Eligible shareholders include partnerships, natural persons, limited partnerships, and limited liability partnerships.

Authorized Farm Corporations - Eligible shareholders must be natural persons. Shareholders are limited to five, but no relation is required. Limited liability is offered in this structure. As a general rule, a corporation is a tax paying entity, but it depends on whether the corporation is organized as Subchapter "C" or Subchapter "S." Dividends paid to shareholders, however, are fully taxable.

Limited Liability Companies - ILLEGAL IN MINNESOTA FARMING OPERATIONS

Figure 1. illustrates various business structures and includes some options not currently legal in Minnesota for dairy operations. It is important to consult an attorney for legal advice when selecting and implementing a business. Information on how the Minnesota Corporate Farm Law is regulated and questions relating to the law can be addressed to the Minnesota Department of Agriculture, 90 West Plato Blvd., St. Paul, MN 55108. Attention: Corporate Farm Law Administrator.

Hybrid Organizations

Businesses can be organized by combining two or more entities or ownership forms.

EXAMPLE A:                    FAMILY FARM CORPORATION
                              |     |         |
                         Individual |         |
                                    |         |
  ELIGIBLE                       General      |
SHAREHOLDERS                   Partnership    |
                                              |           
                       Limited Liability Partnership or Limited Partnership

Any combination of the above can be used, with an unlimited amount of shareholders, however a majority of the shareholders must be related within the 3rd degree of kindred and non-natural persons can not be related to individuals. The related individuals must make up the majority of shareholders and must own the majority of the voting stock.

Notice that no corporations or limited liability companies are eligible to be shareholders in family farm corporations.

EXAMPLE B:                    LIMITED LIABILITY PARTNERSHIP
                              |     |          |
  ELIGIBLE               Individual |          |    
SHAREHOLDERS                        |          |
                                 General       |
                               Partnership     |
                                               |     
                       Other entities certified under the corporate farm law

Any combination above can be used, and there can be an unlimited number of shareholders in a limited liability partnership.

Notice that only corporations that qualify under the corporate farm law can be eligible shareholders.

These are only two general examples of hybrid organizations. There are numerous other ways to create such organizations, each with their own restrictions. It is also important to remember that there are other requirements that need to be satisfied when applying for certification. Because each entity or ownership form has its own restrictions, it is impossible to make broad generalizations about compliance with the corporate farm law. The best thing to do is to contact an attorney or the Minnesota Department of Agriculture, where situations can be dealt with on a case-by-case basis.