In a recent article in the American Agriculturist, Darrell Boone made the case that farm operations should establish multiple limited liability companies (LLCs) to segregate the risk exposure of one aspect of the farming operation from the others. While his theory is sound and may be the best option in most states, Virginia offers a better structure—the Virginia Business Trust—to achieve the goals Boone recommends.
In Boone’s example, he suggests a four-LLC approach: the Operating LLC, the Land LLC, the Machinery LLC, and the Trucking LLC. The underlying concept is that each class of assets—land, machinery, trucking equipment, etc.—also has unique risk factors. By isolating each risk category into separate LLCs, you shelter the assets of each LLC from a creditor’s claims against one of the others.
Let’s illustrate this using a comparison between an operation that uses a single LLC and one that uses the four-LLC approach that Boone recommends. In the single LLC case, all of your assets—land, cattle, machinery, etc.—are lumped together into a single LLC. This shelters your personal assets from any liability that your agriculture operation may incur, but it puts each class of assets within the LLC at risk when a claim arises out of any single asset class.
For instance, Boone points out that “Trucks are the most dangerous piece of equipment on the farm. If you’re in a wreck and get sued, how do you think the jury is going to react when they find out that you most likely don’t have a commercial driver’s license, or that your truck is not Department of Transportation inspected? It’s not going to be a good outcome.” In the single LLC case, an accident victim who gets a judgment against you could execute against your land to satisfy the judgment arising out of the truck accident. In contrast, using the four-LLC approach, the accident victim would be limited to the assets of the Trucking LLC. In addition to your personal assets being protected, your land, machinery, etc. would also be out of reach of the judgment creditor.
There’s no legal limit to how many LLCs you could use to segregate your various asset classes. Depending on the size of your operation, it may make sense from a liability protection perspective to create additional LLCs to manage and isolate your risks. From a practical perspective, though, in terms of financial costs and administrative burdens, Virginia offers a better option: the Virginia Business Trust (VBT).
The Virginia legislature created the VBT vehicle in 2002 as a means of offering a business structure that would maximize operational flexibility as well as limited liability. As stated in the statute, the law should “be construed in furtherance of the policies of giving maximum effect to the principle of freedom of contract and of enforcing governing instruments.” In other words, within certain statutory limits and consistent with public policy, your VBT can be tailored to your specific circumstances and easily modified as these circumstances change—there is no one size fits all.
To explain what a VBT is, let’s start with what it isn’t. When we hear the term “trust” we often think of the “living trust”, the estate planning vehicle used to avoid probate and/or estate taxes. While the VBT and the living trust have some features in common, such as the transfer of property to a trustee for the benefit of another, the nature and purposes of the two types of trusts are profoundly different. By creating a living trust, you establish a fiduciary relationship between the trustee and the beneficiaries, but you haven’t created an independent legal entity. A VBT, on the other hand, exists as a completely independent entity from its owners just like a corporation or LLC do.
While Virginia offers both LLCs and VBTs, the VBT has a unique feature that makes it more suitable for the strategy Boone recommends. That feature is the notion of “series”. A single VBT can contain any number of series that are treated as independent companies within the VBT structure. In other words, instead of creating four LLCs, you would establish a single VBT that contains four series: the Operational Series, the Land Series, the Machinery Series, and the Trucking Series. (Again, these are just examples. Your structure should be created to best fit your circumstances.) By law, any claim arising out of any one of the series would be limited to the assets existing in that same series even though all series operate under a single VBT.
While each of the VBT series need to be carefully documented to maintain its limited liability protection, this is an internal process that doesn’t require additional filings with the state. The same process should be followed with LLCs, but establishing separate LLCs with the state are necessary. Costs are also a factor over time. Currently, the costs for LLCs and VBTs in Virginia are the same: $100 to establish, and $50 a year thereafter. Over 10 years, the cost of establishing and maintaining the registration on four LLCs would be $2,200. Over the same time period, establishing and maintaining the registration on a VBT with four series would be $550. While not a huge difference, the added flexibility for establishing and dissolving series within a single VBT over time as your circumstances change make the VBT a superior choice over the multiple LLC model for the same level of liability protection. The additions or deletions of series would be an internal matter to the VBT rather than establishing or discontinuing LLCs with the state. Thus, the owners of agriculture operations in Virginia should take a close look at their current legal structure to see if it’s optimized to provide them the best and most efficient legal protection available.
Note: Effective July 2020, the Virginia legislature authorized the creation of Series LLCs in Virginia. Each series in the Series LLC, however, must be filed with the Virginia State Corporation Commission as though it were an individual company, and the same registration fee applies upon registration and annually thereafter for each series in the LLC. These requirements, coupled with other restrictions on their convertibility to other types of entities, result in a situation where there is no real advantage to using a Series LLC in Virginia over the multiple LLC structure described above. As a result, the flexibility and cost effectiveness of the VBT series structure remains the superior alternative to the multiple LLC or the Series LLC structures for agricultural operations in Virginia.