There has been a significant change in the laws governing how farms may be owned and operated. The “how” and “why” are somewhat involved, so bear with us as we explain why reorganizing those properties and operations into limited liability companies (“LLCs”), limited partnerships, or S corporations should now be considered.
Agricultural Real Estate Ownership Issues
There are a variety of issues that must be considered in connection with the ownership and operation of agricultural real estate. Certain states impose limitations on the ownership of agricultural real estate. For example, South Dakota has adopted policies against the ownership of agricultural land by corporations or LLCs, irrespective of whether domestic or foreign,[1] and states such as Iowa have adopted integrated statutes as to “family farms.”[2] Other states have adopted laws that preclude ownership of real estate, agricultural or otherwise, by business organizations that include a “foreign adversary.”[3] At the federal level, acquisitions and transfers of interests in “agricultural land”[4] by a “foreign person”[5] trigger certain reporting obligations,[6] with civil penalties for failure to do so.[7]
Practically speaking, it has been common to hold and operate agricultural real estate in partnership consequent to how certain farm support programs—namely, the Price Loss Coverage and the Agricultural Risk Coverage, each created by the Agricultural Act of 2014 (also known as the “2014 Farm Bill”)—have determined who can receive payments.[8] Until recently, each has provided for certain payments to each person “actively engaged in farming”; where a partnership was used, separate payments (now up to $155,000 per annum) could be made to each partner. However, where a farm was operated through a business entity such as a corporation or an LLC, there was no “look-through” to the natural persons who are themselves actively engaged in farming, and the entity would be treated as a single farmer.[9] This treatment had the effect of dissuading the operation of certain farming operations through business organizations that afford limited liability and, on particular facts, other benefits.
Related: Making Implied Covenant of Good Faith Express
Changes Under the One Big Beautiful Bill Act
This treatment changed under the One Big Beautiful Bill Act (“OBBBA”), which at section 10306 created a new category of entity, a “qualified pass-through entity,” namely:(A) a partnership . . . ;(B) an S corporation . . . ;(C) a limited liability company that does not affirmatively elect to be treated as a corporation; and(D) a joint venture or general partnership.[10]
It was then provided that:Payments made to a qualified pass-through entity shall not exceed, for each payment specified in subsections (b) and (c), the amount determined by multiplying the maximum payment amount specified in subsections (b) and (c) by the number of persons and legal entities (other than qualified pass-through entities) that comprise the ownership of the qualified pass-through entity.[11]
This provides a look-through of the qualified pass-through entity to those persons who are themselves “actively engaged in farming,”[12] equivalent to what had previously been reserved for partnerships and joint ventures.[13]
