The Limited Liability Company (LLC) has become in North Carolina and elsewhere the preferred entity of choice for most closely-held businesses, including farms. The LLC has also become more widely used to hold family land interests. The LLC is a hybrid of a partnership (informality of management) and a corporation (limited liability), and has largely replaced these two entity forms in modern legal practice. Formation, management and dissolution of LLCs is governed by the North Carolina Limited Liability Company Act (the “Act”) unless otherwise agreed between the owners by written contract (see Operating Agreement, below). This Factsheet discusses the steps in forming an LLC in North Carolina for your farm.
Overview. The Limited Liability Company in North Carolina is authorized by the North Carolina Limited Liability Act (NCGS §57D-1-01 et seq. This statute authorizes the formation and provides the framework for interest owner rights and entity governance in the absence of a written Operating Agreement between the interest owners. LLC’s provide essentially the same liability protections as the corporate form of business organization, but without the necessity of securing state permission to authorize shares in the company, or requiring a shareholder election of board of directors to elect officers to run the company. The LLC cuts through these requirements by simply allowing the founders to organize the company, secure its recognition from the state, then as an internal matter decide who will own what percentage and who will manage the company. Below are the decision and action steps in formation of an LLC.
Step One: Who Are the Owners? Owners of an LLC are generally referred to as “Members.” Members are normally those who come together to form the LLC and make its initial capital contributions (in the form of cash and hard assets). The Members’ relative contributions normally determine their percentage ownership, though other factors such as skill and intellectual capital may determine Member percentages. Like a corporation, a Member’s liability for debts of the LLC is limited to the liquidated value of his or her ownership interest the LLC. Ownership in the LLC is considered a percentage interest rather than distinct shares (as with a corporation), although many people authorize (by Operating Agreement) a number of “units” to represent the economic ownership percentage as a matter of convenience.
Step Two: Who Makes Decisions? The person (or persons) authorized to make binding decisions and obligations on behalf of the LLC is known as a “Manager.” Under the Act, all Members are deemed to be Managers unless otherwise agreed in a written Operating Agreement executed by all Members. The Members can choose to designate one or more Managers to make operational decisions for the entity within limits specified in the Operating Agreement, reserving to themselves a vote in big decisions such as admitting new Members, making large purchases and financial commitments, and dissolution of the entity and distribution of assets. Traditional offices of President, Vice-President, etc. may be assigned as well (see Step 5, #6 below).
Step Three: Determine Need for and Scope of an Operating Agreement. The decision to appoint from the Members a lesser number of Managers is of itself a reason to adopt an Operating Agreement. This is common in multi-generation farm LLCs. As noted earlier, in the absence of an operating agreement, the key elements of LLC management, governance and dissolution are governed by state statute. The operating agreement can address any number of issues, such as division of profits between members, the limits of management authority without a vote of the members, and restrictions on who can become members as well as restrictions on transfers of ownership. For example, an Operating Agreement may allow a Manager to make financial commitments up to $10,000, above which a percentage vote of Members is required to approve the transaction. Another key feature of an Operating Agreement can be a buy-sell agreement embedded within. Again, an Operating Agreement is not required to form an LLC, but depending on the relationships between the would-be Members, they may want to agree on the parameters of working together before filing.
Step Four: Choosing a Name. Your LLC name must be distinguishable from all other entities formed or domesticated as LLCs with North Carolina Secretary of State (NCSOS). The LLC name can be name of your farm or it can be some other name. Tip: If your farm name has been captured by another entity, think how you can distinguish yours or use another name, then complete and record an Assumed Name Certificate using your farm name with your county register of deeds ($26 recording fee). This allows you to safely use your chosen farm name which you present to the public and your customers. Note that if your farm name has been trademarked under federal law by another entity, it is not available for your use.
Step Five: Filing the Entity. The LLC is formed as a legal entity by filing the proper form with the NCSOS. It is easiest to use the form provided by NCSOS on their website. It is here that you or your designee will take on the role of “Organizer” of the LLC to file the form. The form is fairly self-explanatory, includes instructions, and requires the following decisions:
- LLC Name. As explained above, the name must be unique from all others filed with NCSOS. It may be that your name was used by a now-dissolved LLC, and if sufficient time has lapsed, the name may now be available. The name must contain “LLC” or some variation thereof. If the name is registered as another entity type (e.g. corp.), the name is available for use as an LLC.
- Party Filing the LLC. This is the name and address of the initial Member(s) or designated Organizer (e.g. an attorney) filing the Articles of Organization on the Members’ behalf.
- Registered Agent. You must designate a registered agent (usually a Member) with an address in North Carolina. The purpose of the registered agent is recipient for all official communications regarding the entity, including legal actions.
- Principal Address. This address may be the same as your registered address but need not be. You are not required to submit a principal office, but doing so can help ensure that your county serves as venue in any litigation against the LLC.
- Purpose of Entity. Optional, but for entities holding land enrolled in the Present Use Value, it is important to use the words “farming” or “forestry” in your organization’s purpose. For example, a purpose may simply state “The purpose of [this LLC] is to operate a farm and perform all business related thereto.”
- Officers. Optional as well, but you may wish to list a President and other officers for the purpose of transacting initial tasks such as opening bank accounts, retitling vehicles at Department of Motor Vehicles, etc.
- Signing. The parties listed as Member or Organizer (or both) on the LLC form must all sign the document. Unlisted Members need not sign, but if a Member will be transacting business on behalf of the LLC, it is advisable such Member be listed and sign as proof to third parties of said Member’s authority. An attorney may sign and submit the form as Organizer without individual Members’ signatures.
- Submission. You can either mail in the signed form with a $125 check, or file online for an extra two dollars (you will have to set up an account with NCSOS). NCSOS may take up to 10 days, depending on volume, to process the filing or alert you of any deficiencies. NCSOS offers an expedite fee of $100 for one day turn-around. Tip: put your email on the form for quicker correspondence and return of your formation certificate. Any deficiencies in the filing can then be directly addressed by email.
Step 6: Secure Federal Tax ID Number (Employer Identification Number or EIN). Because the LLC is a distinct legal entity, you cannot use your social security number as its tax identification and therefore must get a new number. This is an easy online process with the Internal Revenue Service (just Google “IRS EIN” and use the IRS.gov site), the multiple information requests are accompanied by explanations, and the process takes about five minutes. Tip: At the conclusion when asked how you want to receive your EIN, request “receive EIN letter online” and you will get a download PDF of the IRS letter with your EIN.
Step 7: Open a New Bank Account and Set Up Accounting. With your EIN letter and your NCSOS acceptance certificate (showing your name as Member or other office), you may open a bank account. One of the primary liability limitation requirements of an LLC is that you keep business and personal funds separate. Upon opening the bank account, open a new company book in Quickbooks (or other bookkeeping software) for the new LLC.
Step 8: Retitle Vehicles and Update Vendor/Customer Contracts. If you have titled vehicles such as farm trucks or delivery trucks you wish to contribute as assets to the LLC, you will need to take your filing certificate to the Department of Motor Vehicles with your vehicle titles for transfer to the new LLC (DMV charges a fee for each title change). Likewise, if you have tobacco or other contracts or participate in FSA programs, you will need to update these (but not later than first months of the year). If you have filed an LLC for land ownership, be sure to update your Present Use Value application within sixty (60) days of recording the deed of transfer. Tip: Though it may be enrolled in PUV, make sure your land qualifies before transferring title.
Step 9: Complete Your Organization Book. While the only requirement of having an LLC is acceptance by the NCSOS, it is very useful to have an organization book (e.g. a binder with tabs) where you keep the following information:
- Articles of Organization (certificate from NCSOS)
- Operating Agreement (signed by all Members)
- EIN Letter (and any future tax elections)
- Ledger of Ownership Interests
- Unit Ownership Certificates (optional, but useful for executing transfers of interest to other Members)
- Asset List (e.g. equipment, other personal property contributed to LLC)
- Leases and contracts
- Annual Reports to NCSOS (this is annual requirement with $200 fee)
- Minutes of Member meetings
Step 10: Maintain the LLC. As noted earlier, the LLC limits a Member’s liability to the extent of his or her investment in the LLC (ultimately reflected as the liquidated value of his or her economic interest). That said, it is always a possibility that a claimant - say for money damages resulting from an injury - can convince a court to disregard the LLC’s liability protections (this is called “piercing the corporate veil) in order to access the Members’ personal assets. To minimize this risk, it is important to follow the formalities of the LLC, such as keeping LLC expenses and personal expenses separate (no matter how convenient or tempting to treat every expenditure as “farming”) and keeping minutes of meetings. Required Annual Reports (a simple online process) are due April 15 of the year following the year of formation (with a fee of $200), and failure to file by the fall of that year will result in “administrative dissolution.” If your LLC is administratively dissolved, NCSOS will hold it as inactive for a specified time (before releasing the name) wherein you may pay a $100 penalty (and back filing fees) for reinstatement. Tip: If you are late in the year, it is advisable to form your LLC after January 1 so you will not have to file an annual report (and pay the fee) until the following year.
Publication date: Feb. 5, 2019
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