When setting up an LLC for Iowa farmland ownership makes sense

Farmland often passes from one generation to the next. And when it does, the question is usually how to divide it.

If the parcel is large enough — and shaped in a way where it can be physically split to allow each owner access — then individual ownership by heirs can make sense.

For example, if you own a farm with three distinct fields in different townships and there are three heirs, assigning each heir their own parcel makes sense. Each person can sell, lease or develop their program as they see fit.

But that isn’t always an option …

When an LLC makes more sense

There are a few situations where taking ownership through shares in an LLC can make more sense than dividing the land among individual heirs.

We typically see landowners take LLC ownership in a few key scenarios:

• The patriarch/matriarch wants to see the farm stay in the family.
• The parcel is too small or shaped in a way that doesn’t support subdivision.
• Unrelated parties who want to co-own a farm.

Let’s explore these scenarios.

1. The family farm

Ever heard of a family farm now owned by 30+ cousins? I have. 

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They take the proceeds each year and use them to fund a family reunion. While 30+ cousins sounds like a nightmare to some, the idea of keeping the farm in the family is very real. And not just by farm families. We see many investors who recognize farmland as a long-term wealth generator and want to see the next generation(s) hold it.

2. Subdivision isn’t ideal

Some tracts just don’t divide well. Imagine a 200-acre tract with only 1/8 mile of road frontage. Attempting to subdivide it could result in no road access or irregular boundaries — both of which destroy land value. 

Let's face it: part of real estate's value is in the eye of the beholder. One key performance indicator for farmers is acres per hour of machinery passes. Tracts that are odd-shaped, poorly accessible or too small aren’t desirable to a farmer — either from a leasing perspective or for purchase. (Keep in mind, farmers own +60% of U.S. farmland.) 

We regularly help landowners weigh these kinds of tract-size tradeoffs before they make a decision. 

What to know if you’re considering an LLC

In all these situations, an LLC for multiple partners could be the solution. Here are a few things to consider.

Pros of holding farmland in an LLC 

• Ownership structure: Multiple owners (called members in an LLC) can hold shares of the company that owns the asset without physically dividing the land. This means no survey required or fenceposts to install.
• Defined management: You can also decide how decisions get made. LLCs can be run by all members (member-managed) or by a designated manager (manager-managed). The manager is appointed by the members and may or may not be a member of the LLC themselves.

Cons of holding farmland in an LLC 

• Setup costs:  While forming an LLC is a fairly straightforward process, legal experts suggest it may cost $1,250–$1,500. A custom buy-sell agreement may add another $1,000.
• Maintenance costs: In Iowa, LLCs are required to file a biennial report ($50 fee to the state). This can be handled by the LLC manager or an attorney and takes about 30 minutes.
• Taxes: LLCs are a pass-through entity. This means that members pay taxes based on their share of the profits per ownership percentage, reported via a Schedule K-1. The income tax liability is basically equal to direct ownership. However, the LLC still needs to prepare and file its own tax return and issue K-1s to its members. Experts indicate this can cost ~$500 per year.

What about liability? 

Some legal professionals point to liability protection as an advantage of an LLC, but others indicate that it’s not absolute. Liability insurance is still strongly recommended for landowners, no matter how they hold the property.

The most important document in your LLC: the buy-sell agreement

If there’s one thing that determines whether an LLC is successful or not, experts seem to agree that it’s the buy-sell agreement.

A buy-sell agreement governs how shares are valued and transferred if one of the owners wants to sell. In family-farm arrangements, the buy-sell might require that heirs sell only to the remaining members (aka other family members) and possibly at a discount — even up to 50% of the market value. That helps discourage sales to outsiders and keeps the land in the family.

I've seen this arrangement appeal to patriarchs/matriarchs who believe in the adage: "You don't sell farmland".

What about a case where you don't want a disincentive to sell? A buy-sell agreement could define the valuation method, perhaps granting existing owners/members the right of first refusal or providing restrictions on transfers. Either way, the owners agree to the terms upfront, reducing potential stress, disputes and even costly litigation down the road.  

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Reid Weiland is the managing partner of Weiland Farms. If you’re thinking through an LLC for your north central Iowa farmland or how to structure it, feel free to schedule a consultation.

‍Disclaimer: This article is for general informational purposes only and does not constitute investment, financial or tax advice. You should consult with a licensed professional for advice concerning your specific situation.