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Value-added dairy: Business structure and legal considerations

Jen Bradley for Progressive Dairyman Published on 22 May 2019

“An LLC, corporation or cooperative is a good thing,” said Rachel Armstrong, founder and executive director of Farm Commons, which offers legal education and support to farmers, seeking to encourage them and implement best legal practices.

When looking to value-added processing for dairies, business structure and other legal considerations must be weighed thoroughly. As an attorney and someone who is passionate about helping farmers resolve legal issues that stand in the way of their goals, Armstrong said value-added products can increase a farm’s profit but also contribute greatly to the local food system.

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She addressed the Resilient Farms Conference in Wisconsin Dells, explaining the variety of business structures available to farmers. On the Farm Commons website, a free download is also available which provides a more in-depth look at legal considerations for farmers looking to bring added value to their business through product offerings.

She told the audience organizational documents make a farm stronger and more resilient in the face of problems that can occur. “It’s important to think proactively and challenge ourselves,” she said. “It’s also a lot easier to talk about it beforehand, as these are things that can make a business fail.”

Business entities

In another free online resource, “Farmers’ Guide to Business Structures,” Armstrong and her expert team offer a detailed review of all business entities. She discussed all these at the conference, which attracted many farmers looking to develop a niche business.

She said many farms and side businesses still operate under the “assumed” sole proprietorship or even partnership, which doesn’t require formal documentation. This is true even if they register a trade name with the Department of Financial Institutions, perhaps because they don’t want to take on the obligation of an LLC or other entity.

“The downside to this is that personal assets are available to satisfy business liability,” Armstrong explained. “This is not recommended.”

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A business entity protects personal assets, but she was quick to explain that does not take away the need for insurance. “Insurance is the only thing that protects business assets from business liabilities,” she said.

The first step is to simply consider the variety of entities available and decide if one is a good fit for a farm business. Armstrong always recommends working alongside an attorney or tax professional who can answer individual questions.

“Models can help you think through this but can’t give all the answers that are right for you,” she added. “This process also helps develop an authentic commitment to what you are trying to do.”

On the Farm Commons site, many resources can be found and, in the guide mentioned earlier, an entity comparison chart, decision flowchart and other information can help a farmer get started with this task.

“LLCs, corporations and cooperatives work best when used as an opportunity to work through the details,” Armstrong said. There are pros and cons to each, but she says it’s essential to just start from scratch, looking at the options, the business goals and how to best make the added value option an actual value, not a problem down the road.

Legal considerations with processing

Through Farm Commons, Armstrong and her team empower farmers to explore the risks they take when it comes to value-added processing – but also resolve them. She explains in her “Adding Value to Farm Products” manual there is no single set of laws that apply to value-added products, and no single definition of value-added product.

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“If we’re handling the product beyond taking it out of the field and washing it to make it more presentable for sale, we need to pay attention to the legal aspects of adding value,” Armstrong said.

She recommends farmers work with their nearby extension agents too, as they are knowledgeable in these state food processing rules. Various licenses, permits, inspections, etc., are all legal considerations a farmer must be aware of when thinking of expanding their products.

Costs are a factor here, the same as when deciding what business entity to embark upon. There are cottage food laws in many states that offer exemptions, but those differ greatly across state borders. It’s imperative to know what a state allows and how it defines terms such as pickling, processed or baked.

“Refrigerator pickles may not be ‘pickles’ and pumpkin pie may not be a ‘baked good’ under certain state cottage food laws,” she explained.

After deciding what’s truly doable, affordable and attractive to customers, Armstrong says insurance still plays a big part in food safety liability. “Insurance is an incredibly valuable tool,” she said. “Insurance policies will pay on successful, covered judgements, and the insurance company provides an attorney to defend the farmer from the suit.”

She also wants people to know that all the legal talk doesn’t have to raise red flags of worry. Armstrong said risk management is the name of the game, and it’s something farmers are not strangers to anyhow.

From business entities to insurance and processing risks, value-added dairy products can be brought into an existing farm business with some careful consideration. When addressing how to take the necessary legal steps forward, Armstrong told the audience: “Follow through.”  end mark

Jen Bradley is a freelance writer in Chilton, Wisconsin.

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