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Welcome to the

Tennessee Value‐Added Beef Webinar Series

Made Possible By:

Today’s Topics & Presenters

• Circling the Wagons

– Managing the Legal Risk of Direct Marketing Beef

Rusty Rumley,Staff Attorney, National Agricultural Law Center

Hal Pepper,Financial Analyst, CPA

Megan Bruch, Marketing Specialist, CPA

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Session Overview

• Introduction to risk, risk assessment and risk tmanagement

• How business structure may be used as a tool to manage legal risk

• How product liability insurance may be used as a tool to manage legal riskas a tool to manage legal risk

Session Objectives

• Increase awareness of strategies or tools to l l i kmanage legal risk

• Increase legal risk assessment and implementation of tools to manage legal risk

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Risk is…

The uncertainty regarding likelihood or magnitude of lossmagnitude of loss, damage or injury

Types of Risk

1. Legal– Laws/regulations

4. Production– Weather, disease, pests, / g

– Injury to customers or employees

2. Human Resources– Death, divorce, disability and disagreement

– Employee turnover

3 Business Interruption

, , p ,errors

5. Marketing– Ability to entice customers

– Increased competition

6. FinancialAbilit t t h fl3. Business Interruption

– Weather, natural disasters, other

– Ability to meet cash flow, obtain affordable credit, grow equity

– Damage or loss to personal property

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Risk Management Methods

1 A id Ri k 3 T f Ri k1. Avoid Risk

– Choose not to engage in a specific activity

2. Reduce Risk

Implement preventative

3. Transfer Risk

– Transfer to another party – typically with insurance

4 Accept Risk– Implement preventative measures/procedures

4. Accept Risk

– Prepare for loss or damages – create emergency fund

Risk Management Methods• Certain methods more suited to some risks than others

• Based on – Expected severity of loss

– Expected frequency of loss

Low Severity High Severity

Low Frequency

Reduce or Accept Reduce or Accept

High Frequency

Reduce or Transfer Reduce, Transfer or Avoid

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Example Methods to Reduce Risk

• Familiarize yourself with laws and regulations d f ll i t l t tand follow requirements relevant to your 

operation

• Develop and implement – Safety measures and procedures for customers and employees

– Emergency response plan

– Incident reporting system

– Food handling procedures

– Product recall procedures

Example Methods to Transfer Risk

• Obtain insurancel b l h l h d b l l f– Property, liability, health, disability, life, crop, etc.

• Learn and follow insurance requirements and claim procedures

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Example Methods to Accept Risk

• Develop a business analysis and management tsystem

• Choose a beneficial business structure

• Monitor market conditions

• Create an emergency fund to pay insurance deductibles and other potential lossesdeductibles and other potential losses

Ri k A tRisk Assessment & Management for Your Business

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Step 1 – Risk Assessment

• Identify specific risks associated with your businessbusiness

• Consider all types– Legal– Human Resources– Business Interruption– Production– Marketing– Financial

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Step 2 – Risk Assessment

Analyze likelihood of injuryinjury

– Can rate on scale of 1=Low to 5=High

Analyze magnitude of potential losspotential loss

– Can rate on scale of 1=Small to 5=Large

Step 3 – Risk Management

• Decide which general methods of risk t i tmanagement are appropriate

– Avoid, Reduce, Transfer or Accept

Low Severity High Severity

Low Frequency

Reduce or Accept Reduce or Accept

High Frequency

Reduce or Transfer Reduce, Transfer or Avoid

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Step 4 – Risk Management

D id hi h ifiDecide which specific strategies you will take to manage risk

Estimate costs

Step 5 – Risk Management

Implement risk management strategies

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Step 6 – Risk Management

Evaluate effectiveness of risk managementrisk management strategies implemented

Then return to Step 1

(Refer to Risk Assessment and Management Worksheet Handout)

www.NationalAgLawCenter.orgwww.NationalAgLawCenter.org

Limiting Liability with Business Organizationsg

Rusty RumleyCenter Staff Attorney

479-575-7646 • nataglaw@uark.edu

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www.nationalaglawcenter.org

Administrative Law Animal Identification Aquaculture Biosecurity Business Orgs Clean Water Act

C i l T

Agritourism ADR AFOs Animal Welfare Bankruptcy Biotechnology

Ch k ff Commercial Trans. Conservation Programs Cooperatives Disaster Asst/Crop Ins Estate & Taxation Food Labeling International Law Labor Landowner Liability Local Food Systems

N t’l O i P

Checkoff Climate Change Commodity Programs Corp. Farming COOL Environmental Law Finance & Credit Food Safety International Trade Marketing Orders

N t iti P Nat’l Organic Program Packers & Stockyards Pesticides Renewable Energy Specialty Crops Urbanization & Ag

Nutrition Programs PACA Production Contracts Secured Trans. Sustainable Ag Water Law

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BUSINESS BUSINESS ORGANIZATION ORGANIZATION OPTIONS TO PROTECT OPTIONS TO PROTECT YOUR PERSONAL AND YOUR PERSONAL AND YOUR PERSONAL AND YOUR PERSONAL AND BUSINESS ASSETS.BUSINESS ASSETS.

The Business StructureThe Business Structure

What is so Important about a Business Structure?Structure? Liability Protection – separating assets so that a

creditor or plaintiff cannot take everything you own

Fairly cheap to use

Easy to set up

Great estate planning toolp g

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How Business Entities Work to How Business Entities Work to Protect YouProtect YouKnow what business entities provide protection:protection: No protection - Sole Proprietorship and

General Partnership Some partners protected – Limited

Partnership Full protection – Limited Liability

Companies and Corporations

How Business Entities Work to How Business Entities Work to Protect You, continuedProtect You, continuedWhy the differences in protection?protection? Some business

entities function as a separate legal entity (like another person) and others do not.

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Business Organizations are Organizations are like “fire breaks” and not shields

640 Acre section of land.

How to use a Business EntityHow to use a Business Entity

Creating a business entity is not enough entity is not enough to provide any protection

Creating a business entity is like buying another basket…

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Respect the Business StructureRespect the Business Structure

At the end of the day, Courts will only respect your business structure as much respect your business structure as much as you do.

What does this mean?◦ You HAVE to keep the business separate from

your personal life and from other businesses h that you run.

◦ Keep separate bank accounts, business records, etc…◦ Don’t use business funds for the family

vacation

Issues we’ll cover for each oneIssues we’ll cover for each one

Liability of Owners

Legal Status

Formation

Management

Taxation

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Types of Business StructuresTypes of Business Structures

Sole ProprietorshipG l P hi General Partnership

Limited Liability Corporation Corporations

-Subchapter “S”-Subchapter “C”-Subchapter C

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Sole ProprietorshipSole Proprietorship

Liability of Owners-100% liability for the business debt-100% liability for the business debt

- Creditors will be able to reach your personal assets as well as what you invested into the business.

- This means that property such as your land, your home, your personal bank accounts are at risk!

Legal Status-Not a separate legal entity

-You would be sued directly.

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Sole ProprietorshipSole Proprietorship

Formation- No formalities are required…if you start a business by

lf h hi i h h q y y

yourself than this is what you have. - Formed or dissolved at the discretion of the individual

who owns it- Only 1 person, or it becomes a partnership

Management- Easy decision making – only one person to consult!

Taxation- Income is taxed on the individual’s tax return (1040)

-Schedule C

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General PartnershipGeneral Partnership

DefinitionAn association of two or more “persons” who -An association of two or more persons who agree to carry on as co-owners of a business for profit.

-No intent is necessary to form a general partnership and it is possible to create one without intending to.without intending to.

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General PartnershipGeneral Partnership

Liability- Each partner is jointly and severally liable Each partner is jointly and severally liable

for the debts of the business.- Not only are you personally liable for the

debts and actions of the business (just like the sole proprietorship), but you are also responsible for all of the other partners actionsactions

- Creditors can reach your personal assets, in addition to what you have invested into the business

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In Re Simmons (Arkansas 2007)In Re Simmons (Arkansas 2007)

Simmons farming operation was in financial trouble and filed for Chapter 7 pwhich would discharge many of the debts.

Simmons’ son, and general partner, produced a forged personal guarantee on a loan that Simmons had no knowledge of at the time (he later found out about it)( )

Court held that the Son’s actions imputed fraud to ALL partners so no discharge was allowed.

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General PartnershipGeneral Partnership Legal Status

- Recognized as a separate legal entityg p g y

Formation- No formalities are required- Can be formed unintentionally (only intent

required is to run business for profit) Example look at your crop share profit)…Example look at your crop share lease forms when you go home.

- There can be a formal partnership agreement that details management responsibilities and how profits/losses will be split

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General PartnershipGeneral Partnership

ManagementEach member of the partnership is called a - Each member of the partnership is called a “general partner”

- The decisions are made by all partners and all partners actively participate…any partner can bind the rest of the partners to a contractProfits and losses are split evenly - Profits and losses are split evenly - Unless the partnership agreement states otherwise

and there typically has to be a good reason for this.

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General PartnershipGeneral Partnership

TaxationThe general partnership has the advantage of - The general partnership has the advantage of being a “pass-through entity”

- This means the partnership itself pays no income taxes

- Instead, income is taxed only after it is distributed to the partnersdistributed to the partners.- This is different than the “double tax” where income

is taxed when the business earns it and when it is paid out to the individual partners.

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Limited Liability Company (LLC)Limited Liability Company (LLC)

LLC – created in the 1970s- Similar to Limited Partnerships…except Similar to Limited Partnerships…except

everybody can be protected.- Provides protection to personal assets- Made up of “members” rather than “partners”

Liability- Members’ personal assets are protected from Members personal assets are protected from

creditors of the business. - Creditors can only reach that which has been

invested or pledged to the business

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LLCLLC Legal Status

- Recognized as separate legal entity Formation

- Can be formed with 1 or more members- Created by delivering Articles of Organization to the

Secretary of State’s office- Must include

- Name of LLC- Address of LLC- Agent for service of process

- Certain reports must be filed each year to maintain LLC status

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LLCLLC

Management – 2 optionsMember Management (small businesses)- Member Management (small businesses)- All members have the right to participate in

management- This is the more common option

- Manager Management (large businesses)- Only designated members have management Only designated members have management

authority as provided in articles of organization

- Profits and losses are shared equally among members unless otherwise agreed

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LLCLLC

TaxationThe LLC can elect to be a “pass through - The LLC can elect to be a pass-through entity”- Income is taxed only when it is distributed to the

members

- Or the LLC also has the option of being taxed as a corporationp- Income would be taxed when the LLC earns it and

again when it is distributed to the members

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CorporationsCorporations

Most complex business organization

Offer liability protection for shareholders- Similar to that of LLC- Older business organization with centuries of

case law.

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CorporationsCorporations

LiabilityShareholders are protected from creditors of -Shareholders are protected from creditors of the corporation in most cases

Legal Status-Corporation is a separate legal entity

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CorporationsCorporations Formation

- Articles of incorporation must be filed with Secretary of Stateof State- Must include

Name of corporationPurpose of corporationStock structure

- Fictitious name statement- By Laws

I l d d il f h h i ill b - Include details of how the corporation will be runOfficersShareholder meetingsNumber and terms of Directors on Board

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CorporationsCorporations

FormalitiesRecord keeping requirements-Record keeping requirements

-Regular board meetings -Annual shareholder meetings-Annual filing requirements for the state

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CorporationsCorporations

ManagementShareholders elect a Board of Directors- Shareholders elect a Board of Directors

- Board of Directors appoint Officers- Officers are responsible for day-to-day management

decisions- Board of Directors is responsible for long term

planning and managementp g g- Shareholders have limited management authority

and vote only on extraordinary measures- Like selling more than 1/2 of the assets or dissolving

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Types of CorporationsTypes of Corporations

S Corporation-Limited number of shareholders (100 or less)Limited number of shareholders (100 or less)-“Legal persons” that are allowed to be

shareholders is limited to citizens, resident aliens, estates and certain trusts-No corporations, non-resident aliens

-Only one class of voting stock-Distribution rights to shareholders must be

equal-No tax at the corporate level…“pass through”

-Similar to taxation of LLC

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How to choose!How to choose!

Deciding which business structure to use is an important decision is an important decision.

Many factors to consider-Who is involved-What is their role-What are the requirements-What makes the most sense for my business

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Bus. Orgs and Estate PlanningBus. Orgs and Estate Planning

There are also ways that attorneys can use business organizations to assist in use business organizations to assist in estate planning as well as limiting liability.

Probate is required to pass on property, but what about business entities that own property?

Bus. Orgs and Estate PlanningBus. Orgs and Estate Planning

Other advantages besides avoiding besides avoiding probate:◦ You can “gift” shares

of a business much easier than physically dividing up assets

B li i ◦ By splitting up ownership of a business between different people you can lower the taxable value of an estate.

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CONTACT CONTACT INFORMATION:INFORMATION:

Rusty W. RumleyPhone: (479) 575-2636E il l @ k dEmail: rrumley@uark.edu

DisclaimerDisclaimer

The National Agricultural Law Center does not provide legal advice Any The National Agricultural Law Center does not provide legal advice Any The National Agricultural Law Center does not provide legal advice. Any The National Agricultural Law Center does not provide legal advice. Any information provided on or by this Web site is not intended to be legal advice, information provided on or by this Web site is not intended to be legal advice, nor is it intended to be a substitute for legal services from a competent nor is it intended to be a substitute for legal services from a competent professional. This work is supported by the U.S. Department of Agriculture professional. This work is supported by the U.S. Department of Agriculture under Agreement No. 59under Agreement No. 59--82018201--99--115, and any opinions, findings, conclusions, 115, and any opinions, findings, conclusions, or recommendations expressed in the material on this Web site do not or recommendations expressed in the material on this Web site do not necessarily reflect the view of the U.S. Department of Agriculture.necessarily reflect the view of the U.S. Department of Agriculture.

Web site:Web site: www NationalAgLawCenter orgwww NationalAgLawCenter orgWeb site:Web site: www.NationalAgLawCenter.orgwww.NationalAgLawCenter.org

Phone: (479)575Phone: (479)575--7646 7646 Email: NatAgLaw@uark.eduEmail: NatAgLaw@uark.edu

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Liability Insurance

Liability Insurance

Insurance policies are complicatedcomplicated.

Insurance should be appreciated as a business expense.

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• Liability insurance is a way of protecting your business in case someone gets ill from eatingbusiness in case someone gets ill from eating meat you sold them. You could be financially responsible if you are sued by them.

• Every business, whether large or small, is at risk of being sued for negligence causing property damage or bodily injury and legal fees from claim settlements are always increasing.

Insurance Coverage Options

• General Farm Liability Insurance Policy

C i l B i Li bilit I• Commercial Business Liability Insurance

• Product Liability Insurance Policy

• Product Recall Insurance Policy

• Accidental or Product Contamination Policy

• Malicious Tampering InsuranceMalicious Tampering Insurance

• Combination Policies

• Excess/Umbrella/Surplus Lines of Insurance

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• General Farm Liability Insurance Policy

– Protects against claims for bodily injury and property damage that occur on the farm premises or as a result of farm operations

– Accidents that affect farmers, employees, guests and customers

– Covers activities considered “farming”

• Commercial Business Liability Insurance

– Covers activities that a farmer also undertakes that are not considered “farming”

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• Note: Many farmers believe their general farm li bilit li id th ith iliability policy provides them with coverage in the situation where someone gets ill from eating food the farmer sold them. In many situations, it may not!

• Product Liability Insurance Policy

– Protects against claims of injury from food products that cause foodborne illness

– Covers “products and completed operations”

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• Combination Policies

– General farm liability policy and commercial business coverage may be combined with a homeowner’s policy

• Excess/Umbrella/Surplus Lines of Insurance

– Provide catastrophic loss protection when the underlying insurance is inadequate

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Coverage varies from company to company.

Raw products produced by the farmer/sellerby the farmer/seller may be covered under a general farm liability insurance policy.

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• If you are selling processed products (like t) d th l fmeat) you may need more than a general farm 

liability insurance policy.

Th l f t fThe sale of meat from animals grown by another farmer is not covered under a general farm liability policy.

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• “But I’m only selling my meat to friends and f il I t t ”family I trust.”

When you buy an insurance policy…

• You are required to pay the premium at the ti i d th li ill l b itime required or the policy will no longer be in force.

• You are required to report (in a timely fashion) any occurrences to the agent and companyany occurrences to the agent and company.

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When you buy an insurance policy…

• You are required to report any material h i th t f ti iti thchanges in the nature of your activities or the property which is subject to insurance.

• You are required to cooperate with the insurer in matters of subrogationin matters of subrogation.

How much insurance do I need?

• Consider the value of your assets.

C id th d ll t f t ti l• Consider the dollar amount of potential claims.

• Buyers of your product (grocery stores) may require a minimum amount of product liability insurance (Whole Foods $2 million)

• Discuss your particular situation with your insurance agent to verify coverage & needs.

• Reevaluate your coverage annually.

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Make sure the proper business entity isbusiness entity is insured. 

Premiums often are based largely on product sales and hazards involved. Provide annual salesProvide annual sales updates to your insurance agent.

• Hazards and insurance needs are real. Learn to d li d k i tread your policy and ask your insurance agent 

when you have questions. You could stand to lose everything if you take your insurance for granted.

• Read and understand your policies.

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Take Home Messages

• It is important to assess all types of potential i k t ti d i l trisk to your operation and implement appropriate strategies to manage risk

• Various business structures may provide some protection for legal risk

• Consider all characteristics advantages andConsider all characteristics, advantages and disadvantages of business structures before choosing

Take Home Messages

• Product liability insurance is a vital legal risk t t l f l dd d b fmanagement tool for value‐added beef 

producers

• Carefully consider needs for coverage 

• Work closely with insurance agent and communicate well and oftencommunicate well and often

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Contact Us

Center for Profitable Agriculture

https://ag.tennessee.edu/cpa

Megan Bruch’s E‐mail – mlbruch@utk.edu

Hal Pepper’s E‐mail – hal.pepper@utk.edu

(931) 486‐2777

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Special thanks again to our funding partners:

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Join Us for the Next Webinar

• January 8, 2013

• 6 30 pm Central/ 7 30 pm Eastern• 6:30 pm Central/ 7:30 pm Eastern

• Marketing: It’s Not Magic It’s Mandatory

• Megan Bruch, Center for Profitable Agriculture

• Slides and archived versions of all webinars will be made available on http://cpa.utk.edu