Your Farm, Your Business

1
Your Farm, Your Business

• Presentation by Crystal Middleton, Esq.
• Land Loss Prevention Project, SmartGrowth
  Business Center

2
Overview

• Farming as a Business
• Choosing the Business Entity
• Understanding SmartGrowth

3
Types of Entities

• Proprietorship
• General Partnership
• Limited Partnership
• Limited Liability Corporation
• C Corporation
• S Corporation

4
Sole Proprietorship

• One owner
• Unlimited liability
• Lowest formation and maintenance costs
• Assumed name certificate
• Freely transferable ownership

5
Sole Proprietorship (continued)

• Business income reported on individual tax return
• Self Employment Tax
• Rarely used for business with significant
  revenues (e.g. 100,000)
• Single member LLC gives equivalent tax treatment
• Normally liquidated following death of owner

6
General Partnership

• No written agreement required
• If written agreement exists, then it controls
• Unlimited Liability
• Apparent Authority of Partner
• Each partner may act on behalf of the partnership
  
• Conversion Merger
• Pass-thru Taxation
• Limited Fringe Benefits

7
Limited Partnership

• Formation filing of certificate
• Written partnership agreement controls
• Limited liability for limited partners only
• Management by General Partner

8
Limited Partnership (continued)

• Conversion or Merger
• Fringe Benefits limited for partners
• Pass-thru Taxation

9
Limited Liability Corporation

• Formation filing certificate with Secretary of
  State
• Written Operating Agreement controls
• Limited liability for members
• Management by members or by managers
• Conversion Merger

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Limited Liability Corporation (continued)

• Pass-thru Taxation
• Limitations on Fringe Benefits for
  Members/Employees
• Flexible Capital Structures
• Single Member LLCs

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Pass-thru Taxation Status

• No income tax at partnership level
• Partner taxed at individual level
• Partnership losses subject to limitation
• at risk limitationsPartner may use losses only
  up to amount at-risk
• Capital contributions
• Personal liability on debt
• Passive loss limitations
• Loss deductible only up to amount of passive
  income
• Balance deducted upon sale of partnership
  interest

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C Corporation

• Formation
• Filing
• Organizational meetings
• Organizational documents
• Issuance of capital stock

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C Corporation (continued)

• Limited liability
• Structured management
• Varied alternatives for capital structure
• Double taxation
• Fringe benefits

14
S Corporation

• Same formation steps as with C Corporation
• IRS Election to be taxed as S Corporation
• Limitations on Shareholders
• 100 or fewer
• Types

15
LLC vs. C Corporation

• Advantages of LLC
• Pass-thru taxation
• No corporate level tax (no double tax)
• Allows nontaxable distributions of property to
  members
• No franchise tax (in most states)
• Ease of conversion to corporation
• Property may be distributed to LLC members
  without gain recognition

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LLC vs. C Corporation

• Advantages of C Corporation
• Lower overall tax rates
• Tax free mergers and reorganizations
• Flexibility of fiscal year-end
• Fringe benefits to employee shareholders
• Well-defined body of corporate law

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LLC vs. S Corporation

• Advantages of LLC
• LLC can use pro rata portion of debt as basis
• No restrictions on types or quantity of
  shareholders
• Allows nontaxable distributions of property to
  members
• No franchise taxes
• No threat of S status termination by
  disqualified shareholder

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LLC vs. S Corporation

• Advantages of S Corporation
• Well developed body of corporate law
• May switch to C corporation easily
• If currently C corporation, may switch to S
  corporation without liquidation
• Tax on built-in gains may be shifted to other
  shareholders
• No constructive termination upon 51 transfer

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S Corporation vs. C Corporation

• Advantages of S Corporation
• Pass-thru taxation avoids double taxation
• Existing C corporation can elect S status
  without liquidation
• Unreasonable compensation not an income tax issue

20
S Corporation vs. C Corporation

• Advantages of C Corporation
• Flexibility on fiscal year end
• Fringe benefits not taxable to employee/shareholde
  r
• No restrictions on types or quantity of
  shareholders

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SmartGrowth

• Resource of the Land Loss Prevention Project
• Provides legal assistance, referrals, and
  informational resources to farmers looking to
  gain or expand their business expertise
• Assists clients in planning for succession

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Questions?

• Land Loss Prevention Project
• Phone [phone]
• Toll Free [phone]