1. January 23, 2014
BUSINESS
STRUCTURES
AND TAXES
Legal and Tax Considerations

2. What are your goals?
Ease of operation
 Transferability
 Tax benefits
 Liability protection

Self-Employment
tax
 Fringe Benefits
 Flexibility
 Real Estate Basis


3. Other Considerations
Life/stage of
business
 Sources of capital
 Inter/intra family
issues
 Taxes
 Risk management
 Preparing for next
generation

Estate planning
implications
 Management or
control
 Termination of
business
 Multiple entities
 Key Employees


4. Using Entities in Farm Planning

Business
Purpose
 Liability
Protection
 Organize
Operation(s)
 Greater Flexibility
 Better profitability
analysis

Estate Planning
Purpose
 Protect Farm
Assets from family
or creditors
 Greater flexibility in
planning
 Easier transfer of
assets

5. Types of Entities
C Corporation
 S Corporation
 Limited Liability Company
 Partnership/Family Limited
Partnership

 Other
 Sole
Entity types
Proprietor (Schedule F)
 Trust (Revocable – Irrevocable)

10. Typical Scenario – Preferred
Choice

Limited Liability Company or S
Corporation
 Flexibility,
Tax benefits, taxed at owner
rate

Multiple Entities – greater flexibility
 Equipment
 Land
 Livestock
and labor pool

11. When To Choose Other Entity Types

C Corporation
 Need for control at the top
 Shareholders who would have trouble
with pass-through income
 Special needs shareholders, “stranger”
shareholders
 Limits movements of assets and cash
 WATCH – Dividends are double-taxed.

12. When To Choose Other Entity Types

Partnership
 Well-suited for short-term project
 Can be adapted or evolved into LLC
 Can be terminated at end of project
 Highest liability issues and joint-partner
risk

13. When To Choose Other Entity Types

Sole Proprietor
 Greatest liability risk – both business
and personal assets at stake

14. LLC versus S Corp
Limited Liability Company



Tax free in-and-out
(mostly)
Easy to change as
circumstances
change
Can have many
layers
Structure
S Corporation


Prevents decapitalization of
Corp by young
owners
Stronger mgmt
control in officers

15. LLC versus S Corp
Limited Liability Company


GENERAL (Active)
Members pay SE
Tax
LIMITED (Passive)
Members are
exempt from SE Tax
SE Taxes
S Corporation

Can be exempt from
SE Tax if salaries
are paid to SH

16. LLC and Trusts
LLCs and Land Ownership




LLCs – “easy-in,
easy-out” flexibility
Basis locked at
formation
Can change structure
at any time
Can organize as
Business
Land
Trusts and Land Ownership




Locked-in for
duration of Trust
Basis locked at
formation
Cannot change
structure
More difficult to
operate as
“business”

17. LLCs and Tax Form
Partnership LLC


Pass-through
income, depreciatio
n, etc.
Humans usually
lower tax rate than
corps
Corporation LLC


No pass-through tax
Corps taxed at
higher level than
humans

18. Entity Structure and Risk Management

Liability Insurance – adapted for every entity
type, but does not make you “risk-proof”
 Entity
structure can either “keep in” or “keep
out” risk
 You cannot insure against your own bad
behavior
 Does not protect against financial liability
(bad debt, bad business decisions, overextended credit)

19. Entity Structure and Risk Management
Keep Risk Out


Liability for outside
events limited to
assets in LLC –
cannot get at your
personal assets
Can protect real
estate from
operational liability
Keep Risk In


High-risk elements
(equipment, labor) in
one LLC
Liability limited to
assets in one LLC
(not entire
operation)

20. Insurance
Basic liability insurance
 Basic casualty insurance
 Crop insurance
 Vehicle insurance
 Workers Comp
 Umbrella/Operations insurance
 Life insurance


21. Entity Choice and FSA/Farm Program

No more “3-entity Rule”
– payment limit falls to individual owners
 Critical factor is “active participation” by
owners
 Careful structure of “cash rent” entities
 Watch issues of Seniors and Minors
 Now

22. Death and Taxes

Indiana Inheritance Tax – repealed

Federal Estate Tax
 2014
- $5.34M per person (adjusted for Inflation)
 Portable between spouses
 Unified Gift/Estate/Generation Skipping Rate

Capital Gain Taxes

23. “Stuck” Structures
What do you do when you can’t get
out?





Built-in Capital Gains
Low basis – High value real estate
Cash in the entity – not in your pocket
Planning ahead – looking out 10+ years
Restructure business operations away from
“stuck” entity

24. Odd and Unusual Factors








Conservation easements
Shared well (water or gas)
Water, Mineral, Gas rights to 3rd parties
Hunting Rights
Cell Towers – long term leases
Wind Towers – long term leases
Air Space/Overhead encroachment
General easements and other Deed
restrictions

25. Fair – vs – Equal

Planning should consider the needs of both
“farm” and “Non-farm” heirs
Whether
“farm” heir should have
preference for land over cash or
inventory inheritance
Whether
all heirs can cooperate for
operating an entity

26. Fair – vs – Equal

Planning should consider the needs of both
“farm” and “Non-farm” heirs
 Whether
“Non-farm” heirs can incorporate farm
income into their personal financial picture
 Use of “non-farm” planning tools to equalize an
estate and leave more “farm” assets to “farm”
heirs
 Life
Insurance, Cash investments
 Special
Needs – Special Heirs
 Physical/mental
entitlements
 Legal issue
infirmity – qualification for Gov’t

27. Plan for Transition – Gen 1
QUESTIONS
What will be the most
effective and fair way
to pass the farm
business to the next
generation?
When should the
change take place?
OPTIONS
Buy out
Rent out
Other Family
Gift
Bequest
TIMING OF
TRANSITION
During Life
After Death of Spouse 1
After Death of Spouse 2

28. Case Study
Goodacre Farms LLC
A&B Goodacre Farm Management LLC
Goodacre Hogs LLC
Bill & Ann Goodacre
Mary – Tom – Jane

29. Assets
Farm Assets



1,400 acres owned
ground
1,400 acres rented
ground
$2M
machinery, buildings
, bins
Personal Assets


$500,000 Savings
$500,000
Retirement
Value of Estate (March
2013)



RE =
$ 9.8M
Farm EQP = $ 2.0M
Cash assets =
$
1.0M

30. • Machinery
• Labor
• Contract
Farming
• Key
Employee
Goodacre Hogs LLC
• Farm Real
Estate
• Cash or
Share
Rent
A&B Goodacre Farm
Goodacre Farms, LLC
Organizational Structure
• Livestock
contracts
• Animal
buildings

31. Real Estate LLC
Entity Relationships
• Contract with MGMT LLC
• Liability insulation
• Estate Plan – Ownership to all children
Management LLC
Cross
Contracts
• Contract Farming
• Production “stake” for sweat equity (Son &
Key Employee
• Liability insulation
Livestock LLC
• Production stake
• Liability insulation from Real Estate

32. Family Relationships
Real Estate LLC
•
•
•
•
Starting out - Owned by Parents
Gifted to/inherited by children
Rental income to owners
Downside – Basis lock!
Management LLC
• Starting out - Owned by Parents
• Sweat Equity and gradual “buy in” by farming
child
Livestock LLC
• Opportunity for start-up by Gen 2 (Son)
• Can be co-ownership by parents/son

33. Considerations

Income tax effect of LLC on off-farm owners
 K-1
and personal tax rate
 Unwelcome complications to Gen 2 taxes
 Issue of locked-in basis for real estate
 Yes,

but is that important? Will there be liquidation?
Estate Tax
 Planning
for entity discount
 Minimizing estate taxes in high value real estate
market

34. Factors in Farm Planning
Entity
structure
Business
Operations
Risk Mgmt
Taxes
Fair v
Equal
Transition

35. Farm Entity Structure


Flexibility is KEY
Goals suggest structure
 Estate
Planning – Will there be an Estate Tax
Risk?
 Transition to Gen 2
 Consideration of on-farm and off-farm children
 Needs of Gen 1, Gen 2 and Gen 3
 Liability protection/insulation of assets

36. Business Structures and Taxes
Questions?
Contact information:
Derek Fisher, Fisher & Associates
Email: derekf@fisheraccounting.net
Miriam Robeson, Attorney at Law
Email: miriamrobeson@lawlatte.com
Website: lawlatte.com