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BUSINESS STRUCTURES
AND TAXESLegal and Tax Considerations
Presenters:Derek Fisher, CPA -- Fisher & Associates
Miriam Robeson -- Attorney at Law
January 23, 2014
What are your goals?
Ease of operation
Transferability Tax benefits Liability
protection
Self-Employment tax
Fringe Benefits Flexibility Real Estate
Basis
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
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
Types of Entities
C Corporation S Corporation Limited Liability Company Partnership/Family Limited
Partnership
Other Entity typesSole Proprietor (Schedule F)Trust (Revocable – Irrevocable)
Typical Scenario – Preferred Choice
Limited Liability Company or S Corporation Flexibility, Tax benefits, taxed at owner
rate
Multiple Entities – greater flexibility Equipment and labor pool Land Livestock Operations
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.
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
When To Choose Other Entity Types
Sole Proprietor Greatest liability risk – both
business and personal assets at stake
LLC versus S Corp
Tax free in-and-out (mostly)
Easy to change as circumstances change
Can have many layers
Prevents de-capitalization of Corp by young owners
Stronger mgmt control in officers
Limited Liability Company
S Corporation
Structure
LLC versus S Corp
GENERAL (Active) Members pay SE Tax
LIMITED (Passive) Members are exempt from SE Tax
Can be exempt from SE Tax if salaries are paid to SH
Limited Liability Company
S Corporation
SE Taxes
LLC and Trusts Land
LLCs – “easy-in, easy-out” flexibility
Basis locked at formation
Can change structure at any time
Can organize as Business
Locked-in for duration of Trust
Basis locked at formation
Cannot change structure
More difficult to operate as “business”
LLCs and Land OwnershipTrusts and Land Ownership
LLCs and Tax Form
Pass-through income, depreciation, etc.
Humans usually lower tax rate than corps
No pass-through tax
Corps taxed at higher level than humans
Partnership LLC Corporation LLC
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, over-extended credit)
Entity Structure and Risk Management
Liability for outside events limited to assets in LLC – cannot get at your personal assets
Can protect real estate from operational liability
High-risk elements (equipment, labor) in one LLC
Liability limited to assets in one LLC (not entire operation)
Keep Risk Out Keep Risk In
Insurance
Basic liability insurance Basic casualty insurance Crop insurance Vehicle insurance Workers Comp Umbrella/Operations insurance Life insurance
Entity Choice and FSA/Farm Program
No more “3-entity Rule” Now – 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
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
“Stuck” StructuresWhat 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
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
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
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 infirmity – qualification for Gov’t
entitlements Legal issue Residence issues
Plan for Transition – Gen 1
QUESTIONSWhat will be the
most effective and fair way to pass
the farm business to the next generation?
When should the change take
place?
OPTIONSBuy out Rent out
Other FamilyGift
Bequest
TIMING OF TRANSITION
During LifeAfter Death of
Spouse 1After Death of
Spouse 2
Goodacre Farms LLCA&B Goodacre Farm Management LLCGoodacre Hogs LLCBill & Ann GoodacreMary – Tom – Jane
Case Study
Assets
1,400 acres owned ground
1,400 acres rented ground
$2M machinery, buildings, bins
$500,000 Savings $500,000
Retirement
Farm Assets Personal Assets
Value of Estate (March 2013)
RE = $ 9.8M Farm EQP = $ 2.0M Cash assets = $ 1.0M Total Estate = $12.8M
Organizational StructureG
ood
acr
e F
arm
s,
LLC• Farm
Real Estate
• Cash or Share Rent
A&
B G
ood
acr
e
Farm
• Machinery
• Labor• Contract
Farming• Key
Employee
Good
acr
e H
og
s LL
C• Livestock contracts
• Animal buildings
En
tity
Rela
tion
ship
sReal Estate LLC• Contract with MGMT LLC• Liability insulation• Estate Plan – Ownership to all
children
Management LLC• Contract Farming• Production “stake” for sweat equity
(Son & Key Employee• Liability insulation
Livestock LLC• Production stake• Liability insulation from Real Estate
CrossContracts
Fam
ily R
ela
tion
ship
sReal 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
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
Factors in Farm Planning
Entity structure
Risk Mgmt
Fair v Equal
Transition
Taxes
Business Operatio
ns
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
Questions?
Contact information:
Derek Fisher, Fisher & AssociatesEmail: [email protected]
Miriam Robeson, Attorney at LawEmail: [email protected]: lawlatte.com
Business Structures and Taxes