BUSINESS                STRUCTURES                AND TAXESMarch 7, 2013   Legal and Tax Considerations
What are your goals? Ease of operation       Self-Employment Transferability          tax Tax benefits            Fri...
Other Considerations Life/stage of         Estate planning  business               implications Sources of capital    ...
Typical Scenario – Top Choice   Limited Liability Company or S    Corporation     Flexibility,   Tax benefits, taxed at ...
When To Choose Other Entity Types   C Corporation     Need for control at the top     Shareholders who would have troub...
When To Choose Other Entity Types   Partnership     Well-suited for short-term project     Can be adapted or evolved in...
When To Choose Other Entity Types   Sole Proprietor     Greatest liability risk – both business      and personal assets...
LLC versus S CorpStructureLimited Liability Company   S Corporation   Tax free in-and-out        Prevents de-    (mostly...
LLC versus S Corp                           SETaxLimited Liability Company   S Corporation   GENERAL                    ...
LLC and Trusts                             LandLLCs and Land Ownership     Trusts and Land Ownership   LLCs – “easy-     ...
LLCs and Tax FormPartnership LLC           Corporation LLC   Pass-through             No pass-through tax    income,    ...
Entity Structure and Risk Management   Liability Insurance – adapted for every entity    type, but does not make you “ris...
Entity Structure and Risk ManagementKeep Risk Out               Keep Risk In   Liability for outside      High-risk elem...
Entity Choice and FSA/Farm Program   No more “3-entity Rule”     Now   – payment limit falls to individual owners     C...
Case StudyGoodacre Farms LLCA&B Goodacre Farm Management LLCGoodacre Hogs LLCBill & Ann GoodacreMary – Tom – Jane
AssetsFarm Assets              Personal Assets   1,400 acres owned       $500,000 Savings    ground                  $5...
Organizational Structure                      • Farm Real                       • Machinery                       • Livest...
Real Estate LLC                       • Contract with MGMT LLC                       • Liability insulation               ...
Real Estate LLC                       •   Starting out - Owned by Parents                       •   Gifted to/inherited by...
Considerations   Income tax effect of LLC on off-farm owners     K-1 and personal tax rate     Unwelcome complications ...
Farm Entity Structure   Flexibility is KEY   Goals suggest structure     Estate   Planning – Will there be an Estate Ta...
Business Structures and TaxesQuestions?Contact information:Derek Fisher, Fisher & AssociatesEmail: derekf@fisheraccounting...
2013 succession planning   business structures sq
2013 succession planning   business structures sq
2013 succession planning   business structures sq
2013 succession planning   business structures sq
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2013 succession planning business structures sq

  1. 1. BUSINESS STRUCTURES AND TAXESMarch 7, 2013 Legal and Tax Considerations
  2. 2. What are your goals? Ease of operation  Self-Employment Transferability tax Tax benefits  Fringe Benefits Liability protection  Flexibility  Real Estate Basis
  3. 3. Other Considerations Life/stage of  Estate planning business implications Sources of capital  Management or Inter/intra family control issues  Termination of Taxes business Risk management  Multiple entities  Key Employees
  4. 4. Typical Scenario – Top Choice Limited Liability Company or S Corporation  Flexibility, Tax benefits, taxed at owner rate Multiple Entities  Equipment and labor pool  Land  Livestock
  5. 5. 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.
  6. 6. 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
  7. 7. When To Choose Other Entity Types Sole Proprietor  Greatest liability risk – both business and personal assets at stake
  8. 8. LLC versus S CorpStructureLimited Liability Company S Corporation Tax free in-and-out  Prevents de- (mostly) capitalization of Easy to change as Corp by young circumstances owners change  Stronger mgmt Can have many control in officers layers
  9. 9. LLC versus S Corp SETaxLimited Liability Company S Corporation GENERAL  Can be exempt from Members pay SE SE Tax if salaries Tax are paid to SH LIMITED Members are exempt from SE Tax SOMEONE has to pay SE Tax
  10. 10. LLC and Trusts LandLLCs and Land Ownership Trusts and Land Ownership LLCs – “easy-  Locked in for in, easy-out” duration of Trust flexibility  Basis locked at Basis locked at formation formation  Cannot change Can change structure structure at any time  Can protect privacy
  11. 11. LLCs and Tax FormPartnership LLC Corporation LLC Pass-through  No pass-through tax income,  Corps taxed at depreciation, etc. higher level than Humans usually humans lower tax rate than corps
  12. 12. 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)
  13. 13. Entity Structure and Risk ManagementKeep Risk Out Keep Risk In Liability for outside  High-risk elements events limited to (equipment, labor) in assets in LLC – one LLC cannot get at your  Liability limited to personal assets assets in that LLC Can protect real estate from operational liability
  14. 14. 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
  15. 15. Case StudyGoodacre Farms LLCA&B Goodacre Farm Management LLCGoodacre Hogs LLCBill & Ann GoodacreMary – Tom – Jane
  16. 16. AssetsFarm Assets Personal Assets 1,400 acres owned  $500,000 Savings ground  $500,000 1,400 acres rented Retirement ground Value of Estate (March 2013) $2M machinery,  RE = $ 9.8M buildings, bins  Farm EQP = $ 2.0M  Cash assets = $ 1.0M
  17. 17. Organizational Structure • Farm Real • Machinery • Livestock Goodacre Hogs LLC A&B Goodacre FarmGoodacre Farms, LLC Estate • Labor contracts • Cash or • Contract • Animal Share Farming buildings Rent • Key Employee
  18. 18. Real Estate LLC • Contract with MGMT LLC • Liability insulation • Estate Plan – Ownership to all childrenEntity Relationships Cross Management LLC Contracts • Contract Farming • Production “stake” for sweat equity (Son & Key Employee • Liability insulation Livestock LLC • Production stake • Liability insulation from Real Estate
  19. 19. Real Estate LLC • Starting out - Owned by Parents • Gifted to/inherited by children • Rental income to owners • Downside – Basis lock!Family Relationships 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
  20. 20. 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
  21. 21. 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
  22. 22. Business Structures and TaxesQuestions?Contact information:Derek Fisher, Fisher & AssociatesEmail: derekf@fisheraccounting.netMiriam Robeson, Attorney at LawEmail: miriamrobeson@lawlatte.comWebsite: lawlatte.com

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