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2014 succession planning business structures v 01-10-14
This document discusses legal and tax considerations for business structures. It notes that limited liability companies (LLCs) or S corporations are typically preferred as they provide flexibility, tax benefits, and taxation at the owner's rate. Multiple entities can provide greater flexibility by separating different business operations like equipment, land, and livestock. The document also discusses entity choice considerations, tax implications of different structures, risk management strategies, and planning for intergenerational transition of the farm business.
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Similar to 2014 succession planning business structures v 01-10-14
2014 succession planning business structures v 01-10-14
- 1. January 23, 2014 BUSINESS STRUCTURES ANDTAXES Legal and Tax Considerations
- 2. What are yourgoals? 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 inFarm 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 CCorporation 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 ChooseOther 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 ChooseOther 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 ChooseOther Entity Types Sole Proprietor Greatest liability risk – both business and personal assets at stake
- 14. LLC versus SCorp 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 SCorp 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 LLCsand 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 TaxForm 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 andRisk 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 andRisk 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 andFSA/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 IndianaInheritance 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 doyou 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 UnusualFactors 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 FarmsLLC A&B Goodacre Farm Management LLC Goodacre Hogs LLC Bill & Ann Goodacre Mary – Tom – Jane
- 29. Assets Farm Assets 1,400 acresowned 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 EntityRelationships • 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 EstateLLC • • • • 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 effectof 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 FarmPlanning Entity structure Business Operations Risk Mgmt Taxes Fair v Equal Transition
- 35. Farm Entity Structure Flexibilityis 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 andTaxes Questions? Contact information: Derek Fisher, Fisher & Associates Email: derekf@fisheraccounting.net Miriam Robeson, Attorney at Law Email: miriamrobeson@lawlatte.com Website: lawlatte.com