This document discusses various legal structures for operating a farm business and their tax implications. It compares entities like limited liability companies (LLCs) and S corporations, noting LLCs provide flexibility while S corps avoid self-employment taxes. The document also addresses estate planning considerations, managing risk between entities, ensuring fairness between farming and non-farming heirs, and planning a multi-generational transition of the farm business. Flexibility and tailoring the structure to individual goals and circumstances is emphasized.

1. BUSINESS
STRUCTURES
AND TAXES
Legal and Tax Considerations
January 24, 2014

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 Entity types
Sole 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 and labor pool
Land
Livestock

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
 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

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

16. 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 Ownership Trusts and Land Ownership

17. 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

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, over-
extended credit)

19. 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

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”
 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

22. Death and Taxes
 Indiana Inheritance Tax – repealed
 Federal Estate Tax
 $5.25M 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
 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 infirmity – qualification for Gov’t
entitlements
 Legal issue

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

29. 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

30. Organizational Structure
GoodacreFarms,LLC
• Farm Real
Estate
• Cash or
Share
Rent
A&BGoodacreFarm
• Machinery
• Labor
• Contract
Farming
• Key
Employee
GoodacreHogsLLC
• Livestock
contracts
• Animal
buildings

31. EntityRelationships Real 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
Cross
Contracts

32. FamilyRelationships 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
Risk Mgmt
Fair v
Equal
Transition
Taxes
Business
Operations

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