This document discusses various business structures and tax considerations for farms. It compares entity types like LLCs, S corporations, and C corporations. An LLC or S corp is typically preferred for tax benefits and flexibility. The document also discusses using multiple entities for different farm operations. Proper entity structure can provide liability protection and aid in transitioning the farm to the next generation. Taxes, risk management, and fair treatment of farm and non-farm heirs are important planning factors.

1. Business Structures
and Taxes
Legal and Tax Considerations
December 7, 2016

2. What are your goals?
Ease of operation
Transferability
Tax benefits
Liability protection
Reduce Self-
Employment tax
Fringe Benefits
Flexibility
Real Estate Basis
Handout: Long Term Planning Goals

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)
Handout: Comparison of Entity Types

6. 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

7. 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.

8. 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

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

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

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

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

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

14. 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)

15. 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)

16. Insurance
Basic liability insurance
Basic casualty insurance
Crop insurance
Vehicle insurance
Workers Comp
Umbrella/Operations insurance
Life insurance

17. 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

18. Death and Taxes
 Indiana Inheritance Tax – repealed 2013
 Federal Estate Tax
 2016 - $5.45M per person
 2017 - $5.49M per person(adjusted for Inflation)
 Portable between spouses ($10.5M per couple)
 Unified Gift/Estate/Generation Skipping Rate
 Capital Gain Taxes
 Beware Discount Valuation for 2017 – IRS denies
future family use of discount valuation

19. “Stuck” Entity Structures
What is a Stuck Structure?
 C Corporation
 S Corporation
 Irrevocable Trust
Why Stuck?
 Low basis/High Value Land
 High Retained Earnings
 Cannot change entity without significant tax

20. “Stuck” Entity 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

21. 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

22. 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

23. Fair – vs – Equal
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

24. 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

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

26. Assets
Farm Assets
 Owned Acres
 Rented ground
 $3M machinery,
buildings, bins
Personal Assets
 $500,000 Savings
 $500,000 Retirement
Value of Estate (March 2016)
 RE = $ 9.8M
 Farm EQP = $ 3.0M
 Cash assets = $ 1.0M
 Total Estate = $12.8M

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

28. 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

29. 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

30. 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

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

32. 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

33. Business Structures and Taxes
Questions?
Contact information:
Miriam Robeson, Attorney at Law
Email: miriamrobeson@lawlatte.com
Website: lawlatte.com