4/2/08Version 1.001.08 Adapted for use by ASFMRA 1 of 28 Ag Land Management Business Ownership...

4/2/08 Version 1.001.08 Adapted for use by ASFMRA

1 of 28

Ag Land Management Business Ownership Structure


2 of 28


Legal Disclaimer

The American Society of Farm Managers and Rural Appraisers does not claim, in fact or perceived

interpretation, to present educational information that is legally defendable in cases of business law.


3 of 28


Why structure the business?

• Legal identity• Liability management• Financing • Tax management• Division of multi-owner responsibilities• Estate planning


4 of 28


Options available

• Sole proprietorship• General partnership• Limited partnership• Limited liability corporation• Limited liability partnership• S corporation• C corporation


5 of 28


Sole proprietorship

Points to Consider• Easiest type of business organization to establish• No formal requirements for starting a sole proprietorship • Decision making is in direct hands of owner • All profits and losses of the business are reported

directly to the owner's income tax return • The startup costs for a sole proprietorship are minimal


6 of 28


Sole proprietorship

Points to Consider• Owner has unlimited liability• Both the business and personal assets of the sole

proprietor are subject to the claims of creditors • A sole proprietorship is not a separate legal entity• It usually terminates when the owner becomes disabled,

retires, or dies


7 of 28


Sole proprietorship

Points to Consider• It is difficult for a sole proprietorship to raise capital• Financial resources are generally limited to the owner's

funds and any loans outsiders are willing to provide• Owner could spend unlimited amount of time responding

to business needs


8 of 28


General partnership

Points to Consider• There are few legal requirements to creating a

partnership• A partnership agreement is not necessary, although it is

advised• Partners may pool their resources and talents• This allows all partners to share control and participate

equally in management of the partnership


9 of 28


General partnership

Points to Consider• A general partnership has flow-through taxation meaning

the partnership does not pay taxes• The individual partners are taxed on the income they

receive from the partnership• Profits and losses are divided among partners in any

manner they choose


10 of 28


General partnership

Points to Consider• There are generally no fees associated with creating a

general partnership • Assets of any of the partners can be used to cover the

business's liabilities, regardless of which partner incurred the liability.

• Partners have unlimited liability in a partnership form of business


11 of 28


Limited partnership “LP”

Points to Consider• An entity distinct from its partners • Must contain both general partners and limited partners• A person can serve as a general and limited partner • The partnership agreement governs relations among the

partners and between the partners and the partnership


12 of 28



Points to Consider• In order for a limited partnership to be formed, a

Certificate of Limited Partnership must be signed• Achieves both limited liability and partnership principles • No fiduciary duty to the limited partnership or to any

other partner solely by reason of being a limited partner


13 of 28



Points to Consider• A limited partnership has the power to sue and be sued• Can defend in its own name • Can maintain an action against a partner for harm

caused to the limited partnership by a breach of the partnership agreement or violation of a duty to the partnership


14 of 28



Points to Consider• The name of the limited partnership must contain the

phrase limited partnership or the abbreviation L.P., or LP • To dissolved a limited partnership requires filing a

statement of termination


15 of 28


Limited liability corporation “LLC”

Points to consider• Its owners have limited liability for the entity's debts and

obligations• Its income and losses are normally passed through to

the owners as if it were a partnership or sole proprietorship


16 of 28



Points to consider• An LLC is most like an “LP”, except that an “LP” is

required to have at least one general partner liable for the debts and obligations of the partnership

• States have different requirements for forming an LLC


17 of 28



Points to consider

• Earnings are generally subject to self-employment tax • Liquidation of a Limited Liability Company (LLC) as a

partnership is generally a tax-free event• Conversion of an existing business to Limited Liability

Company (LLC) status could result in tax recognition on appreciated assets


18 of 28


Limited liability partnership “LLP”

Points to consider• A partnership in which the liability of all partners is

limited• Generally, the partners are not responsible for the debts,

obligations, or liabilities of the partnership resulting from the actions or negligence of another partner, employee or agent of the partnership


19 of 28


Limited liability partnership “LLP”

Points to consider• Follow the same entity classification rules as Limited

Liability Company(s) (LLCs)• May elect to be treated as a corporation• If no election is made, the Limited Liability Partnership

(LLP) is treated as a partnership


20 of 28


S corporation

Points to consider• A regular corporation that has elected "S corporation" tax

status• Enjoys the limited liability of a corporate shareholder but

pays income taxes as if you were a sole proprietor • All business profits "pass through" to the owners, who

report them on their personal tax returns


21 of 28


S corporation

Points to consider• The S corporation itself does not pay any income tax• Owners can use corporate loss to offset income from

other sources• More expensive to create than partnership or sole

proprietorship


22 of 28


S corporation

Points to consider• More paperwork than for a limited liability company,

which offers similar advantages• Income must be allocated to owners according to their

ownership interests

• Fringe benefits limited for owners who own more than 2% of shares


23 of 28


“C” corporation

Points to consider• A “C” corporation is separate and distinct from the

stockholders – the owners of the corporation.• Shareholders should generally have liability protection

from the debts and obligations of the corporation.• If a stockholder dies or wishes to sell out, the corporation

continues• Can offer employee incentive stock plans


24 of 28


“C” corporation

• Primary AdvantagesPrimary Advantages– Liability protection available to shareholders; limited to the extent

of corporate assets– Ownership interest easily transferable– Ability to issue publicly traded debt and equity

• Major DisadvantagesMajor Disadvantages– Double taxation– Complexity involved with complying with gov’t regulations –

documentation, filings, etc.– Cost of formation


25 of 28


Summary

• Ownership structures allow for business operations• Make transfer of ownership orderly• Often used for tax management• Consult an attorney or tax planning advisor


26 of 28

Family Farm Succession Planning


27 of 28


• Communication


28 of 28


• Communication and Compromise


29 of 28


• Communication and Compromise– Communication must be open and honest– No one will get everything they want


30 of 28


• Parents are reluctant to give up management responsibilities

• Parents are reluctant to give up control of assets

• Retirement funds are tied up in the business

• Children have limited capital


31 of 28


• Equal is almost never fair

• Advice is usually well intended


32 of 28



• Advice is usually well intended– But is not always well received


33 of 28



• Advice is usually well intended– But is not always well received

• Be aware of and respect each other’s priorities

4/2/08Version 1.001.08 Adapted for use by ASFMRA 1 of 28 Ag Land Management Business Ownership...

Documents

Transcript of 4/2/08Version 1.001.08 Adapted for use by ASFMRA 1 of 28 Ag Land Management Business Ownership...