Business Entities Webinar

Women in Ag Wednesday Webinars, April 13

Ashley Ellixson Extension Legal Specialist, Department of Ag and Resource Economics

Paul Goeringer, Extension Legal Specialist, Department of Ag and Resource Economics

The Agriculture Law Education

Initiative (ALEI) is a collaboration of the University of Maryland Francis King Carey School of Law at the University of Maryland, Baltimore (UMB); the College of Agriculture & Natural Resources at the University of Maryland, College Park (UMCP); and the School of Agricultural and Natural Sciences at the University of Maryland Eastern Shore. ALEI is an initiative of the University of Maryland: MPowering the State.

Website: www.umaglaw.org

Twitter: @MdAgLaw

Facebook: www.facebook.com/MdAgLaw

Email: umaglaw@umd.edu

Agriculture Law Education Initiative

University of Maryland MPower

The University of Maryland: MPowering the State brings together two universities of distinction to form a new collaborative partnership. Harnessing the resources of each, the University of Maryland, College Park and the University of Maryland, Baltimore will focus the collective expertise on critical statewide issues of public health, biomedical informatics, and bioengineering. This collaboration will drive an even greater impact on the state, its economy, the job market, and the next generation of innovators. The joint initiatives will have a profound effect on productivity, the economy, and the very fabric of higher education.• http://www.mpowermaryland.com

• Updated periodically with timely legal, crop insurance, and farm policy information.

• www.aglaw.umd.edu

• Signup for updates on the site to get new posts emailed to you, or

• Text 999066 to 1-781-262-3877 to signup

Md. Risk Management Blog

Disclaimer

This presentation is intended to provide general information and should not be construed as providing legal advice. It should not be cited or relied upon as legal authority. State laws vary and any attempt made to discuss laws of states other than Maryland is for general information to help the viewer better understand Maryland law. For advice about how these issues might apply to your individual situation, consult an attorney.

OVERVIEW

82.67%

7.60% 6.92%

1.04% 1.78%

64.87%

15.38% 15.96%

1.36% 2.42%

58.19%

13.53%

24.64%

2.53% 1.11%

0.00%

15.00%

30.00%

45.00%

60.00%

75.00%

Individual or Family Partnership Family-held Corp Other Corp Other business form

2012 Census of Ag Percentage of Farms, Acreage in Farms, and Value of Production by Legal Entity in Maryland, Census of Ag

Percent of Farms Percent of Acres Percent of Value of Production

Common Business Structure

• Common reasons:

– Limit your liability

– Allow farm/business to be continued for generations.

Why Use One?

Photo by Edwin Remsberg

• Partnership:– General – Limited

• Limited Liability Company

• Corporation

• Cooperative

• Family Farm Business

Common Structures

Photo by Edwin Remsberg

SOLE PROPRIETORSHIP

• Simplest business structure

• Created by 1 person

– If more than 1 we have a partnership

• Create by just declaring yourself a business

Sole Proprietorship

Photo by Edwin Remsberg

• Advantages:

– Owner has full managerial control of the business

Sole Proprietorship

Photo by Edwin Remsberg

• Disadvantages:

– Business ends at owners death

– Limited source of funds:• Personal Assets

• Borrowed capital

– No opportunity to shield assets from liabilities.

Sole Proprietorship

Photo by Edwin Remsberg

PARTNERSHIPS

• Come in 2 forms:

– General Partnership

– Limited Partnership

Types of Partnerships

Photo by Edwin Remsberg

• Similar to Sole Proprietorship, simplest form of partnership.

• Liability also not limited to business assets

– Partners personal assets also at risk

General Partnerships

Photo by Edwin Remsberg

• Each partner shares in ownership and management

• Dissolve at death of a partner

• Also can be dissolved by partners just calling it quits

General Partnerships

Photo by Edwin Remsberg

• Require at least:– 1 general partner

– 1 limited partner

• To create file certificate of limited partnership with state.

• Must include in name LP to be valid

Limited Partnerships

Photo by Edwin Remsberg

• Allows for investment by limited partners.

– Limited partner is only at risk for their investment

• General partners would still have risk on personal assets.

Limited Partnerships

Photo by Edwin Remsberg

CORPORATION

• A corporation is a legal entity separate and distinct from its owners.

• A corporation is owned by its shareholders who are individuals, other business organizations, or both.

What Is A Corporation?

• The ease in which real property could be transferred

• If the owner wanted to transfer the property over time, he would need to transfer an interest in the property over time (which would incur transaction costs and complicate title) – Farm is a corporation, he

could simply convey the individual shares in the corporation

Features of a Corporation

• Limited liability coverage

– Can only be held accountable for amount of investment

• Owners only pay tax on their salary

• Corporation is taxed but at a lower corporate tax rate

Features of a Corporation

• Complex

• Costly administrative fees

• tax requirements

– Taxed twice• Profits

• Pays dividends

• Heavily regulated

Disadvantages of Corporations

LIMITED LIABILITY CORPORATION

• A hybrid of a corporation and partnership

• Limited liability but treated as a noncorporate entity for tax purposes

What Is A Limited Liability Corporation?

• Any entity can be an owner

– Creates room for creativity for farms with separate operations

• Less restrictive than corporations and less paperwork

– LLC Operating Agreement

Features of LLCs

• Sets forth the LLC structure

• It is the main governing document of the LLC, above all others

• Since the Operating Agreement is a contract, it must be agreed to by all participating parties.

Operating Agreements

• Can set out who is doing the managing, decision making, etc. to ease conflict in the future

• Can also dictate what happens in the occurrence of a death or sell-buy instances when someone wants out

Operating Agreements

• Self employment tax– High tax rate than

corporate tax rate

• Taxed on the profits from the LLC

• LLC Operating Agreement– Who is managing and who

is not?

Disadvantages of LLCs

COOPERATIVE

• A farm, business, or other organization owned and run jointly by its members

– share the profits, common goal, and marketing scheme

• Typically close group of members geographically

What is a Cooperative?

• Can choose to incorporate or not (LLC or corp)

• Share in both expenses and risks

• Purchasing power

• Create a brand

– Greater exposure

• Not double taxed

– Taxed once on income

Features of Cooperatives

• Slower cash flow

• Generic branding

• Lack of membership and participation

Disadvantages of Cooperatives

FAMILY FARM BUSINESS

• Maryland Code, Corporations and Associations, Section 1-209 says a family farm must encompass each of the following to be considered a family farm:

What Is A Family Farm?

• 1) A domestic entity which owns, or within 1 year after filing articles of incorporation, articles of organization, or a certificate of partnership, will own or take control of property qualifying for agricultural use assessment under § 8-209 of the Tax -Property Article

• 2) The entity must own onlyagriculturally or residentially assessed real property and personal property used for agricultural purposes OR owns only personal property is used for agricultural or agricultural marketing purposes.

Family Farm

• 3) The entity must also be controlled, managed, and operated by one individual who has an equity interest in the entity OR two or more individuals who have an equity interest in the entity and who share its assets and earnings.

• 4) Is declared in a charter provision to be a family farm AND has no assets other than those described in item (2)

Family Farm

• Reduced Fees

– If your farm operates as a limited liability partnership (LLP) you must file an annual personal property tax report with the State Department of Assessments and Taxation (SDAT)

Advantages of Family Farm in MD

• If your farm is a limited liability corporation (LLC) in Maryland, it must file an annual report and personal property tax return each year and pay a fee of $300 in addition to any personal property tax

Advantages of Family Farm in MD

• Every corporation, LLC, LLP, or limited partnership doing business in Maryland must file an annual personal property report with the SDAT, by April 15 each year

– REDUCED from $300 TO $100 for Family Farms

Advantages of Family Farm in MD

PICKING BUSINESS ENTITY

Picking a Business Entity

• No simple answer

• What to consider when making decision?– Are you okay with separate

bank accounts?

– Do you want to protect personal assets with business liabilities?

– Do you want ability to grow business by taking on outside capital?

Picking a Business Entity

• If you answered yes, then potentially want to consider LLC or Corporation.

• Before making the decision, talk to your accountant and attorney.

Picking a Business Entity

• Farmcommons.org offers checklist to help you decide on entity.

Resources Available

• Check out the ALEI-UME publication from Ashley Newhall and Paul Goeringer

• Provides more detail on this topic

• Available at http://go.umd.edu/BusOrgs.

More Information

Thanks!Any Questions?

Paul Goeringer:

Email: lgoering@umd.edu

Phone: 301-405-3541

Twitter: @AgLawPaul

Ashley Ellixson:

Email: aellix@umd.edu

Phone: 301-458-5125

Twitter: @Legally_Ashley