BUSINESS STRUCTURES AND TAXESLegal and Tax Considerations
Presenters:Derek Fisher, CPA -- Fisher & Associates
Miriam Robeson -- Attorney at Law
March 7, 2013
What are your goals?
Ease of operation
Transferability Tax benefits Liability
protection
Self-Employment tax
Fringe Benefits Flexibility Real Estate
Basis
Other Considerations
Life/stage of business
Sources of capital Inter/intra family
issues Taxes Risk management
Estate planning implications
Management or control
Termination of business
Multiple entities Key Employees
Typical Scenario – Top Choice
Limited Liability Company or S Corporation Flexibility, Tax benefits, taxed at
owner rate Multiple Entities
Equipment and labor pool Land Livestock
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.
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
When To Choose Other Entity Types
Sole Proprietor Greatest liability risk – both
business and personal assets at stake
LLC versus S Corp Structure
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
LLC versus S Corp SE Tax
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
LLC and Trusts Land
LLCs – “easy-in, easy-out” flexibility
Basis locked at formation
Can change structure at any time
Locked in for duration of Trust
Basis locked at formation
Cannot change structure
Can protect privacy
LLCs and Land OwnershipTrusts and Land Ownership
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
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)
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 that LLC
Keep Risk Out Keep Risk In
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
Goodacre Farms LLCA&B Goodacre Farm Management LLCGoodacre Hogs LLCBill & Ann GoodacreMary – Tom – Jane
Case Study
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 Total Estate = $12.8M
Organizational StructureG
ood
acr
e F
arm
s,
LLC• Farm
Real Estate
• Cash or Share Rent
A&
B G
ood
acr
e
Farm
• Machinery
• Labor• Contract
Farming• Key
Employee
Good
acr
e H
og
s LL
C• Livestock contracts
• Animal buildings
En
tity
Rela
tion
ship
sReal 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
CrossContracts
Fam
ily R
ela
tion
ship
sReal 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
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
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
Questions?
Contact information:
Derek Fisher, Fisher & AssociatesEmail: [email protected]
Miriam Robeson, Attorney at LawEmail: [email protected]: lawlatte.com
Business Structures and Taxes
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