BUSINESS STRUCTURES

AND TAXESLegal and Tax Considerations

Presenters:Derek Fisher, CPA -- Fisher & Associates

Miriam Robeson -- Attorney at Law

January 24, 2014

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 Preparing for next

generation

Estate planning implications

Management or control

Termination of business

Multiple entities Key Employees

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

Types of Entities

C Corporation S Corporation Limited Liability Company Partnership/Family Limited

Partnership

Other Entity typesSole Proprietor (Schedule F)Trust (Revocable – Irrevocable)

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

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

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

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

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 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 one LLC (not entire operation)

Keep Risk Out Keep Risk In

Insurance

Basic liability insurance Basic casualty insurance Crop insurance Vehicle insurance Workers Comp Umbrella/Operations insurance Life insurance

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

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

“Stuck” StructuresWhat 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

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

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

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 Residence issues

Plan for Transition – Gen 1

QUESTIONSWhat will be the

most effective and fair way to pass

the farm business to the next generation?

When should the change take

place?

OPTIONSBuy out Rent out

Other FamilyGift

Bequest

TIMING OF TRANSITION

During LifeAfter Death of

Spouse 1After Death of

Spouse 2

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

Factors in Farm Planning

Entity structure

Risk Mgmt

Fair v Equal

Transition

Taxes

Business Operatio

ns

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: derekf@fisheraccounting.net

Miriam Robeson, Attorney at LawEmail: miriamrobeson@lawlatte.comWebsite: lawlatte.com

Business Structures and Taxes