your farm, your business crystal middleton, esq. presentation by: crystal middleton, esq. land loss...
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Your Farm, Your Your Farm, Your BusinessBusiness
Presentation by: Crystal Middleton, Esq.Crystal Middleton, Esq. Land Loss Prevention Project, SmartGrowth Business
Center
OverviewOverview
Farming as a Business
Choosing the Business Entity
Understanding SmartGrowth
Types of EntitiesTypes of Entities
Proprietorship General Partnership Limited Partnership Limited Liability Corporation “C” Corporation “S” Corporation
Sole ProprietorshipSole Proprietorship
One owner Unlimited liability Lowest formation and
maintenance costs Assumed name certificate Freely transferable ownership
Sole Proprietorship Sole Proprietorship ((continuedcontinued))
Business income reported on individual tax return
Self Employment Tax Rarely used for business with
significant revenues (e.g. $100,000+) Single member LLC gives equivalent
tax treatment Normally liquidated following death
of owner
General PartnershipGeneral Partnership
No written agreement required If written agreement exists, then it
controls Unlimited Liability Apparent Authority of Partner
Each partner may act on behalf of the partnership
Conversion; Merger Pass-thru Taxation Limited Fringe Benefits
Limited PartnershipLimited Partnership
Formation: filing of certificate Written partnership agreement
controls Limited liability for limited
partners only Management by General
Partner
Limited Partnership Limited Partnership ((continuedcontinued))
Conversion or Merger Fringe Benefits limited for
partners Pass-thru Taxation
Limited Liability CorporationLimited Liability Corporation
Formation: filing certificate with Secretary of State
Written Operating Agreement controls
Limited liability for members Management by members or by
managers Conversion; Merger
Limited Liability Corporation Limited Liability Corporation ((continuedcontinued))
Pass-thru Taxation Limitations on Fringe Benefits
for Members/Employees Flexible Capital Structures Single Member LLCs
Pass-thru Taxation Status Pass-thru Taxation Status
No income tax at partnership level Partner taxed at individual level
Partnership losses subject to limitation
“at risk” limitations—Partner may use losses only up to amount at-risk
• Capital contributions• Personal liability on debt
Passive loss limitations • Loss deductible only up to amount of
passive income • Balance deducted upon sale of
partnership interest
““C” Corporation C” Corporation
Formation Filing Organizational meetings Organizational documents Issuance of capital stock
““C” Corporation C” Corporation ((continuedcontinued))
Limited liability Structured management Varied alternatives for capital
structure Double taxation Fringe benefits
““S” CorporationS” Corporation
Same formation steps as with “C” Corporation
IRS Election to be taxed as “S” Corporation
Limitations on Shareholders: 100 or fewer Types
LLC vs. “C” CorporationLLC vs. “C” Corporation
Advantages of LLC Pass-thru taxation
• No corporate level tax (no double tax)• Allows nontaxable distributions of
property to members
No franchise tax (in most states) Ease of conversion to corporation Property may be distributed to
LLC members without gain recognition
LLC vs. “C” Corporation LLC vs. “C” Corporation
Advantages of “C” Corporation: Lower overall tax rates Tax free mergers and
reorganizations Flexibility of fiscal year-end Fringe benefits to employee
shareholders Well-defined body of corporate
law
LLC vs. “S” CorporationLLC vs. “S” Corporation
Advantages of LLC: LLC can use pro rata portion of
debt as basis No restrictions on types or
quantity of shareholders Allows nontaxable distributions of
property to members No franchise taxes No threat of “S” status termination
by disqualified shareholder
LLC vs. “S” CorporationLLC vs. “S” Corporation
Advantages of “S” Corporation: Well developed body of corporate law May switch to “C” corporation easily If currently “C” corporation, may switch
to “S” corporation without liquidation Tax on built-in gains may be shifted to
other shareholders No constructive termination upon 51%
transfer
““S” Corporation vs. “C” CorporationS” Corporation vs. “C” Corporation
Advantages of “S” Corporation: Pass-thru taxation avoids double
taxation Existing “C” corporation can elect
“S” status without liquidation Unreasonable compensation not
an income tax issue
““S” Corporation vs. “C” CorporationS” Corporation vs. “C” Corporation
Advantages of “C” Corporation: Flexibility on fiscal year end Fringe benefits not taxable to
employee/shareholder No restrictions on types or
quantity of shareholders
SmartGrowthSmartGrowth
Resource of the Land Loss Resource of the Land Loss Prevention ProjectPrevention Project
Provides legal assistance, Provides legal assistance, referrals, and informational referrals, and informational resources to farmers looking to resources to farmers looking to gain or expand their business gain or expand their business expertise expertise
Assists clients in planning for Assists clients in planning for succession succession
Questions? Questions?
Land Loss Prevention Project
Phone: (919) 682-5969
Toll Free: (800) 672-5839