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: derekf@fisheraccounting.net

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

Business Structures and Taxes