Educating Producers on Proper Land Titling &Using a

Business OrganizationLori Lynch

Paul Goeringer, Center for Agricultural and Natural Resource Policy

University of Maryland

Who is in business with you? Property Titles and Business

FormatsLori Lynch

Agricultural and Resource EconomicsUniversity of Maryland

March 2013

What is ownership? Rights of ownershipRights of useCan one sell or transfer the

propertyThe man who had built her so

well said “ The little house can never be sold for silver and gold and she will live for our great-great-great grandchildren…”

Can one pass it to heirs

People do not really know what ownership means. We think we understand what we own but sometimes we don’t. I try to give examples such as “the little house” to explain rights of use and ability to “pass it on”; ability to sell

Different Types of OwnershipFee simple absoluteLife EstatesFee Simple but….

Condition: pass to male heirDeterminableSubject to a condition subsequent

Tenancy in commonJoint tenancy

With survivorshipTenancy by the entirety

Pride and Prejudice: Mr. Bennet has no son so Mr. Collins is heir to his entailed estate. Austen described him as "not a sensible man” but Mr. Bennet can do nothing to change itDownton Abbey – must go to male issue or back to the King

Fee simple absolute (no limitations of rights)

Greatest bundles of rightsCan sell and give awayCan divide the landCan make all decisionsReceive all the income and interestCan be passed on to children or notLiable for all obligations – mortgage, property

taxes, these obligations passes with the land if the land is used as collateral for the loan

Define the various types of property titles

Life Estates (owns only rights to use)Owner owns the property for his or her lifetimeCan exclude others from the property even the one who will

receives the land once owner diesCollect all the income and interest in the propertyCan be transferred (leased) but can not be passed on to

children Difficult to sell because one does not know the term of

ownership – could be an hour or could be 20 years.Can not use for collateral; owner might die before loan is

paid and once dead, property shifts ownershipEconomic waste – if the income from property less than the

expenses for taxes and interest on the mortgage – courts may allow a sale.

Fee simple: Determinable or Subject to a Condition Subsequent

Own outright as long as follow “rules”Can put almost any type of rule into the ownership condition:

for example, no selling alcohol, must keep farming, must allow hunting, must not allow hunting, cannot play cards, cannot pray; to Ann as long as the property is used for a park"

If violate the rules, lose rights to property immediately when determinable

Condition subsequent – again must follow the rules: If violate conditions, Joe (the grantor) can get the property

back"to Ann, but if Ann sells alcohol on the land, then Joe has the

right of entry(or power of termination)."But grantor can waive condition or not act upon itLess automatic – in the sense may not lose rights immediately

Tenancy in common Each tenant owns a share of one piece of property- for

example Jill owns 60% and Jack owns 40% of a propertyCo-owners own the land in proportion to the amount each

contributed to purchase the property – if Jill paid 60% of the purchase, she owns 60% of the property

Can convey their interest in the land either by sale or by inheritance – Jill can sell or pass on her 60% of the property

Can mortgage her share or secure a loan – however cannot sell other owners’ interest. Thus if Jill default on the loan, bank only forecloses on 60% of the property.

Joint tenancy Each member is vested with an equal share of the

undivided wholeEach member has the right of survivorshipIf one owner dies, her interest in the property ends – the

surviving owners continue to be ownersCan not pass on interest in land post-death unless one is

the last one aliveCan be used to avoid the cost and time involved in the

probate process – for married couple or business partnerPeople can sell their share of the property. If one

transfers or sells the interest in the land before death, it severs survivorship rights (i.e. ends joint tenancy)

Joint tenancy with survivorshipPrimary advantage

Automatic transfer of ownership upon the death of one of the joint tenants

Does not go through probate Avoid time and expense

Do not avoid the federal and state taxes – the value of the transfer counts as part of the “estate” – so unless to a spouse would owe taxes on $ above that excluded

DisadvantagesCo-ownership of assets – if difference of opinion over management –

“fight”Unintended consequence as to who inherits the property upon

death (children and other heirs might be disinherited)Wills have no legal effect over this particular property – the type of

ownership dominates any wishes expressed in the will

Tenancy by the entiretyReserved for husband and wife – own the

property as a unit rather than equal sharesMust be marriedRight of survivorshipOne spouse can not unilaterally sever the tie.Can foreclose only it both spouses signed

loan documents – some states permit banks to foreclose on ½ interest of debtor spouse

Both must execute sales agreement to sell property

Can check

what your

state allo

ws

For all co-tenants: tenants in common; jt tenants and tenancy in the entirety

All tenants have a right to revenue minus costsDon’t owe rent to another “tenant” unless one

restricts the other from entry.Co-tenants must pay pro-rata share of taxes and

mortgage payments (due or past due) unless only one of the “tenants” uses property

Can not collect for repairs or improvements from other co-tenants without agreement

Partition: Can petition a court to partition propertyDivide in parcels of equal value or money paymentSell the parcel and divide proceeds

Common Law StatesProperty is owned by the spouse who paid for

it or inherited it – can sell it or pass it on (can’t comingle)

In case of divorce, wife’s and husband’s right have become somewhat like community property states.

Creditors must exhaust separate assets before community assets – can’t take non-debtor spouse’s separate assets.

Can look it up – there is a map athttp://www.bankrate.com/brm/news/pf/20060322a1.asp

Should check

what your

state allows

Business Organization StylesSole ProprietorCorporationLimited Liability CompanyPartnership

I find this section does not work well – could be it is at the end of the evening so people’s brains are tired. Or too many “bad” words. Haven’t found the right way to do it – but we can discuss.

Sole Proprietor Business and person the “same” in the eyes

of the lawAdvantages:

Do not have to file incorporation papersEasier decision making – no partnersDo not pay corporate tax so no risk of double

taxationSimpler accounting – file a schedule C rather

than business tax formsCan buy health care for self-employed persons

Sole proprietorDisadvantages:

Personal assets are at risk of seizure if business debts are not paid

Unlimited liabilityNo sharing of the riskPay personal income tax – deductions?Can not sell shares in the businessIf owner dies, the business ceases to exit; can’t

sell the value

CorporationAre like a separate person

Can bring lawsuits, buy and sell property, sign contracts, are taxed, can even commit crimes

Owned by shareholdersManaged by board of directors

AdvantagesProtects owners from personal liability for corporate

debts and obligationsPerpetual life – continues past the death of the owner(s)Can sell shares of stock – if need capital – selling

ownershipCan transfer ownership through transfer of securities

CorporationUnlimited lifeCorporation can have better tax benefits under

certain circumstance“c” corporations may be subject to ‘double taxation’

on profits; corporation pays taxes on income and then shareholders pay taxes on dividends

DisadvantagesRequire annual meetings and other formalitiesMore expensive to set up and more paperworkRequire periodic filings with the state and annual

feesTakeovers?

Partnership Advantages

Easy and inexpensive to startAre not required to have annual meetings or formalitiesOffer favorable taxation to most smaller businessDo not have to pay minimum taxes that are required of

LLCs and corporationsDisadvantages

All ownership subject to unlimited personal liability for the debts, losses and liabilities of the business

Individual partners bear responsibility of the actions of other partners

Poorly organized partnership and oral partnerships can lead to dispute among owners

PartnershipIf a husband-wife partnership and if filing

married filing jointly on tax return can now elect to be taxed as a qualified joint venture.

Sole proprietor, farm family partnerships and corporations may use the cash method of accounting.Corporations can only use cash method if they

have average annual gross receipts under $5 Million for the prior 3-taxable years

Limited Liability CompanyHybrid business formCombines the liability protection of corporation

with tax treatment and ease of administration of a partnership

Advantages:No burdensome formalityNo annual meetings/require few ongoing formalitiesOwners protected from personal liability for

company debts and obligationsPartnership-style, pass through taxation – favorable

to many small business

Limited Liability CompanyDisadvantages:

Harder to raise moneyHarder to eventually go public if one wants –

and sell sharesLess legal precedent – thus hard to know what

could happen under certain scenarios but becoming more reliable

More expensive to set up than partnershipsPeriodic filing with the stateAnnual fees

Comparison of Business types               

CorporationLimited Liability

Company Partnership Sole Proprietorship

Ease of setup More Difficult More Difficult Less Difficult Easy

Initial costs such as filing fees, state fees, and legal

fees High High Medium to high Low

Owners are personally protected from liability

for the organization's debts Yes Yes

No, except in limited partnerships No

Entity must make annual or biennial state filings Yes Yes Almost never No

Entity must pay annual or biennial state sees Yes Yes Almost never No

Annual meetingsRequired by law, except for close corporations

Not required, but recommended

Not required, but recommended No

Formalities required in connection with voting

and internal governance Yes Relaxed formalities Relaxed formalities No

Can Exist Indefinitely Yes Yes Yes* No

Can Issue Shares or Interest in Exchange for

Cash Yes Yes Yes No

CorporationLimited Liability

Company Partnership Sole ProprietorshipAppropriate Entity to Raise Venture Capital Yes No No No

Appropriate Entity to Become Publicly Traded Yes No No No

Entity Can Elect To Be Taxed as a Corporation Yes Yes No No

Entity Can Elect To Be Taxed as Partnership Yes Yes Yes No

Can choose fiscal year other than that of its

owners Yes No No No

Owner can mingle personal and business

assets and funds No No No Yes

Registration required in foreign states in which

company does business? Yes YesNo, except for limited

partnerships No

State laws governing entity are uniform

throughout nation? Laws vary widely Laws vary moderately Laws vary very little Laws vary very little

Maximum Number of Members

Unlimited, but S Corp. maximum is 75 owners Unlimited Unlimited by law** One

*Partnerships can, conceivably, have unlimited life if new partners are admitted into the partnership as old partners exit the partnership.  **While general partnerships are not limited in size by operation of law, prudence dictates that they not have too many partners. Because each partner is liable for the acts of the other partners acting on the partnership's behalf, a large general partnership is not wise. Any general partnership of more than ten persons is likely to become difficult to manage.Source: http://www.learnaboutlaw.com/newsletter/corporation_vs_llc.htm, 2007