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