Your Farm, Your Business Crystal Middleton, Esq. Presentation by: Crystal Middleton, Esq. Land Loss Prevention Project, SmartGrowth Business Center

Overview Farming as a Business Choosing the Business Entity Understanding SmartGrowth

Types of Entities Proprietorship General Partnership Limited Partnership Limited Liability Corporation “C” Corporation “S” Corporation

Sole Proprietorship One owner Unlimited liability Lowest formation and maintenance costs Assumed name certificate Freely transferable ownership

Sole Proprietorship (continued) 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 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 Partnership Formation: filing of certificate Written partnership agreement controls Limited liability for limited partners only Management by General Partner

Limited Partnership (continued) Conversion or Merger Fringe Benefits limited for partners Pass-thru Taxation

Limited 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 (continued) Pass-thru Taxation Limitations on Fringe Benefits for Members/Employees Flexible Capital Structures Single Member LLCs

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 Formation   Filing   Organizational meetings   Organizational documents   Issuance of capital stock

“C” Corporation (continued) Limited liability Structured management Varied alternatives for capital structure Double taxation Fringe benefits

“S” 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” 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 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” 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” 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” 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” 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

SmartGrowth Resource of the Land Loss Prevention Project Resource of the Land Loss Prevention Project Provides legal assistance, referrals, and informational resources to farmers looking to gain or expand their business expertise Provides legal assistance, referrals, and informational resources to farmers looking to gain or expand their business expertise Assists clients in planning for succession Assists clients in planning for succession

Questions? Land Loss Prevention Project Phone: (919) Toll Free: (800)