4/2/08Version Adapted for use by ASFMRA 1 of 28 Ag Land Management Business Ownership Structure

4/2/08Version Adapted for use by ASFMRA 2 of 28 Ag Land Management Business Ownership Structure Legal Disclaimer The American Society of Farm Managers and Rural Appraisers does not claim, in fact or perceived interpretation, to present educational information that is legally defendable in cases of business law.

4/2/08Version Adapted for use by ASFMRA 3 of 28 Ag Land Management Business Ownership Structure Why structure the business? Legal identity Liability management Financing Tax management Division of multi-owner responsibilities Estate planning

4/2/08Version Adapted for use by ASFMRA 4 of 28 Ag Land Management Business Ownership Structure Options available Sole proprietorship General partnership Limited partnership Limited liability corporation Limited liability partnership S corporation C corporation

4/2/08Version Adapted for use by ASFMRA 5 of 28 Ag Land Management Business Ownership Structure Sole proprietorship Points to Consider Easiest type of business organization to establish No formal requirements for starting a sole proprietorship Decision making is in direct hands of owner All profits and losses of the business are reported directly to the owner's income tax return The startup costs for a sole proprietorship are minimal

4/2/08Version Adapted for use by ASFMRA 6 of 28 Ag Land Management Business Ownership Structure Sole proprietorship Points to Consider Owner has unlimited liability Both the business and personal assets of the sole proprietor are subject to the claims of creditors A sole proprietorship is not a separate legal entity It usually terminates when the owner becomes disabled, retires, or dies

4/2/08Version Adapted for use by ASFMRA 7 of 28 Ag Land Management Business Ownership Structure Sole proprietorship Points to Consider It is difficult for a sole proprietorship to raise capital Financial resources are generally limited to the owner's funds and any loans outsiders are willing to provide Owner could spend unlimited amount of time responding to business needs

4/2/08Version Adapted for use by ASFMRA 8 of 28 Ag Land Management Business Ownership Structure General partnership Points to Consider There are few legal requirements to creating a partnership A partnership agreement is not necessary, although it is advised Partners may pool their resources and talents This allows all partners to share control and participate equally in management of the partnership

4/2/08Version Adapted for use by ASFMRA 9 of 28 Ag Land Management Business Ownership Structure General partnership Points to Consider A general partnership has flow-through taxation meaning the partnership does not pay taxes The individual partners are taxed on the income they receive from the partnership Profits and losses are divided among partners in any manner they choose

4/2/08Version Adapted for use by ASFMRA 10 of 28 Ag Land Management Business Ownership Structure General partnership Points to Consider There are generally no fees associated with creating a general partnership Assets of any of the partners can be used to cover the business's liabilities, regardless of which partner incurred the liability. Partners have unlimited liability in a partnership form of business

4/2/08Version Adapted for use by ASFMRA 11 of 28 Ag Land Management Business Ownership Structure Limited partnership “LP” Points to Consider An entity distinct from its partners Must contain both general partners and limited partners A person can serve as a general and limited partner The partnership agreement governs relations among the partners and between the partners and the partnership

4/2/08Version Adapted for use by ASFMRA 12 of 28 Ag Land Management Business Ownership Structure Limited partnership “LP” Points to Consider In order for a limited partnership to be formed, a Certificate of Limited Partnership must be signed Achieves both limited liability and partnership principles No fiduciary duty to the limited partnership or to any other partner solely by reason of being a limited partner

4/2/08Version Adapted for use by ASFMRA 13 of 28 Ag Land Management Business Ownership Structure Limited partnership “LP” Points to Consider A limited partnership has the power to sue and be sued Can defend in its own name Can maintain an action against a partner for harm caused to the limited partnership by a breach of the partnership agreement or violation of a duty to the partnership

4/2/08Version Adapted for use by ASFMRA 14 of 28 Ag Land Management Business Ownership Structure Limited partnership “LP” Points to Consider The name of the limited partnership must contain the phrase limited partnership or the abbreviation L.P., or LP To dissolved a limited partnership requires filing a statement of termination

4/2/08Version Adapted for use by ASFMRA 15 of 28 Ag Land Management Business Ownership Structure Limited liability corporation “LLC” Points to consider Its owners have limited liability for the entity's debts and obligations Its income and losses are normally passed through to the owners as if it were a partnership or sole proprietorship

4/2/08Version Adapted for use by ASFMRA 16 of 28 Ag Land Management Business Ownership Structure Limited liability corporation “LLC” Points to consider An LLC is most like an “LP”, except that an “LP” is required to have at least one general partner liable for the debts and obligations of the partnership States have different requirements for forming an LLC

4/2/08Version Adapted for use by ASFMRA 17 of 28 Ag Land Management Business Ownership Structure Limited liability corporation “LLC” Points to consider Earnings are generally subject to self-employment tax Liquidation of a Limited Liability Company (LLC) as a partnership is generally a tax-free event Conversion of an existing business to Limited Liability Company (LLC) status could result in tax recognition on appreciated assets

4/2/08Version Adapted for use by ASFMRA 18 of 28 Ag Land Management Business Ownership Structure Limited liability partnership “LLP” Points to consider A partnership in which the liability of all partners is limited Generally, the partners are not responsible for the debts, obligations, or liabilities of the partnership resulting from the actions or negligence of another partner, employee or agent of the partnership

4/2/08Version Adapted for use by ASFMRA 19 of 28 Ag Land Management Business Ownership Structure Limited liability partnership “LLP” Points to consider Follow the same entity classification rules as Limited Liability Company(s) (LLCs) May elect to be treated as a corporation If no election is made, the Limited Liability Partnership (LLP) is treated as a partnership

4/2/08Version Adapted for use by ASFMRA 20 of 28 Ag Land Management Business Ownership Structure S corporation Points to consider A regular corporation that has elected "S corporation" tax status Enjoys the limited liability of a corporate shareholder but pays income taxes as if you were a sole proprietor All business profits "pass through" to the owners, who report them on their personal tax returns

4/2/08Version Adapted for use by ASFMRA 21 of 28 Ag Land Management Business Ownership Structure S corporation Points to consider The S corporation itself does not pay any income tax Owners can use corporate loss to offset income from other sources More expensive to create than partnership or sole proprietorship

4/2/08Version Adapted for use by ASFMRA 22 of 28 Ag Land Management Business Ownership Structure S corporation Points to consider More paperwork than for a limited liability company, which offers similar advantages Income must be allocated to owners according to their ownership interests Fringe benefits limited for owners who own more than 2% of shares

4/2/08Version Adapted for use by ASFMRA 23 of 28 Ag Land Management Business Ownership Structure “C” corporation Points to consider A “C” corporation is separate and distinct from the stockholders – the owners of the corporation. Shareholders should generally have liability protection from the debts and obligations of the corporation. If a stockholder dies or wishes to sell out, the corporation continues Can offer employee incentive stock plans

4/2/08Version Adapted for use by ASFMRA 24 of 28 Ag Land Management Business Ownership Structure “C” corporation Primary AdvantagesPrimary Advantages –Liability protection available to shareholders; limited to the extent of corporate assets –Ownership interest easily transferable –Ability to issue publicly traded debt and equity Major DisadvantagesMajor Disadvantages –Double taxation –Complexity involved with complying with gov’t regulations – documentation, filings, etc. –Cost of formation

4/2/08Version Adapted for use by ASFMRA 25 of 28 Ag Land Management Business Ownership Structure Summary Ownership structures allow for business operations Make transfer of ownership orderly Often used for tax management Consult an attorney or tax planning advisor

4/2/08Version Adapted for use by ASFMRA 26 of 28 Family Farm Succession Planning

4/2/08Version Adapted for use by ASFMRA 27 of 28 Family Farm Succession Planning Communication

4/2/08Version Adapted for use by ASFMRA 28 of 28 Family Farm Succession Planning Communication and Compromise

4/2/08Version Adapted for use by ASFMRA 29 of 28 Family Farm Succession Planning Communication and Compromise –Communication must be open and honest –No one will get everything they want

4/2/08Version Adapted for use by ASFMRA 30 of 28 Family Farm Succession Planning Parents are reluctant to give up management responsibilities Parents are reluctant to give up control of assets Retirement funds are tied up in the business Children have limited capital

4/2/08Version Adapted for use by ASFMRA 31 of 28 Family Farm Succession Planning Equal is almost never fair Advice is usually well intended

4/2/08Version Adapted for use by ASFMRA 32 of 28 Family Farm Succession Planning Equal is almost never fair Advice is usually well intended –But is not always well received

4/2/08Version Adapted for use by ASFMRA 33 of 28 Family Farm Succession Planning Equal is almost never fair Advice is usually well intended –But is not always well received Be aware of and respect each other’s priorities