1. AGRI 1623 Farm Management III
Corporations
AGRI 1623
Farm Management III

2. Corporations Consists of a completely separate legal entity
The business and its owners are separate from each other
Corporations can:
be taxed differently
be sued
own property
enter or exit contract agreements
How it is taxed depends on the type of corporation

3. Corporations Consists of one or more owners
Owners are called shareholders
A board of directors can be formed
A manager can be selected
The owners become employees of the corporation
Decision making is done by Board of Directors, by a manager, or by shareholders

4. Corporations Requires filing paperwork with the government to set up
Need Articles of Incorporation
Can be costly and complex
Need to involve a lawyer or accountant
Used for general operating and for asset ownership
Land and other longer term assets are almost always left out
Reason? Putting assets in is tax free. Taking them out is taxable.
Acquiring capital can be easier

5. Corporations Liability Limited in all types of corporations
Personal assets are almost always protected
It is one of the main reasons people use them

6. Corporations Continuity and Asset Transfer
The business does not end with the death or exit of a shareholder
Exception: an LLC may end
Shares can be bought, sold, gifted, and passed through inheritance
Can be an excellent estate planning tool

7. Corporations 3 Main Types of Corporations S Corporation C Corporation
Limited Liability Corporation (or Company)

8. S Corporations It is a completely separate entity from its owners
Owners must be individuals, not other businesses or a trust
It is a corporation, but allows income to be shown on individuals tax return
Limits liability while showing income on personal tax returns

9. S Corporations Land is generally left out
Must have fewer than 100 shareholders
Must have only one type of stock
Can convert to a C Corp at any time at a minimal expense
Has some flexibility in the tax year

10. S Corporations Taxes Taxed very similar to partnerships
All income is shown on individuals tax return according to the amount of ownership
Shareholders are considered employees and are paid a salary
Must pay SE taxes on salary
Salary is deductible for the business
Must pay tax on business profits not distributed
Must pay income tax, but not SE taxes
Not deductible to the business

11. S Corporations
Taxes
Must own more than 2% of the business to follow regular tax laws
What is deductible?
Salaries to shareholders and employees are
Some benefits such as health insurance and retirement accounts are
Fringe benefits are not
Unless it is for business use in your personal house (can claim that)
Tax Forms
File the same as a self employed individual, plus Form 1120S and the Schedule K-1

12. S Corporations Liability Limited under the S Corp
Personal assets are protected
The most a person could lose is the amount of their investment in the business
This is true for both debts and adverse legal actions
Exceptions:
Lenders may require a personal obligation
You can be held liable for your neglect (if on business time, both personal and business assets may be at risk)
If a shareholder loses a lawsuit, the winner could claim their portion of the business assets

13. S Corporations Farm Transfer
Can sell, gift, or pass shares through inheritance
Fairly flexible

14. C Corporations Completely separate entity from its owners
Has fewer restrictions than an S Corp.
May face limits on FSA loans and in government programs
Is it a family farm?
Can have different types of stock
Example: nonvoting and preferred
Need an accountant or attorney to set it up
Shareholders must have an annual meeting

15. C Corporations Taxes The C Corp actually files a tax return
Taxed under corporate rules at corporate rates
Income of the corp. is not shown on owners individual tax return
Shareholders can be employees
Wages are deductible to the corp.
Employee pays income taxes and their half of SE taxes

16. C Corporations
Taxes
Fringe benefits can be paid tax free to the corp. and employee (in most cases)
Health and Life Insurance
Medical bills
Electricity
Water
Phone
Lodging
Meals
Clothing
Etc.

17. C Corporations Taxes Dividends Tax Forms
Paid out to shareholders
Not a deductible expense to the corp
The corp still must pay taxes on that income
Shareholder must pay income tax, but doesn’t have to pay SE taxes
This is where it is double taxed
Tax Forms
C corp files Form 1120
Individuals still file normal forms
Has complete flexibility in the tax year

18. C Corporations Liability Very similar to S Corps
Limited under the C Corp
Personal assets are protected
The most a person could lose is the amount of their investment in the business
This is true for both debts and adverse legal actions
Exceptions:
Lenders may require a personal obligation
You can be held liable for your neglect (if on business time, both personal and business assets may be at risk)
If a shareholder loses a lawsuit, the winner could claim their portion of the business assets

19. C Corporations Liability
In order to keep limited liability status you must:
Keep it fully funded or build a “cushion”
Be formed properly
Follow laws

20. C Corporations Farm Transfer
Can sell, gift, or pass shares through inheritance
Continues after death or exit of a shareholder
Very flexible
Can be very expensive to completely exit or end the business

21. Limited Liability Company (LLC)
Can have one or more owners, called members
The portion each member owns is called Membership Interest or Ownership Interests
Treated as a separate entity from its owners
It is similar to an S Corp in many ways

22. Limited Liability Company (LLC)
Combines pass through income taxation of a partnership with the limited liability of a corporation
Setting one up is more complex than a partnership, but operating it is easier than a C or S Corp
Using an accountant or attorney to set up is recommended
Must file Articles of Organization
You will want to create an Operating Agreement
Defines the benefits, rights, and obligations of the members

23. Limited Liability Company (LLC)
Managing the business
Can be managed by the members or by a manager
Gives the most management flexibility
Make sure you identify this in the Operating Agreement
Need to make sure it is fully funded

24. Limited Liability Company (LLC)
Benefits
Member wages cannot be a business deduction
Some benefits such as health insurance and retirement accounts are deductible
Fringe benefits are generally not deductible

25. Limited Liability Company (LLC)
Taxes
Taxed similar to a partnership
The owner is the taxpayer and is held personally liable for his/her share
Owner combines income or loss from business with other income such as personal income
Amount of taxes paid vary on tax bracket
Owner must pay self-employment taxes
15.3% for Social Security and Medicare
Tax year usually follows calendar year
Tax forms used:
Form 1040
Schedule F (Profit or Loss from Farming)
Schedule SE
Usually will have a depreciation schedule
Need to file Form 1065 for LLC income/loss
Can elect to be taxed as a C Corp

26. Limited Liability Company (LLC)
Must not have more than two of these characteristics to be taxed as a partnership:
Limited liability
Continuity of life
Centralization of management
Free transfer of membership interests
Otherwise, corporate tax forms will have to be used and it will be taxed as a C Corp

27. Limited Liability Company (LLC)
Continuity/Farm Transfer
LLC can continue forever, can end with the exit of a member, or for a set number of years; it should be defined when set up
Can pass membership interests by gifting, selling, or through inheritance
May not be as easy as transferring shares of a corporation
Still is a good estate planning tool

28. Limited Liability Company (LLC)
Limited similar to a C or S corporation
Personal assets are protected
Offers protection from legal actions and business debts
The most a person could lose is the amount of their investment in the business
Exceptions:
Lenders may require a personal obligation
You can be held liable for your neglect (if on business time, both personal and business assets may be at risk)
If a member loses a lawsuit, the winner could claim their portion of the business assets
You break the law

29. Limited Liability Company (LLC)
In a nutshell, an LLC is a partnership with the limited liability of a corporation
Note! LLC’s have not been tested in court yet.

30. Corporations and LLC’s
Advantages
Shareholders/members have limited liability for debts or lawsuits (Note: exceptions do exist)
Corporations can raise additional funds through the sale of stock
May be able to deduct the cost of wages and benefits to owners/employees
Can use different taxation methods
Offer management flexibility
Can be easy to enter or exit when planning farm transfer
Business continuation

31. Corporations and LLC’s
Disadvantages
Often complex and costly to form
Probably more paperwork to comply with regulations
Double taxation of C-Corps
Learn more tax laws
Can be costly to exit structure
May be easy to lose limited liability status
Potential disagreements with other owners