Your Farm, Your Business

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

2. Overview • Farming as a Business • Choosing the Business Entity • Understanding SmartGrowth

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

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

5. 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

6. 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

7. Limited Partnership • Formation: filing of certificate • Written partnership agreement controls • Limited liability for limitedpartnersonly • Management by General Partner

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

9. 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

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

11. 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

12. “C” Corporation • Formation • Filing • Organizational meetings • Organizational documents • Issuance of capital stock

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

14. “S” Corporation • Same formation steps as with “C” Corporation • IRS Election to be taxed as “S” Corporation • Limitations on Shareholders: • 100 or fewer • Types

15. 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

16. 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

17. 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

18. 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

19. “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

20. “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

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

22. Questions? Land Loss Prevention Project Phone: (919) 682-5969 Toll Free: (800) 672-5839