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Your Farm, Your Business

This presentation, led by Crystal Middleton, Esq. of the Land Loss Prevention Project, explores the essential business structures for farmers looking to optimize their operations. Key topics include the differences between sole proprietorships, partnerships, LLCs, and corporations, highlighting their unique benefits, tax implications, and liability considerations. Learn how to choose the right business entity for your agricultural ventures, manage risks, and benefit from SmartGrowth’s resources, including legal assistance and business planning support.

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Your Farm, Your Business

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  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

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