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02-22-2011 02:38 PM - edited 02-22-2011 02:49 PM
It depends on the objectives.
Seems all too many people want to deal with the type of entity before dealing with the reasons that cause their operation to be what it is.
One needs to isolate the objectives, the anticipated time frames involved for the major players, the amount of expansion desired/expected, and the specific activities that each major player will provide/engage in.
Add to the mix the one basic rule of NEVER, NEVER put appreciating real estate into a C corp (we're talking farming now).
Adequate recordkeeping is assumed..........with that assumption in mind, the selection of the tax entity is totally independent of recordkeeping considerations-----------all entities, including sole proprietorships, need to maintain adequate records, including general ledgers. That results in the only real difference between the books of one entity over another being the specific equity accounts used.
Final assumption------------adequate tax advisors will be used. Not Susie or Sam the H&R specials, or Dicky the local attorney, or Billy the local CPA who has a hard time doing bookkeeping---------I'm talking getting a good tax advisor who understands tax, and lives in that world throughout the year,........reads the literature, takes tax continuing education courses, is known for their involvement in taxation. There are more around than most people think--------just have to spend a little effort to locate them.
Rules of thumb for selecting tax entities----------
LLC----------- seldom has any application in the "typical" owner/operator farm environment. Usually relegated to the real estate-owning situations, where there are multiple owners who need liability protection from each other's actions, and who need relatively easy transfer of interests.
Partnership----------- seldom used for anything except machinery ownership with "neighbors", or specific joint ventures------including ownership of real estate where liability concerns are nominal.
S corp----------- only use for owning farmland by the same person who is also a major participant in the farm operation. Objective is to bypass problems of SE tax under Section 1402. This concern----which is major, and will continue to get bigger----------still exists in even the 8th Circuit, since IRS has indicated they will not follow the cases where the 8th slapped IRS down with respect to charging SE tax on rental paid to the owners of farmland who were also active participants in farm operation.
Using an S corp for the entity to own the operations is like kissing one's sister-------might be fun at the time, but the longterm expections are disasterous. No employee benefits for over 2% SHs, compensation issues exist now and will only get worse, since IRS is after the payroll taxes on all moneys taken out, no deferal of income or use of an "extra" tax bracket to enhance internal financing, etc etc etc.
C corp----------- the entity of choice for containing OPERATIONS..........not for holding the land----never, never. Allows substantial employee benefits--------medical expenses, meals, lodging, etc etc. Allows retention of earnings for use for internal financing, at much lower tax rates during the period for tying up the funds.
The one item that seems to be always talked about as the achilles heel of the C corp--------double taxation-------is just pure garbage, and a problem that only rank amateurs worry about. That is the reason for retaining someone who has tax savy--------they will handle things timely and appropriately to keep such things as unwarranted dividend income from occuring.
Now........establish your objectives, the parameters of the operations, and merely fit them into the proper entity to hold them.
Most likely it will be................as simple as...........C corp to own/run operations, and S corp to own farmland.
Take salaries from C corp based upon work performed. Charge large rental rates to C by S, and let any residual moneys, after payment of interest, principal and property taxes, to slide out of the S to the shareholders.
Caveat...........don't put too much land into one S corp---------- use as many S corps as needed to fit the logical post-death situations for beneficiaries. If beneficiaries intend on holding land for some time after shareholders' death, use multilple S corps, so parcels sold for use by beneficiaries for fast cars and candy bars fit the holdings of that S corp, and therefore that owning S corp can be liquidated in the same tax year. (Remember----- at death of shareholder, the land owned by the S corp does NOT receive a stepped up basis---rather the stock owned by the shareholder receives that step-up. therefore, need to liquidate that corp in same year as the sale so the beneficiaries have on their personal tax returns for that year----- the gain from the sale, offset by the loss from liquidation of corp.)
Alternative to multiple S corps at front end----------is to use the "splitup" rules at the back end, prior to any sales, to split up the land holdings into salable parcels, prior to actual sales.
..........but that does involve some hoops to jump thru, so make sure the decision is timely, and the rules are known much ahead of time........I'm talking years.
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