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Senior Contributor

LLC, Corp., Inc...which one to choose?

This young farmer's looking to set up her family's farm business structure and wants to know: "How do you have your operation set up and what are some advantages/disadvantages of sole proprietorship versus corporation versus LLC versus incorporation, etc.?"


One farmer in the discussion says: "Usually sole proprietorship is seen with professionals like doctors, insurance agents, and things like that, not always but thats what I have seen.  The personal liability protection is why I am an LLC.  It also has tax advantages that I prefer over the others."


What's your farm's business structure and why is it set up that way? 

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5 Replies

Re: LLC, Corp., Inc...which one to choose?

Jeff, we've had this discussion several times before...while we choose to use LLCs for our liability limitation, ease of tax filings and estate planning purposes, some people would not have them. 

 If I want to buy a little piece of land with some question marks attached to it, as we've done a couple of times, I will opt for an LLC, on advice of legal counsel.  Honestly, this young lady needs advice from her own team of, CPA, etc. 

Also, she may have to consider what her elders and her partners want to agree to...a lot of young people wnat to come on board and tell the old heads how things need to be done.  Good way to start a ruckus.  If this is a marital partnership, then that needs to be considered, too.  How will be business be controlled if the wedding vows wear thin? 

One additional thought: I am also an officer in a family-owned sub-S corp, for holding mineral rights to several properties back home.  That involvement has been a nightmare for me personally, since the corp does whatever it wants to do, then I have to clean up the mess, as the only landowner whose land has been mined. 

I would thus say: "Watch out for arranngements that provide power with no corresponding responsibility to deal with the consequences." 

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Jim Meade / Iowa City
Senior Contributor

Re: LLC, Corp., Inc...which one to choose?

I have a sole proprietership.


I have little personal knowledge of an LLC, but see it discussed frequently among pilots who are interested in limiting liability.  Here are some things to consider:


1.  Each state LLC laws are different.  You very definitely need to consult legal and financial experts who know your local laws.

2.  An LLC does not protect one against all laiability claims.  For exampe:  If you have an LLC which owns a tractor and you cause an accident, it is likely that you will be personally sued for negligence and the LLC won't protect you.  If you loan the LLC tractor to a third party who causes an accident with it, you may be held personally responsibile in some circumstances, such as if the tractor is mechanicallly defective.


It is useful to ask fellow farmers and to search online, but my advice is to pay the money to hire a competent local attorney and also discuss it with  your financial advisor and tax planner.

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Re: LLC, Corp., Inc...which one to choose?

I echo Kays response to sit down with a qualified agricultural tax expert before making such an important decision.  If you don't want to spend the time or money with a professional, just pick a form because you likely aren't going to get the desired results.


There is no one size fits all.  Different forms of business organization meet different goals.  It amazes me that some producers contantly cite the reason for an LLC as liability protection when in reality its often better to cover risk with insurance.  The LLC generates social security tax that may be reduced by one of the forms of corporate organization.  An LLC is a fine tool for land ownership, but probably the poorest choice for the "tenant" side of an operation.


Terry Evans

Farm and Ranch Tax Letter

115 East Twyman Street

Bushnell, Illinois 61422

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Re: LLC, Corp., Inc...which one to choose?

It never ceases to amaze me that people will seek out such crucial decision-making information on the Internet, where anymore could tell you anything, just for the heck of it.  I will ask a question like this to get farmer perspective, since we do look at the world from a different viewpoint than many other businesses; however, as you point out, I do use LLCs to hold much of our land. 

That said, every parcel is covered by liability insurance, and we keep a general liability umbrella over all of our entities in each state. 

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jake scia

Re: LLC, Corp., Inc...which one to choose?

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 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.