Farm Businesses – Choosing the Right Entity
I am working on putting the finishing touches on materials for a conference I am speaking at in December. Among the topics I will be speaking on is choosing the right entity for your farm or ranch business. There are many considerations in making this choice and often the business objectives can be at odds with the estate planning objectives. It is important to consider and weigh both when making these decisions.In our current environment there are many options for the form of business entity. Sole Proprietorships are the easiest and take no effort to form. However, they leave you with no liability protection. Partnerships can take many forms: General Partnerships, Limited Partnerships, and now Limited Liability Limited Partnerships. There is also the increasingly popular Limited Liability Company. Corporations, whether taxed as C Corporations or S Corporations can still be beneficial in certain circumstances.As always, it is important to consider your goals and objectives. Is the entity for operations or real estate holdings? What are the tax consequences? Will farm program payments be affected? Some of your goals may include:
- Asset protection
- Facilitating gifting without the fractionalization of real property
- Claiming valuation discounts
- Limiting management to selected owners
- Providing buy-out terms upon the occurrence of triggering events such as death, disability, divorce, disagreement, etc.
In addition to what type of entity, the use of multiple entities may be of benefit. Using multiple entities can provide:
- Greater liability protection
- Additional retirement options for the senior generation
- Additional options for creating “fairness” for off-farm heirs
- Options to reduce the investment needed by the on-farm heirs to gain control of the operating side of the business
These can be difficult choices to make. As we are approaching another year end, it is a good time to consider whether or not creating an entity will benefit your farm or ranch operation. You should meet with your advisory team to consider what will work best for you.