Skip to main content

Publications

Apr 2013
25
April 25, 2013

Making Sense of LLCs and Corporations

What’s the best classification for your farming operation?


Farming operations traditionally have been organized as general partnerships. A partnership offers simplicity, pass-through tax treatment (no tax on the entity itself, but tax on the owners of the entity) and the flexibility to maximize federal farm payments.  However, of the various types of entities, a partnership provides the least amount of liability protection to the individual partners for the obligations and actions of the partnership.

Prior to converting to a limited liability company (LLC), multiple LLCs or a corporation,  a farming operation should seek the advice of experienced attorneys and accountants to make sure that such a conversion is the right choice.  While the rise in litigation in our culture has many of us looking for ways to better protect ourselves from liability, farming operations face multiple issues in assessing such a conversion, such as:
 
  1. Tax.  All of the forms mentioned above offer the potential to avoid double taxation (having the entity pay tax on its income and the owners pay tax on their income).  A conversion from a partnership to a corporation can cause other tax issues.  For example, if the farming operation creates a separate LLC to purchase and hold farm equipment, that separate LLC may lose the sales tax exemption available for the acquisition of farm equipment, since the new “equipment LLC” will not be considered to be engaged in actual farming.  There are other issues regarding taxes that require careful planning when changing your entity to avoid unintended and potentially disastrous consequences.
  2. Liability and Maintaining the Entity.  The LLC and the corporation provide greater liability protection to the individual members or shareholders of the entity.  However, this greater protection does require more attention to formality and detail.  The entity must have separate books and records, a separate bank account, hold meetings and follow certain procedures to approve certain actions.  A failure to follow these formalities can result in a loss of that greater protection.  This means some additional effort is required by the owners.
  3. Federal Farm Payments.  To the extent that Congress reenacts a farm bill that provides for federal farm subsidy payments, a partnership provides the most flexibility to maximize payments, since each individual partner is considered a separate entity.  A corporation or LLC is considered to be one entity under the farm payment program, regardless of the number of members or shareholders.
  4. Labor.  The option to create a separate LLC for the sole purpose of retaining employees and handling employment issues also has an impact on unemployment compensation and the farming operation’s unemployment tax.
  5. Succession Planning.  Owners need to discuss and plan for the future, such as if an owner desires to leave, if an owner dies or if there is a logjam among the owners about how to proceed with operations.  Unlike a partnership, an LLC or corporation does not automatically dissolve upon the withdrawal of a member or shareholder.
  6. Health Care.  Depending on the size of the farming operation, converting from a partnership to an LLC could have implications as to whether health plan benefits are subject to the Affordable Care Act’s play-or-pay provisions.  While partners would not be counted as employees toward the 50 full-time-employee/full-time-equivalent threshold, owners of the LLC may not have the same exemption.
  7. Environmental.  Recent years have witnessed significant erosion of a number of environmental liability exemptions and protections traditionally enjoyed by the farming community.  Farmers today face a variety of environmental compliance challenges, from drainage and wetland issues, to increased regulation of agrichemicals, to permits for livestock operations.  This trend is expected to continue.  An LLC or corporation protects your family’s assets from exposure to environmental liabilities.  They also significantly reduce risk and increase options in the sale, purchase and transfer of property.

The issues and considerations referenced above all form part of the analysis as to whether conversion of a farming operation to an LLC or a corporation makes legal and financial sense.  The individual facts and circumstances of each farming operation potentially dictate a different result.  A trustworthy and competent law firm and a trustworthy and competent accounting firm provide the best insurance that the right choice will be made and professionally implemented.

NOTICE. Although we would like to hear from you, we cannot represent you until we know that doing so will not create a conflict of interest. Also, we cannot treat unsolicited information as confidential. Accordingly, please do not send us any information about any matter that may involve you until you receive a written statement from us that we represent you.

By clicking the ‘ACCEPT’ button, you agree that we may review any information you transmit to us. You recognize that our review of your information, even if you submitted it in a good faith effort to retain us, and even if you consider it confidential, does not preclude us from representing another client directly adverse to you, even in a matter where that information could and will be used against you.

Please click the ‘ACCEPT’ button if you understand and accept the foregoing statement and wish to proceed.

ACCEPTCANCEL

Text

+ -

Reset