Business Entities. Advantages and Disadvantages of Using Alternative Types of Business Entities To Create an Ownership Structure for Your Farm

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1 Business Entities Advantages and Disadvantages of Using Alternative Types of Business Entities To Create an Ownership Structure for Your Farm

2 Contact Information Alan Miller Farm Business Management Specialist Purdue University

3 Questions Do I need a separate business entity? Advantages & disadvantages of entities? What are the business entity alternatives? In general, what is the best business entity? If one is good, what about multiple entities? Is it preferable to sell interests in existing entities or create new ones?

4 Life does have its share of problems!

5 Entities and Liability Protection Not a substitute for liability insurance General partnerships increase liability Limited personal liability for acts of business and co-owners Liability may arise from one own conduct, not a substitute for umbrella/professional liability insurance Protection of assets from creditors Charging order protection for LLCs Establishing boundaries between personal and business assets

6 Other Desirable Entity Characteristics Convenience (simpler than joint ventures) More flexibility of management/ownership Enhanced continuity Opportunities for economies of scale Succession/estate planning tool Income tax/self employment tax advantage

7 Entity Disadvantages Time Additional start-up costs Additional annual fees & costs Additional management complexity Additional legal requirements (formalities)

8 Selected Alternatives for Organizing a Business Entity Individuals Pass Through Entities Taxable Entities Sole Proprietor Partnership (Ptr.) Corporation (Corp.) Joint Venture S Corp. LLC Corp.** SMLLC* SMLLC S Corp.** SMLLC Corp.** LLC Ptr./S. Corp.** LLP*** *Single member limited liability company **Information after the hyphen indicates taxable entity election(s) ***Limited liability partnership

9 Business Entity Continuum Partnership LLC Corporation More Flexible Less Flexible

10 Selected Alternatives for Organizing a Business Entity* Individuals Pass Through Entities Taxable Entities** Sole Proprietor Partnership (Ptr.) Corporation (Corp.)*** Joint Venture S Corp. LLC Corp.*** SMLLC**** SMLLC S Corp. SMLLC Corp.*** LLC Ptr./S. Corp. LLP *A business entity is a legally recognized organization separate and distinct from its owners. **A taxable entity is a separate taxpayer from shareholders/members. ***Personal service corporation status is a tax trap to be avoided relative to a C-Corporation. ****Status of liability protection is uncertain, proceed only after seeking legal advice.

11 Additional Issues to Consider When Creating a Business Entity Management structure (centralized or not?) Sharing of capital and profits Exit plan buy-sell agreement Participation in interstate commerce Federal and state securities laws Self-employment tax Types of members (voting, nonvoting, etc.) Individuals vs. legal entities

12 Multiple Entities More useful in managing liability than single entity Entity types have advantages/disadvantages; optimal structure may entail different entity types Permits establishment of boundaries between more risky and less risky business ventures Permits establishment of boundaries between operating entity and asset holding entities Varying ownership enhances asset protection Adding entities is an alternative to selling interests in already existing entities

13 Multiple Entity Farm Structure Source: Using Liability Limiting Entities to Manage Liability Exposure for Ohio Farms: Entities.pdf

14 Review Questions Do I need a separate business entity? Advantages & disadvantages of entities? What are the business entity alternatives? In general, what is the best business entity? If one is good, what about multiple entities? Is it preferable to sell interests in existing entities or create new ones?

15 What is the next step? Seek out skilled advisers Attorney skilled in business entity formation Tax accountant skilled in entity taxation Purdue Resources: Dr. Gerry Harrison Professor and Ag Law Specialist Purdue University Indiana Business Portal: Entity Registration: