Author Topic: Should the farm be set up as a LLC  (Read 691 times)

lovescamping

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Should the farm be set up as a LLC
« on: March 14, 2021, 06:59:38 AM »
My husband recently acquired the family farm that has 2 rental homes and over 100+ acres.  Rentals have great tenants and farmland is leased out.  He is the sole owner of that property.  Then he also co-owns another part of the family farm with a sibling, JTWROS.  This has 1 rental, that is currently vacant, and about 5 acres of farmland that is leased out.  Would it make sense to create a business, like a LLC, for these farms?  If so, I'm assuming due to the different types of ownerships, it would need to be seperate businesses?  We have no experience with starting a business so this is all new to us.  Thanks in advance for any suggestions!

Michael in ABQ

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Re: Should the farm be set up as a LLC
« Reply #1 on: March 14, 2021, 10:09:43 AM »
Yes, it would be a good idea to set these up as one or more LLCs. Especially the one he is a part-owner of.

You can setup an LLC in most states in a day for a couple hundred dollars or less (California will charge about $800 I believe but most states it's $100-200). I paid a local company $200 and had all the documents in hand and my LLC on the secretary of state's website by the end of the day. I got a free business address to use for a year as well.


You're talking about assets worth hundreds of thousands of dollars. So it would definitely be worth spending a couple thousand dollars to consult with a CPA or attorney on setting these up properly, especially the one with his brother. It can be done on the cheap by yourself, but for that kind of money, it's worth it to get professional advice.

From a tax perspective, nothing will really change. Any income or expenses from these businesses will flow through to your personal tax return and be entered on a Schedule C, maybe a Schedule F (not sure how the IRS looks at leased out farmland vs. operating the farm yourself). For the one with his brother, the IRS treats it like a partnership and each partner is responsible for their portion of the taxes. So if they're 50-50 owners, and the profit is $50,000, each will have $25,000 of taxable income. But, the IRS can come after either partner for the whole business. I've heard of minority investors getting stuck with the tax bill for a whole business when the majority partners run off (perhaps after embezzling all the assets from the business). Hopefully not a concern amongst family. But, that's why a good partnership/LLC Operating agreement are critical.

lovescamping

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Re: Should the farm be set up as a LLC
« Reply #2 on: March 14, 2021, 04:22:25 PM »
Thank you! That is very helpful.  I appreciate the heads up on the taxes.  Hopefully it won't be an issue but good to be aware of that. 

valsecito

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Re: Should the farm be set up as a LLC
« Reply #3 on: March 20, 2021, 03:55:55 AM »
Yes, it would be a good idea to set these up as one or more LLCs. Especially the one he is a part-owner of.

You can setup an LLC in most states in a day for a couple hundred dollars or less (California will charge about $800 I believe but most states it's $100-200). I paid a local company $200 and had all the documents in hand and my LLC on the secretary of state's website by the end of the day. I got a free business address to use for a year as well.
Unrelated note. I would love to pay only the California $800 for setting up an llc. Over here, it would be more like:
- ~2000 for setup if doing a lot yourself: notary fees, registration fees, ...
- ~2000/year ex. VAT accounting costs for an empty shell llc
- ~350/year llc social security contribution
- ~100/year ex. VAT for a LEI in case you want to do anything with financial instruments like stocks in your llc ( see https://en.wikipedia.org/wiki/Legal_Entity_Identifier )

Smokystache

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Re: Should the farm be set up as a LLC
« Reply #4 on: March 22, 2021, 07:57:32 AM »
One other thing to be aware of is a state franchise & excise tax. In my state (TN), this will immediately take you from 0% state income tax to adding a 6.5% tax on net earnings. You may find that the additional legal protections of an LLC are worth it - but in my state at least, it costs far more than the couple hundred bucks to set up the LLC.

Tucandream

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Re: Should the farm be set up as a LLC
« Reply #5 on: April 02, 2021, 12:10:58 AM »
For the record I'm a CPA, and v my speciality is farms.

The reason to have an LLC is for liability purposes only. Usually I counsel my clients to own the real estate personally and operate the business via the LLC. The reasoning behind this is if the LLC is  sued, one of your biggest assets is protected,the real estate.

In your case it doesn't sound like you'll be actively running a business, I don't see much of a reason to set up an LLC.

Carolyn M