By: Jennifer Denchak Wetzel, Esquire
The question of whether to form a legal entity to manage and run your agricultural operation is often a major concern for farmers. Further, the choice between a corporation (S or C), limited liability company (LLC), limited partnership (LP), general partnership (GP), trust, or “simply” a sole proprietorship can be overwhelming. Each option carries its own advantages and disadvantages with respect to liability protection, tax issues, ease of transferability, and formation/administrative requirements, among others.
Since its introduction in Pennsylvania in 1996, the LLC has become the entity of choice for many farm businesses and their tax and legal advisors, as it provides the liability protection similar to a corporation, but with the option to be taxed as a partnership/individual, rather than as a corporation. An LLC is a uniquely versatile business entity that can be taxed either as a corporation or a non-corporate taxpayer and its organizational structure can be corporate (manager-managed) or non-corporate (member-managed). An LLC is often an excellent choice for operating and transitioning a farm business to the next generation. However, LLCs may not be the best option when, for example, the business involves high indefinable risk activities or does not qualify for the family farm exemption to Pennsylvania’s capital stock tax.
Further, the choice of no entity, or operating as a sole proprietorship, should not be overlooked. In many instances, the cost and complexity of forming and operating a separate business entity, including the maintenance of separate books and filing of tax returns, can outweigh the anticipated benefits of the entity, particularly if the farm operation carries sufficient liability coverage through an umbrella insurance policy. Further, there can be unexpected negative consequences associated with forming an entity. For instance, farm assets owned by an entity, rather than outright by an individual, do not qualify for the most favorable of the 2012/2013 agricultural/business exemptions to Pennsylvania’s inheritance tax. Similarly, absent additional legislation to address this issue, a farm business can lose tens of thousands of dollars to inheritance taxes if the otherwise exempt farm assets are held by a trust rather than the individual decedent or another type of legal entity.
Mette, Evans & Woodside attorneys can work with you to evaluate your business’s need for a legal entity, to assist with the selection of the proper entity type, and to create/form the appropriate entity.