Business Entities Webinar
Ashley Ellixson Extension Legal
Specialist, Department of Ag
and Resource Economics
Paul Goeringer, Extension
Legal Specialist, Department
of Ag and Resource Economics
Women in Ag Wednesday
Webinars, April 13
Agriculture Law
Education Initiative
The Agriculture Law Education
Initiative (ALEI) is a collaboration of
the University of Maryland Francis
King Carey School of Law at the
University of Maryland, Baltimore
(UMB); the College of Agriculture &
Natural Resources at the University
of Maryland, College Park (UMCP);
and the School of Agricultural and
Natural Sciences at the University of
Maryland Eastern Shore. ALEI is an
initiative of the University of
Maryland: MPowering the State.
Website: www.umaglaw.org
Twitter: @MdAgLaw
Facebook:
www.facebook.com/MdAgL
aw
Email: umaglaw@umd.edu
University of Maryland
MPower
The University of Maryland: MPowering the State brings
together two universities of distinction to form a new
collaborative partnership. Harnessing the resources of
each, the University of Maryland, College Park and the
University of Maryland, Baltimore will focus the collective
expertise on critical statewide issues of public health,
biomedical informatics, and bioengineering. This
collaboration will drive an even greater impact on the
state, its economy, the job market, and the next
generation of innovators. The joint initiatives will have a
profound effect on productivity, the economy, and the
very fabric of higher education.
• http://www.mpowermaryland.com
Md. Risk Management
Blog
• Updated periodically with
timely legal, crop insurance,
and farm policy
information.
• www.aglaw.umd.edu
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Disclaimer
This presentation is intended to provide general
information and should not be construed as providing legal
advice. It should not be cited or relied upon as legal
authority. State laws vary and any attempt made to discuss
laws of states other than Maryland is for general
information to help the viewer better understand Maryland
law. For advice about how these issues might apply to your
individual situation, consult an attorney.
OVERVIEW
Common Business
Structure
2012 Census of Ag Percentage of Farms, Acreage in Farms, and Value
of Production by Legal Entity in Maryland, Census of Ag
82.67%
75.00%
64.87%
60.00%
58.19%
45.00%
30.00%
24.64%
15.38%
15.00%
15.96%
13.53%
7.60%
6.92%
1.04% 1.36% 2.53%
1.78% 2.42% 1.11%
Other Corp
Other business form
0.00%
Individual or Family
Partnership
Percent of Farms
Family-held Corp
Percent of Acres
Percent of Value of Production
Why Use One?
• Common reasons:
– Limit your liability
– Allow farm/business to
be continued for
generations.
Photo by Edwin Remsberg
Common Structures
• Partnership:
– General
– Limited
• Limited Liability Company
• Corporation
• Cooperative
• Family Farm Business
Photo by Edwin Remsberg
SOLE PROPRIETORSHIP
Sole Proprietorship
• Simplest business
structure
• Created by 1 person
– If more than 1 we have a
partnership
Photo by Edwin Remsberg
• Create by just declaring
yourself a business
Sole Proprietorship
• Advantages:
– Owner has full
managerial control of
the business
Photo by Edwin Remsberg
Sole Proprietorship
• Disadvantages:
– Business ends at owners
death
– Limited source of funds:
• Personal Assets
• Borrowed capital
Photo by Edwin Remsberg
– No opportunity to shield
assets from liabilities.
PARTNERSHIPS
Types of Partnerships
• Come in 2 forms:
– General Partnership
– Limited Partnership
Photo by Edwin Remsberg
General Partnerships
• Similar to Sole
Proprietorship, simplest
form of partnership.
• Liability also not limited
to business assets
– Partners personal assets
also at risk
Photo by Edwin Remsberg
General Partnerships
• Each partner shares in
ownership and
management
• Dissolve at death of a
partner
• Also can be dissolved by
partners just calling it
quits
Photo by Edwin Remsberg
Limited Partnerships
• Require at least:
– 1 general partner
– 1 limited partner
• To create file certificate
of limited partnership
with state.
Photo by Edwin Remsberg
• Must include in name
LP to be valid
Limited Partnerships
• Allows for investment
by limited partners.
– Limited partner is only at
risk for their investment
• General partners would
still have risk on
personal assets.
Photo by Edwin Remsberg
CORPORATION
What Is A Corporation?
• A corporation is a legal
entity separate and
distinct from its
owners.
• A corporation is owned
by its shareholders who
are individuals, other
business organizations,
or both.
Features of a Corporation
• The ease in which real
property could be
transferred
• If the owner wanted to
transfer the property over
time, he would need to
transfer an interest in the
property over time (which
would incur transaction
costs and complicate title)
– Farm is a corporation, he
could simply convey the
individual shares in the
corporation
Features of a Corporation
• Limited liability
coverage
– Can only be held
accountable for amount
of investment
• Owners only pay tax on
their salary
• Corporation is taxed but
at a lower corporate tax
rate
Disadvantages of Corporations
• Complex
• Costly administrative
fees
• tax requirements
– Taxed twice
• Profits
• Pays dividends
• Heavily regulated
LIMITED LIABILITY CORPORATION
What Is A Limited
Liability Corporation?
• A hybrid of a
corporation and
partnership
• Limited liability but
treated as a
noncorporate entity for
tax purposes
Features of LLCs
• Any entity can be an owner
– Creates room for creativity
for farms with separate
operations
• Less restrictive than
corporations and less
paperwork
– LLC Operating Agreement
Operating Agreements
• Sets forth the LLC structure
• It is the main governing document of the LLC,
above all others
• Since the Operating Agreement is a contract, it
must be agreed to by all participating parties.
Operating Agreements
• Can set out who is
doing the managing,
decision making, etc. to
ease conflict in the
future
• Can also dictate what
happens in the
occurrence of a death
or sell-buy instances
when someone wants
out
Disadvantages of LLCs
• Self employment tax
– High tax rate than
corporate tax rate
• Taxed on the profits from
the LLC
• LLC Operating Agreement
– Who is managing and who
is not?
COOPERATIVE
What is a Cooperative?
• A farm, business, or other
organization owned and
run jointly by its members
– share the profits, common
goal, and marketing scheme
• Typically close group of
members geographically
Features of Cooperatives
• Can choose to incorporate
or not (LLC or corp)
• Share in both expenses and
risks
• Purchasing power
• Create a brand
– Greater exposure
• Not double taxed
– Taxed once on income
Disadvantages of
Cooperatives
• Slower cash flow
• Generic branding
• Lack of membership
and participation
FAMILY FARM BUSINESS
What Is A Family Farm?
• Maryland Code,
Corporations and
Associations, Section 1209 says a family farm
must encompass each
of the following to be
considered a family
farm:
Family Farm
• 1) A domestic entity which owns, or
within 1 year after filing articles of
incorporation, articles of organization,
or a certificate of partnership, will
own or take control of property
qualifying for agricultural use
assessment under § 8-209 of the Tax Property Article
• 2) The entity must own only
agriculturally or residentially assessed
real property and personal property
used for agricultural purposes OR
owns only personal property is used
for agricultural or agricultural
marketing purposes.
Family Farm
• 3) The entity must also be
controlled, managed, and
operated by one individual
who has an equity interest in
the entity OR two or more
individuals who have an
equity interest in the entity
and who share its assets and
earnings.
• 4) Is declared in a charter
provision to be a family farm
AND has no assets other than
those described in item (2)
Advantages of Family
Farm in MD
• Reduced Fees
– If your farm operates as
a limited liability
partnership (LLP) you
must file an annual
personal property tax
report with the State
Department of
Assessments and
Taxation (SDAT)
Advantages of Family
Farm in MD
• If your farm is a limited
liability corporation
(LLC) in Maryland, it
must file an annual
report and personal
property tax return
each year and pay a fee
of $300 in addition to
any personal property
tax
Advantages of Family
Farm in MD
• Every corporation, LLC,
LLP, or limited
partnership doing
business in Maryland
must file an annual
personal property
report with the SDAT, by
April 15 each year
– REDUCED from $300 TO
$100 for Family Farms
PICKING BUSINESS ENTITY
Picking a Business Entity
Picking a Business Entity
• No simple answer
• What to consider when
making decision?
– Are you okay with separate
bank accounts?
– Do you want to protect
personal assets with
business liabilities?
– Do you want ability to
grow business by taking on
outside capital?
Picking a Business Entity
• If you answered yes,
then potentially want to
consider LLC or
Corporation.
• Before making the
decision, talk to your
accountant and
attorney.
Resources Available
• Farmcommons.org
offers checklist to help
you decide on entity.
More Information
• Check out the ALEI-UME
publication from Ashley
Newhall and Paul
Goeringer
• Provides more detail on
this topic
• Available at
http://go.umd.edu/BusOrgs.
Thanks!
Any Questions?
Ashley Ellixson:
Email: aellix@umd.edu
Phone: 301-458-5125
Twitter: @Legally_Ashley
Paul Goeringer:
Email: lgoering@umd.edu
Phone: 301-405-3541
Twitter: @AgLawPaul