Preparing for transition
Rethinking the Old Farm Partnership
I often ask myself, “What do I want to do when I finally grow up?” Many of us have planned for retirement and have no intention to stop farming, but we have those pesky kids to pass the operation to…eventually. Not all children have the desire to drive the combine or keep up the books the way we do. But maybe there is a better way to drive the family business into the next generation.
As you consider the many personal and business changes that have occurred as your operation evolved, it makes sense to look at the old partnership structure to see if there is a way to make these transitional years more seamless.
Traditional general partnership
For many years, the old general partnership between farming spouses has been the perfect vehicle for keeping the family farm business in compliance with the IRS, Farm Service Agency, and your local lender. However, the operation may have taken on more ground. We have definitely grown older. The kids have grown up and want to farm (or leave the farm). We may now be thinking about purchasing or leasing more ground, aging and health issues, insurance, college expenses, and the next 10 to 20 years of transition.
All of these issues involve both personal and business decisions. For instance, land sales or purchases might be structured as a like-kind exchange (Sec 1031 exchanges), and long-term planning for health needs may require reviewing life and health care insurance. Similarly, education expenses for children and grandchildren might involve 521 Plans or education trusts. None of these issues are overly complicated, but together they can feel overwhelming. And each issue merits some research, thought, and discussion.
As you consider the many personal and business changes that have occurred as your operation evolved, it makes sense to look at the old partnership structure to see if there is a way to make these transitional years more seamless. So where do we begin, and what type of structure will be the best serve the family as we consider our changing roles in the field?
LLCs offer excellent flexibility
Many advisors suggest forming a Limited Liability Company (LLC) to take the place of the general partnership or to work in conjunction with the old partnership and facilitate the transition of an operation. Some of the advantages of an LLC over the general partnership are:
- Smooth succession — This structure may be more flexible when transferring ownership to the children who will eventually inherit it.
- Liability — An LLC limits liability to the LLC and its assets — and not the members. General partners have joint and severable liability for the debts and actions of the partnership.
- Flexible tax structure — An LLC does not lock you into any one type of entity. You have the flexibility of electing to treat the LLC as a partnership, C-corporation, or an S-corporation.
- Tax advantages — There are tax benefits if the LLC is treated as a partnership whose manager members are subject to self-employment tax and income tax on their share of the profit. However, the remaining limited members only pay income tax on their share of the profits.
Documenting the agreements
How you set up the ownership and operation will be determined in the LLC’s operating agreement. Remember that the state in which you are doing business will have specific rules on the licensing and the documentation required to form your LLC. A buy-out agreement should also be set up at the same time, and this will document how the succession of the business will play out in the future. It can be part of the operating agreement or an entirely separate document.
How we can help
No one has to make all of these difficult decisions alone. CLA’s agriculture professionals understand farming, entity selection, the agribusiness industry, and farm family business transitions. It will take some discussions with professionals, family members, and your attorney to fully understand where you are now, where you are hoping the operation will be in the future, and who you want to be a part of the plan. Once you structure the overall plan for the farm, and understand how you want to bring in new members, you can then begin the process of forming your new LLC. And throughout this process of revamping the old partnership and thinking through the next few years, maybe we will also start to figure out what we want to do when we finally grow up.