By Ashley Ellixson
This post should not be relied upon as legal advice.
Today we will continue to discuss business structures that could potentially be utilized when setting up your farm. To summarize, Paul and I have addressed partnerships (general and limited), corporations, and now, the limited liability company. Each type of structure has its advantages and disadvantages. The limited liability company is no different in that aspect.
A limited liability company (LLC) is a noncorporate business whose owners actively participate in the organization’s management. An LLC is a hybrid entity with both the characteristics of a corporation and of a partnership. It provides its owners corporate-like protection against personal liability; however it is usually treated as a noncorporate business organization for tax purposes. This means that even though the LLC individual owner will not be held liable for any debts incurred by the LLC, the individual will be subject to self-employment taxes. The individual will be liable for the profits from the LLC because the LLC is not taxed as a corporate entity but rather, those profits incurred are passed to the individual and taxed on personal federal tax returns. This can be a disadvantage to the LLC and a great reason to remember to speak with your legal and tax representative when considering this business structure.
When making the decision to form an LLC, you should consider many of the benefits the business organization offers. LLCs allow any entity, including individuals, partnerships, trusts, estates, corporations, or other LLCs to be owners. This can be beneficial if you already have part of your operation formed as a business entity and want that entity to be able to benefit from another separate part of your operation. It is also a great way to involve other family members who may not be physically present but want to help manage the farm. However, it is important to discuss your particular needs with a legal and tax representative before moving forward.
LLCs also offer greater flexibility than corporations — they lack the restriction on number of members allowed but have the tax advantages (or disadvantages), as previously noted, of a partnership such as pass-through of taxable income and losses. The IRS does not consider an LLC a distinct and separate entity for tax purposes. What this means is that the IRS does not tax the LLC directly; instead the members of the LLC are able to decide how they want to be taxed. Typically, members of an LLC will create an operating agreement in which they outline how they would like to be treated for tax purposes. Please see IRS.gov for further information regarding taxation of LLCs.
Furthermore, LLCs require significantly less paperwork than its counterpart the corporation. The main paperwork you will want to have is an LLC Operating Agreement. Maryland requires that your LLC have either limited liability company, L.L.C, LLC, L.C., or LC in your name. After that requirement, the rules and regulations are minimal as long as the LLC abides by tax and legal guidelines. Additionally, LLCs are not required, like corporations, to hold annual meetings orprovide annual reports. LLCs also have the flexibility to distribute profits in any manner they wish without regards to each member’s financial contribution.
As we continue to look at the potential advantages and disadvantages of each business organization, it is imperative you speak with a tax and legal representative to discuss your personal needs. Business organizations are not a “one size fits all” situation but rather a unique and situation-based business decision.
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