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Farmers are discovering the benefits of organizing their farms as a limited liability company, or LLC. It’s suitable for any size and type of farm enterprise, and offers many benefits that a sole proprietorship doesn’t have.
John Schwarz is a third-generation farmer and the owner of Schwarz Law Firm in Hudson, Indiana. He says one advantage is the tax benefits. As an example, if you set up an LLC that is a farming operation, and an LLC that holds ground, you won’t have to pay self-employment tax on the rental income.
"If the farmer pays rent over to his landholding LLC, it’s an expense to his farm operation so his farm operation is not showing the level of profit that would generate a higher tax," he says. "Now, you’ll say, but John he paid money over to a company that he owns, isn’t that company going to pay tax on any profit? The answer is yes, but it’s taxed at a lower income tax bracket. It’s not subject to self-employment tax."
An LLC is very helpful when going through succession planning and execution. For example, a farmer and his wife can start gifting shares of the farm company to their children.
"The farmer can stay on as the head of the company, can basically retain income and control but does not have to retain all the ownership," says Schwarz. "Routinely I’ve seen where people have gifted 80%- 90% of the farm company, they’re still in the driver’s seat, they’ve just gifted shares over to the children while they’re alive so it may not be susceptible to estate taxes, and so on."
The limited liability company also shields personal assets in the event of a lawsuit.