The many uses of LLCs in business operations


By Norman Brock
Attorney at Law, Brock Law Firm

wheat field

The author and his son, Corey, utilize hundreds of Limited Liability Companies, or LLCs, in their respective practices to help solve clients’ various needs. I break down such uses between:

  • Business
  • Estate/transition planning

An LLC is often used as the business entity of choice vs. a corporation for its simplicity of forming.

The use of either an LLC or corporation for operating a business, be it the corner grocery store or farm/ranch operation, is paramount in the author’s opinion. Utilizing an LLC or corporation is crucial if the business owner(s) desire personal protection from third party law suits and is absolutely crucial if the business owner has employees; operating your business as a self-employed owner or through a partnership of two or more persons, you remain individually liable for acts of negligence of an employee. 

The possible business considerations in the operation of the business enterprise and the possible tax benefits of an LLC vs. a corporation in your particular business situation should be reviewed with knowledgeable counsel and a CPA. This is especially true for the farmer/rancher where possibly operating through a corporation structure still affords more tax savings benefits than an LLC, in the author’s opinion.

An LLC formed by two or more business associates would generally include careful planning for succession of the business due to death, disability, or retirement of one of the owners. Crafting buy/sell protection is a critical component typically of the business entity. Holding real estate in an LLC as opposed to a corporation does NOT have the income tax drawbacks that holding real estate in a corporate ownership does. This needs to be carefully explained to the landowner by a knowledgeable advisor.

Let’s look at the several benefits of an LLC in most farm/ranch estate/transition planning that the author and his son specialize in:

1. An LLC accomplishes the almost always goal of the farmland owner to “hold the land together.” Succession planning to children/grandchildren that leaves them as tenants in common is usually a wreck! With an LLC, a manager is appointed who handles all the business of the LLC, i.e. receiving the landlord’s share of crop, marketing, paying the bills, Farm Service Agency business, etc., and ultimately reporting business activity on a 1040 Partnership tax return. An LLC is a pass-through entity for tax reporting and does NOT pay tax on net earnings. Net income is reported on a K-1 form for each owner’s proportional share of the net LLC income (or loss). 

The LLC agreement we utilize will ALWAYS contain prohibitions on transfer of ownership of LLC units (shares) so that ownership remains in the line of family, always a goal of the farm/ranch landowners.

The LLC operating agreement we utilize would have provisions for buyback protections in the event of a nonpermitted transfer, i.e. bankruptcy, divorce award, or an unauthorized transfer such as through a will or trust by an owner transferor. 

2. Lifetime gifting to reduce the size of a large estate that could/would be subject to possible federal estate tax and/or Washington/Oregon estate tax is often a big planning issue (Idaho does not have a state estate tax). Since gifting is made in units of the LLC, typically nonvoting, which can be deeply discounted in value, much larger gifts of value can be made. We typically set up an LLC having voting/nonvoting units especially so the owner(s) can gift nonvoting units (value) to children/grandchildren without giving up control of the voting units until such is typically more clear to the landowners later in life.

Gifting of LLC units, whether voting and/or nonvoting, almost ALWAYS should be accompanied by utilization of trusts to hold the gifted (or bequeathed) units so the family always knows where the ownership of the LLC resides and is controlled.

3. We fairly often complete transition planning gifting out of the LLC ownership from parents to the children, setting the parent(s) (original owners) for possible Medicaid planning in later years. On that note, any type of assets can be contributed to an LLC, such as commercial property, rental, brokerage accounts, cash, life insurance, etc. Qualified accounts such as IRAs or 401Ks, would not, however. On that note, the author has yet to meet a client who is happy to have to sell off the family farm to provide possible long-term care in later years.

4. An LLC provides additional planning opportunities. A parent may want to provide for one child to be successor manager (in control), likely some form of protecting a family member such as a son or grandson. The right to always farm/ranch the land is often a critical component of planning.

5. Sometimes the family utilizing an LLC wants a plan in place for how the LLC lands might be divided between the children when the parents are gone. The author calls this “a road map” for distributing, the property amongst the children one day. Often, there is the farmstead (home, shop, etc.) on the LLC lands. At some point, the parents often say, “our son and his family will move into our home when we are gone, and they should own the site, but we don’t want to go to the cost of a short plat now.” We can provide a mechanism in the LLC operating agreement for such future event to be an obligation of the LLC to do.

In summation, an LLC is a wonderful legal entity that can be tailored to your specific transition goals for your lands (and other assets).

Norm Brock has been representing farm families throughout Eastern Washington, Idaho, and Northwestern Oregon for more than 50 years. He works out of the firm’s Davenport and Spokane offices and can be reached at (509) 721-0392 or brocklf.com.

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