lori lynch paul goeringer, center for agricultural and natural resource policy university of...
TRANSCRIPT
Educating Producers on Proper Land Titling &Using a
Business OrganizationLori Lynch
Paul Goeringer, Center for Agricultural and Natural Resource Policy
University of Maryland
Who is in business with you? Property Titles and Business
FormatsLori Lynch
Agricultural and Resource EconomicsUniversity of Maryland
March 2013
What is ownership? Rights of ownershipRights of useCan one sell or transfer the
propertyThe man who had built her so
well said “ The little house can never be sold for silver and gold and she will live for our great-great-great grandchildren…”
Can one pass it to heirs
People do not really know what ownership means. We think we understand what we own but sometimes we don’t. I try to give examples such as “the little house” to explain rights of use and ability to “pass it on”; ability to sell
Different Types of OwnershipFee simple absoluteLife EstatesFee Simple but….
Condition: pass to male heirDeterminableSubject to a condition subsequent
Tenancy in commonJoint tenancy
With survivorshipTenancy by the entirety
Pride and Prejudice: Mr. Bennet has no son so Mr. Collins is heir to his entailed estate. Austen described him as "not a sensible man” but Mr. Bennet can do nothing to change itDownton Abbey – must go to male issue or back to the King
Fee simple absolute (no limitations of rights)
Greatest bundles of rightsCan sell and give awayCan divide the landCan make all decisionsReceive all the income and interestCan be passed on to children or notLiable for all obligations – mortgage, property
taxes, these obligations passes with the land if the land is used as collateral for the loan
Define the various types of property titles
Life Estates (owns only rights to use)Owner owns the property for his or her lifetimeCan exclude others from the property even the one who
will receives the land once owner diesCollect all the income and interest in the propertyCan be transferred (leased) but can not be passed on to
children Difficult to sell because one does not know the term of
ownership – could be an hour or could be 20 years.Can not use for collateral; owner might die before loan is
paid and once dead, property shifts ownershipEconomic waste – if the income from property less than
the expenses for taxes and interest on the mortgage – courts may allow a sale.
Fee simple: Determinable or Subject to a Condition Subsequent
Own outright as long as follow “rules”Can put almost any type of rule into the ownership condition: for
example, no selling alcohol, must keep farming, must allow hunting, must not allow hunting, cannot play cards, cannot pray; to Ann as long as the property is used for a park"
If violate the rules, lose rights to property immediately when determinable
Condition subsequent – again must follow the rules: If violate conditions, Joe (the grantor) can get the property back"to Ann, but if Ann sells alcohol on the land, then Joe has the
right of entry(or power of termination)."But grantor can waive condition or not act upon itLess automatic – in the sense may not lose rights immediately
Tenancy in common Each tenant owns a share of one piece of property- for
example Jill owns 60% and Jack owns 40% of a propertyCo-owners own the land in proportion to the amount
each contributed to purchase the property – if Jill paid 60% of the purchase, she owns 60% of the property
Can convey their interest in the land either by sale or by inheritance – Jill can sell or pass on her 60% of the property
Can mortgage her share or secure a loan – however cannot sell other owners’ interest. Thus if Jill default on the loan, bank only forecloses on 60% of the property.
Joint tenancy Each member is vested with an equal share of the
undivided wholeEach member has the right of survivorshipIf one owner dies, her interest in the property ends – the
surviving owners continue to be ownersCan not pass on interest in land post-death unless one is
the last one aliveCan be used to avoid the cost and time involved in the
probate process – for married couple or business partnerPeople can sell their share of the property. If one
transfers or sells the interest in the land before death, it severs survivorship rights (i.e. ends joint tenancy)
Joint tenancy with survivorshipPrimary advantage
Automatic transfer of ownership upon the death of one of the joint tenants
Does not go through probate Avoid time and expense
Do not avoid the federal and state taxes – the value of the transfer counts as part of the “estate” – so unless to a spouse would owe taxes on $ above that excluded
DisadvantagesCo-ownership of assets – if difference of opinion over
management – “fight”Unintended consequence as to who inherits the property upon
death (children and other heirs might be disinherited)Wills have no legal effect over this particular property – the
type of ownership dominates any wishes expressed in the will
Tenancy by the entiretyReserved for husband and wife – own the
property as a unit rather than equal sharesMust be marriedRight of survivorshipOne spouse can not unilaterally sever the tie.Can foreclose only it both spouses signed
loan documents – some states permit banks to foreclose on ½ interest of debtor spouse
Both must execute sales agreement to sell property
Can check
what your
state allo
ws
For all co-tenants: tenants in common; jt tenants and tenancy in the entirety
All tenants have a right to revenue minus costsDon’t owe rent to another “tenant” unless one
restricts the other from entry.Co-tenants must pay pro-rata share of taxes and
mortgage payments (due or past due) unless only one of the “tenants” uses property
Can not collect for repairs or improvements from other co-tenants without agreement
Partition: Can petition a court to partition propertyDivide in parcels of equal value or money paymentSell the parcel and divide proceeds
Common Law StatesProperty is owned by the spouse who paid for
it or inherited it – can sell it or pass it on (can’t comingle)
In case of divorce, wife’s and husband’s right have become somewhat like community property states.
Creditors must exhaust separate assets before community assets – can’t take non-debtor spouse’s separate assets.
Can look it up – there is a map athttp://www.bankrate.com/brm/news/pf/20060322a1.asp
Should check
what your
state allows
Business Organization StylesSole ProprietorCorporationLimited Liability CompanyPartnership
I find this section does not work well – could be it is at the end of the evening so people’s brains are tired. Or too many “bad” words. Haven’t found the right way to do it – but we can discuss.
Sole Proprietor Business and person the “same” in the eyes
of the lawAdvantages:
Do not have to file incorporation papersEasier decision making – no partnersDo not pay corporate tax so no risk of double
taxationSimpler accounting – file a schedule C rather
than business tax formsCan buy health care for self-employed persons
Sole proprietorDisadvantages:
Personal assets are at risk of seizure if business debts are not paid
Unlimited liabilityNo sharing of the riskPay personal income tax – deductions?Can not sell shares in the businessIf owner dies, the business ceases to exit; can’t
sell the value
CorporationAre like a separate person
Can bring lawsuits, buy and sell property, sign contracts, are taxed, can even commit crimes
Owned by shareholdersManaged by board of directors
AdvantagesProtects owners from personal liability for corporate
debts and obligationsPerpetual life – continues past the death of the owner(s)Can sell shares of stock – if need capital – selling
ownershipCan transfer ownership through transfer of securities
CorporationUnlimited lifeCorporation can have better tax benefits under
certain circumstance“c” corporations may be subject to ‘double taxation’
on profits; corporation pays taxes on income and then shareholders pay taxes on dividends
DisadvantagesRequire annual meetings and other formalitiesMore expensive to set up and more paperworkRequire periodic filings with the state and annual
feesTakeovers?
Partnership Advantages
Easy and inexpensive to startAre not required to have annual meetings or formalitiesOffer favorable taxation to most smaller businessDo not have to pay minimum taxes that are required of
LLCs and corporationsDisadvantages
All ownership subject to unlimited personal liability for the debts, losses and liabilities of the business
Individual partners bear responsibility of the actions of other partners
Poorly organized partnership and oral partnerships can lead to dispute among owners
PartnershipIf a husband-wife partnership and if filing
married filing jointly on tax return can now elect to be taxed as a qualified joint venture.
Sole proprietor, farm family partnerships and corporations may use the cash method of accounting.Corporations can only use cash method if they
have average annual gross receipts under $5 Million for the prior 3-taxable years
Limited Liability CompanyHybrid business formCombines the liability protection of corporation
with tax treatment and ease of administration of a partnership
Advantages:No burdensome formalityNo annual meetings/require few ongoing formalitiesOwners protected from personal liability for
company debts and obligationsPartnership-style, pass through taxation – favorable
to many small business
Limited Liability CompanyDisadvantages:
Harder to raise moneyHarder to eventually go public if one wants –
and sell sharesLess legal precedent – thus hard to know what
could happen under certain scenarios but becoming more reliable
More expensive to set up than partnershipsPeriodic filing with the stateAnnual fees
Comparison of Business types
CorporationLimited Liability
Company Partnership Sole Proprietorship
Ease of setup More Difficult More Difficult Less Difficult Easy
Initial costs such as filing fees, state fees, and legal
fees High High Medium to high Low
Owners are personally protected from liability
for the organization's debts Yes Yes
No, except in limited partnerships No
Entity must make annual or biennial state filings Yes Yes Almost never No
Entity must pay annual or biennial state sees Yes Yes Almost never No
Annual meetingsRequired by law, except for close corporations
Not required, but recommended
Not required, but recommended No
Formalities required in connection with voting
and internal governance Yes Relaxed formalities Relaxed formalities No
Can Exist Indefinitely Yes Yes Yes* No
Can Issue Shares or Interest in Exchange for
Cash Yes Yes Yes No
CorporationLimited Liability
Company Partnership Sole Proprietorship
Appropriate Entity to Raise Venture Capital Yes No No No
Appropriate Entity to Become Publicly Traded Yes No No No
Entity Can Elect To Be Taxed as a Corporation Yes Yes No No
Entity Can Elect To Be Taxed as Partnership Yes Yes Yes No
Can choose fiscal year other than that of its
owners Yes No No No
Owner can mingle personal and business
assets and funds No No No Yes
Registration required in foreign states in which
company does business? Yes YesNo, except for limited
partnerships No
State laws governing entity are uniform
throughout nation? Laws vary widely Laws vary moderately Laws vary very little Laws vary very little
Maximum Number of Members
Unlimited, but S Corp. maximum is 75 owners Unlimited Unlimited by law** One
*Partnerships can, conceivably, have unlimited life if new partners are admitted into the partnership as old partners exit the partnership. **While general partnerships are not limited in size by operation of law, prudence dictates that they not have too many partners. Because each partner is liable for the acts of the other partners acting on the partnership's behalf, a large general partnership is not wise. Any general partnership of more than ten persons is likely to become difficult to manage.Source: http://www.learnaboutlaw.com/newsletter/corporation_vs_llc.htm, 2007