Boldt, Carlisle & Smith, LLC (541)

(1)

Is a LLC or FLP Right for You?

Clint Bentz, CPA, CMA Clint Bentz, CPA, CMA

Boldt, Carlisle & Smith, LLC (541) 928-6500

(2)

Five Alternatives for Property

y Turn it into money (redeploy capital).y ( p y p ) y Give it to charity (partially or entirely). y Subdivide it (fragmentation)

y Subdivide it (fragmentation).

y Give it to one child (European model).

Gi i ll hild ( hi )

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Problems with

Problems with Owning Property

Owning Property

Problems with

Problems with Owning Property

Owning Property

y How to manage multiple owners?

y Lack of common vision & interest/ability y Who manages & how decisions madeo a ages & ow ec s o s a e

y Dealing with homesites & dwellings y Legal liability of undivided owners y Legal liability of undivided owners y Creditor and divorce problems y Partition actions – forced sale

y How to create flexibility to deal with future

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An Intergenerational Affair

gg

Plantingg Harvest 1st Generation d 2nd Generation 3rd Generation 4th Generation 5th Generation

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The Year 1909

y Average Life Expectancy: 47 yearsg p y y y 14% of homes had a bathtub

y 8% of homes had a telephone y 8% of homes had a telephone

y Only 8,000 cars and 144 miles of paved

roads in the US roads in the US.

y Tallest structure: Eiffel Tower @ 990’ y Average wage: 22 cents/hour

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The Year 1909

y No income tax, gas tax, or sales tax y Over 95% of births were at home

y 90% of doctors had no college degreeg g y Women washed hair once/month

y Five leading causes of death:g

◦ Pneumonia & influenza

◦ Tuberculosis

◦ Diarrhea

◦ Heart Disease

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The Year 1909

y American flag had 45 starsg

y Population of Las Vegas, NV: 30

y 6% of Americans graduated from HS y 6% of Americans graduated from HS y 20% of Americans illiterate

N d l d b i

y No crossword puzzles, canned beer or ice

tea (not invented yet)

y No Mothers or Fathers Day

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The Year 1909

y Marijuana, heroin & morphine sold over j p

the counter at drug stores

◦ “Heroin clears the complexion, gives buoyancy to p , g y y the mind, regulates the stomach and bowels and is, in fact, a perfect guardian of health.”

y 18% of households had at least 1 full time

servant

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The Year 1909

y Top 5 States by Population:p y p

◦ New York (9.1m) ◦ Pennsylvania (7.6m)y ( ) ◦ Illinois (5.6m) ◦ Ohio (4.8m)( ) ◦ Texas (3.9m) y California is 12th behind NJ at 2 4m y California is 12 behind NJ at 2.4m

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The Year 2010

The Year 2010 vs

vs 1910

1910

The Year 2010

The Year 2010 vs

vs 1910

1910

y US Population: 310m vs 92million p ◦ % living in rural: 16% vs 54%

y Number in rural: 50m vs 50mNumber in rural: 50m vs 50m

◦ 2.5m farmers, 10m woodland owners

y Ford Diesel Bell Edison Goodrich y Ford, Diesel, Bell, Edison, Goodrich,

Westinghouse vs Gates, Jobs, Buffet

y What will the world be like in 2110? y What will the world be like in 2110?

◦ NEED TO STAY FLEXIBLE

P l d i !

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FLP’s &

FLP’s & LLC’s Solve Problems

LLC’s Solve Problems

FLP s &

FLP s & LLC s Solve Problems

LLC s Solve Problems

y Provides governance & protection y Managing owners? Partner meetings.

y Common vision? Operating agreement.Co o v s o ? Ope at g ag ee e t. y Abilities/interest? GP/Managers.

y Decision making? Voting rights y Decision making? Voting rights. y Legal liability? Limited liability.

y Divorce/Creditors? Partition/buy-sell. y Homesites/dwellings? Leases.

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Terminology

y Limited Liability Company (LLC)

M /N M M b

◦ Managing/Non-Managing Members

y Family Limited Partnership (FLP)

◦ General/Limited Partners

y Operating / partnership agreement y Flow-through (partnership) taxationg (p p) y Majority-in-interest vs majority

y Voting rights vs management rights y Non-voting interests

y Supermajority requirements

E i i h i i h

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FLP’s & LLC’s

FLP s & LLC s

y Partnership taxation rulesp y Defines “rules of the road”

◦ Operating agreementOperating agreement

◦ Buy-sell agreement

◦ Voting rightsVoting rights

◦ Management rights

◦ Admittance/Transfer/Withdrawal rights

y Power of sharing ownership

C ti t & l it / t

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FLP’s & LLC’s

FLP s & LLC s

y Partnerships are contracts - flexible y Separate ownership from control

◦ General partners / Managers

D d l f h

x Day to day control of entity, contracting rights

◦ Limited partners / Non-managers

x Sell substantially all the assetsSell substantially all the assets x Amend agreement

x Dissolve entity

Ad it t / b

x Admit new partners/members x Hire/Fire GP/Managers

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Why Use

Why Use FLP’s & LLC’s?

FLP’s & LLC’s?

Why Use

Why Use FLP s & LLC s?

FLP s & LLC s?

y Governance system for family & property y Liability protection – accidents, lawsuits y Asset protection – creditors, out-lawsp , y Keep assets in family by restricting sale y Ease & safety of gifting (need valuations) y Ease & safety of gifting (need valuations) y Transfer ownership while retaining some

control (IRC 2038 issues) control (IRC 2038 issues)

y Discounted estate value if done correctly

Intan ible ers nal r ert

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Discounts

y Minority Discount (lack of control)y ( )

◦ Voting rights?

x Sell substantially all of the assets

x Removal of General Partner/Manager x Amend agreement

x Admit new partners

x Continuation and dissolution

Di ib i d li id i ih ?

◦ Distribution and liquidation rights?

◦ How large a vote is needed to control?

S i i

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Discounts

y Marketability Discount (lack of market)y ( )

◦ Not publicly traded – blue sky registration

◦ Restrict ownership in buy-sell agreementp y g

◦ Unanimous vote to admit new partners

◦ “Substitute” Limited Partner/Member

◦ 30 year term (FLP)

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FLP

FLP Mechanics

Mechanics

FLP

FLP Mechanics

Mechanics

Family Woodland Family Limited Partnership Parents Parents/Children 1% GP Interest “Control” 99% LP Interest “Own”

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LLC

LLC Mechanics

Mechanics

LLC

LLC Mechanics

Mechanics

Family Family Woodland Limited Liability Company P t & Child Parents & Children Managers/Members

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Income Versus Cash

Stingy Partnership $10 000 Income $10,000 Income $4,000 Distributed Partner 1 (50%) $5,000 Income Partner 2 (25%) $2,500 Income Partner 3 (25%) $2,500 Income $5,000 Income $2,000 Cash $2,500 Income $1,000 Cash $2,500 Income $1,000 Cash

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Accounting Issues

y Bookkeeping requirementsp g q y Multiple tax returns

y Business purpose required y Business purpose required y Operated as a business

Di ib i / b

y Distributions to partners/members y KISS - managing complexity

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LLC

LLC vs

vs FLP

FLP

LLC

LLC vs

vs FLP

FLP

y Both are partnerships for tax purposes y Called Members, not Partners

y Member/Manager managed vs GP/LPg g y No general partner problem for LLC y No 500 hr LP problem in LLCp

y Unlimited life (LLC) vs 30 years (FLP) y Some states tax LLC’s differentlySome states tax LLC s differently

y State law (LLC) vs uniform laws (FLP) y Less history (LLC) for liability shield y Less history (LLC) for liability shield

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Questions?

y Clint Bentz, CPA

y Boldt, Carlisle & Smith, LLC y 321 First Ave E Suite 2A

y 321 First Ave E Suite 2A y Albany, OR 97321

(541) 928 6500

y (541) 928-6500