Levi, Donald R.

Mallett, James I.

Prater, Tom E.

Texas A&amp;M Repository

BUSINESS PLANNING/d - '" -;>~My/...-or:.L-1342FAMILY PLANNINGESTATE PLANNING - EMPHASIS ON PARTNERSHIPTom E. Prater, James I. Mallett and Donald R. Levi*Two of the more important aspects of estateplanning for farmers and ranchers are businessplanning and family planning.The business management facets of estate planninginclude such items as (I) continuity of management,(2) high-quality management, (3) continuous finan-cial flow and (4) continuity of life of the business.TYPES OF PARTNERSHIPSContinuous management is possible only to theextent it is built into an estate plan. If the businessis operated as a sole proprietorship, then contingentplans for operating the farm business by the surviv-ing spouse and/or children are only as sound as thetrust, will or other legal instrument in which theyare set out. If a trust has been established, then theability of the designated individual or corporatetrustee sets the level of management competencyas well as its continuity.A parent-child partnership can give strength toa high-level, continuous management system bygradually developing the child's managerial abili-ties. But this continuous management must be builtinto the business and owner estate plans. It isimportant that the partners consider such items asownership of properties and legal transfer instru-ments and procedures to be followed in case of thedeath of one of the partners. More specifically,partners need to make sound financial plans andinsert specific provisions in their partnership agree-ment to allow the survivor of the partnership tocontinue if desired.In addition to sole proprietorships and partner-ships, families may also operate their farms orranches as corporations. The corporate form ofownership may foster more optimum resource allo-cation to various interested family members undersome ~ircumstances. It may facilitate a planned andorderly transfer of the farm or ranch business as aneconomic entity over time as the family moves in*RespectiYely, Extension economist-management; state Exten-sion community resource deYelopment program leader; andassociate profes;:;or of agricultural law, The Texas A&MUniver~ity System.and out of the business in line with their life cycle.Their operation in the business management facetof estate planning is discussed in more detail inpublication L-1341, Estate Planning - Emphasis onCorporations (Texas Agricultural Extension Serv-ice), available at your county Extension office. (Soleproprietorships, partnerships and corporations arecompared on the brief summary chart found at theend of this publication.)Some of the basic questions which may be askedabout partnership include:1. What is a partnership?2. How does the partnership operate?3. What are the advantages and disadvantages?4. How does the partnership compare with sole proprie-torship and with a corporation?5. Does the parent-child partnership have a place forTexas farmers and ranchers?6. What are the steps in formation of a parent-childpartnership?7. What will be gained and what type of partnershipshould it be?What Is a Partnership?Sometimes a lease agreement or an informal asso-ciation together in business can unintendedly resultin the legal erection of a partnership. Since thismay extend one's business liability further thanwas planned, it is important to ask what a part-nership is.While only an attorney can advise about specificsituations, a general partnership can be thought ofas an association of two or more persons to carryon a business for a profit. Each partner has theopportunity to contribute to the management and/or capital of the partnership (such as money, prop-erty, labor or skill), and each shares in the profitsor losses according to the partnership agreement.Liability for obligations and liabilities of the part-nership extends to all personal assets of all generalpartners.Economic growth of a farming or ranching busi-ness may be accelerated or enhanced by combiningassets of two or more individuals in a partnership.However, the stability of the firm may Ie in ques-tion because of the possibility of willful terminationby a partner or involuntary terminat~n caused byTexas Agricultural Extension Service - The Texas A&M University System - Daniel C. Pfannstiel, Director - College Station, Texasthe death or retirement of a partner. Involuntarytermination may be guarded against through spe-cific provisions in the partnership agreement whichallow the partnership to continue with the estate asa partner or permit the surviving partner to buyout the interest of the deceased or retiring partner.A partnership may have greater access to equitycapital from retained earnings or by contributionsof capital by new or existing partners from non-partnership sources.Specialization of individual effort, division ofresponsibility and combinations of special talentsamong the partners can be a real advantage asso-ciated with partnership management. Also, withproper planning, labor stability may be built intoa partnership.limited PartnershipA second type of partnership is a limited partner-ship. A limited partnership is a special form ofbusiness authorized under state law which permitsa person to invest in a business without incurringthe unlimited liability associated with sole proprie-torships or general partnerships. Rather, his per-sonal liability for partnership debts and obligationsis limited to his contractually required contribu-tions to the partnership.A limited partner may contribute cash or otherproperty but no services or management to a lim-ited partnership. A person can be both a generaland a limited partner at the same time, and alimited partner can loan money and transact otherbusiness with the partnership. The limited partneris not liable as a general partner unless he takespart in the management and control of the businessor otherwise violates some prohibition of state law.General partners in a limited partnership incur allthe responsibilities associated with a general part-nership as discussed above.A limited partnership can be formed by two ormore persons, for any type of business which canbe operated as a general partnership (except bank-ing or insurance), by filing a signed and sworncertificate with the Secretary of State and thenpaying the required filing fee.SOME PARTNERSHIP CONSIDERATIONSSome of the established principles of law to whichpartnerships are subject are:1. Death dissolves the partnership. For this reason, estateplans for transferring property must be so formulatedthat continuance of the business is assured. This meansthe partnership agreement should be written andplanned in advance.2. Each partner is subject to liability for all debts andobligations arising in the partnership business.3. Partnerships only file an information income tax return,with each partner reporting his share of partnershipprofits or losses on his personal income tax return.4. Property can be owned in the name of the partners.5. A majority of the partners control the business de-cisions.6. Profits and losses are divided in accordance with thespecified agreement.Some of the characteristics used to determinewhether a particular arrangement legally consti-tutes a partnership are:1. Owning assets together.2. Operating under a firm name.3. Joint bank account.4. Single set of business records.5. Both parties participating in management.6. Sharing profits.7. Sharing losses.An attorney can provide advice about whethera particular arrangement constitutes a partnership.This determination may be critical in cases where,for example, an agreement might be construed tobe either a lease or a partnership, because theliability would be expanded if a partnership wereunknowingly created.Parent-child partnerships are often created forone or more of the following purposes:1. To provide for the transfer of the farm and ranchoperation from one generation to the next.2. To provide a way for the operation to remain a pro-ductive, efficient unit.3. To allow the child, who often has limited capital,entry into the farm business.4. To allow an orderly shift of the operation from parentto child, with a shift of decision-making responsibilityand capability.5. To allow the parent to move into retirement or semi-retirement while still retaining some responsibility,income and interest.Some aspects necessary to make a parent-child agree-ment work successfully are:1. A desire to share the farm or ranch business (no forcedentries ).2. Income return sufficient for two families, with anequitable division of profits. The division of returnsshould be prearranged by agreement.A good rule to follow is the division of returnsbased on the percent of value contributed by labor,capital and management:• Labor may be skills, talent, and knowhow.• Capital may be real estate, machinery, livestock,dollars, etc.• Management may be responsibility, control anddecision-making ability.In some cases proportionally more weight could beassigned to one of the partners in one of the resourceareas. For example, the parent might have relativelymore capital than the child, but the child could offsetthis by providing more labor, or perhaps by otherspecial skills or knowhow. Or one partner might takeheavier management and operational responsibility inorder to equalize input value. In any event, such ar-rangements should be specifically set out in the partner-ship agreement.3. Legal arrangements should be spelled out and carriedout with respect to the division of property, equipment,animals etc., in order to have a proper settlement incase of voluntary or involuntary withdrawal of one ofthe partners.4. Records should be kept in a definite correct, orderlymanner and should be available for inspection by anypartner.5. Agreements need to be spelled out, and a written planis desirable. Specifically, the written agreement shouldinclude:• Statement of the contribution of each partner to thebusiness.• Definition of expenses and income.• A yearly division of profits and income, with periodicwithdrawals permitted to meet family cash flowrequirements.6. A separate home is essential when the child is married,and the families need to be compatible.7. Other children who are not partners need to under-stand the business in order to avoid family squabblesat a later date.Mutual confidence and trust of partners is veryimportant in a successful partnership. All partnersneed to work closely on decisions and plans and toreview such plan periodically.There are some disadvantages in having a part-nership. Each member is subject to liability for alldebts arising in the partnership business if thepartnership as ets are not sufficient to coyer them.In addition, each partner is liable for wrongful acts(torts) arising in connection with the partnershipbusine s. An automobile accident negligently causedby one hauling grain for the partnership would bean example.To illustrate liability for debts, one partnermight buy a new tractor for the use of the partner-ship without the consent of the other. Both partnersmay be held liable if partnership assets are notsufficient to pay the debt. Legally, they are said tohave "joint and several" liability.However, it should be pointed out that theexistence of this personal liability is not very impor-tant in most parent-child arrangements where essen-tially all assets of both partners are invested in thebusiness because the business and personal liabili-ties then become synonymous. Personal liability isjust important to those who have other, extensivenonpartnership assets which they wish to insulate.Definite arrangements need to be spelled out forprotection in these cases.Before creating either a partnership or a corpo-ra tion, the individual should make sure the formchosen can help meet the desired financial, business,and estate planning objectives. Discussion withothers already in partnerships or corporations willhelp to bring out the major problems they experi-enced as well as the major benefits they enjoyed.This publication sets out some items to consider,but each individual should be cautious and as well-informed as possible. For a more detailed discussion,see publication l\IP-1159, Organizing the TexasFamily Fa1"m 01' Ranch Business as a PaTtnership(Texas Agricultural Extension Service), available atyour county Extension office.Corporations can provide opportunities for estatetransfers that neither the sole proprietorship orpartnership allow. These are discussed in publica-tion L-1341, Estate Planning - Emphasis on COTPO-rations (Texas Agricultural Extension Service),available at your county Extension office. A com-parison of sole proprietorships, partnerships andcorporations is provided in the following summarychart on the back of this publication.COMPARISONS OF FARM AND RANCHBUSINESS ORGANIZATIONSCategoryOwnershipLife of the organizationLiabilityCapitalManagement decisionsand limits on businessTaxesTaxes (estate)Sole ProprietorSingle individualDeath terminates andthere is liquidation;there may be transferof intent during lifeProprietor liablePersonal investments;loansProprietor fullyresponsibleTax on income ofindividual and relatedtax lawsBased on value ofproprietor's estate, bothseparate and his or hercommunity part ofproperty and assetsPartnershipTwo or more individualsBusiness terminates withdeath of partner or at agreedtime; sale to survivingpartner or partners;liquidationPartners are liable for all ofpartnership obligationsPartner contributions; loansAbility and agreement ofpartnersEach partner pays his or herown income tax based on hisor her income and relatedtax la'.~Ts at tax tim~:partnership does fil~ IRSInformation ReportBased on each partner'sestate value, considering notonly all separate property,but also his or her share ofcommunity property; his orher part in the partnershipmust be included in theaboveCorporationA legal separate entityseparate from shareholders(but made up of individualstockholders)Forever, or for fixed numberof years; in case of death,stock passes by will orinheritanceCorporation is liable forobligations; (in some cases,individual stockholders maybe asked to sign separatepayment notes)Shareholders' stock, sale ofstock and loansDirectors' decisions, Articlesof Incorporation and TexasLawRegular Corporation:Corporations file a tax returnand pay tax on income;salaries to shareholders andemployees deductible;Rate: Conform to 1976legislation.Tax-Option Corporation:Each shareholder reportsshared income, operatingloss and long-term capitalgain; IRS Information Reportfiled by corporationBased on value on sharesof stock and other assets,including other separate andshares of communitypropertyEducational programs conducted by the Texas Agricultural Extension Service serve people of all ages regardless of socio-economic levels, race, color, sex, religion or national origin.Cooperative Extension Work in Agriculture and Home Economics, The Texas A&M University System and theUnited States Department of Agriculture cooperating. Distributed in furtherance of the Acts of Congress of May 8,1914, as amended, and June 30, 1914.15M-9-76, Reprint AECO 6

Estate Planning--Emphasis on Partnership.

https://oaktrust.library.tamu.edu/bitstream/1969.1/166587/4/1342/Leaf1342.pdf

Estate Planning--Emphasis on Partnership.

Abstract

Similar works

Full text

Available Versions

Texas A&M Repository

Estate Planning--Emphasis on Partnership.

Abstract

Similar works

Full text

Available Versions

Texas A&amp;M Repository

Texas A&M Repository