Family Business Matters 07/01 10:26
The Importance of Structure
Spend time on one of the variables in the operation over which you have
By Lance Woodbury
DTN Farm Business Adviser
During the course of working day in and day out with family farms and
ranches in transitions, we spend significant time talking about structure and
strategy. Structure has to do with the way the farm or ranchland, the
equipment, livestock and other assets are owned today and how they might be
owned tomorrow. Strategy has more to do with how we might improve or grow the
business so that it remains viable for the future. Both topics are critical to
the success of the family business but need to be addressed in a certain order.
Here, I will focus on business structure, while in the future, I will focus on
The ownership structure is important to get right for several reasons.
First, agriculture businesses are capital intensive. If assets are not placed
in the right type of entity or are not owned by people who make good partners,
money can end up trapped in the business, used on tax payments or, ultimately,
used on partner buyouts instead of improving or growing the enterprise.
Second, agriculture -- and land in particular -- is for many a generational
business. Unlike a publicly traded stock or other liquid assets, people often
intend to own land over decades or even centuries. Parents often gift land to
their children or grandchildren. Several families jokingly tell me that the
words "sell land" are never to be spoken in their presence. My point is that if
you don't have a thoughtful, long-term approach to the ownership structure of
your land, you may end up spending hard-earned money on dismantling what took
several decades and generations to build.
Third, agriculture businesses can be complicated. Utilizing government
programs like crop price subsidies, crop insurance, disaster aid and
conservation programs require a sound business structure with documented
participation by owners. Tax strategies involving various expense deductions,
income deferrals and depreciation strategies can make it challenging to know
where you stand regarding your financial performance. In short, a structure
that doesn't address and make sense of these unique dynamics can put the
business, and its owners, at risk.
A WAY FORWARD
One way to approach structure is to first recognize the benefits and costs
of what you have in place. Sitting down with your accountant and an attorney
together and understanding your structure and its pros and cons may take an
investment of several hundred dollars or more, but the return can be far
greater in terms of saving or protecting capital for the future.
As you discuss your structure, there may also be an opportunity to
understand your family's or partners' expectations about the future. Does
everyone want to own the business in the future? Does anyone want to exit? What
financial expectations does everyone have? Do partners expect dividends or
distributions? Are people planning to gift their ownership to their children?
These kinds of questions foster long-term discussion and planning that can help
the family prevent future conflict.
When you combine a working knowledge of your current structure with your
family members' or partners' thoughts and goals for the future, you end up with
a chance to make deliberate and thoughtful changes or modifications. Too often,
these questions are asked after a taxable event or a tragic accident, or under
the gun of a government deadline, and opportunities to improve or capture more
benefits are missed.
Find the time to understand and manage your structure, which is among a few
variables over which family agriculture businesses have some control.
Structuring your business properly and occasionally reevaluating your approach
can contribute significantly to achieving your family business goals.
Editor's Note: Write Lance Woodbury at Family Business Matters, 2204
Lakeshore Dr., Suite 415, Birmingham, AL 35209, or email firstname.lastname@example.org.
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