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If you are a sole proprietor or part of a business partnership, you and the business are essentially the same entity. As a result, any debts that are incurred by the business are considered to be your personal debts. Plus, if you have a partnership, your personal assets would be in play if your partner or one of your employees was to be accused of negligent actions that caused damages. To protect your personal assets, you could form a limited liability company. Generally speaking, if the business was to fall into debt and face legal actions from creditors, your home, your personal bank accounts, and other property that you own outside of the limited liability company would be protected. Your property would also be out of play if the business partner, the business itself, or someone that works for you was the target of a negligence lawsuit. A corporation would protect assets in this manner. However, establishing a corporation can be complicated and expensive, and there is a lot of paperwork involved. You also have to hold annual shareholder meetings, and there are fees that must be paid to the state. With a limited liability company, things are much simpler, so it will usually be the right choice for smaller businesses. There are tax advantages when you establish a limited liability company. You don’t have to pay personal taxes and separate business taxes. A limited liability company owner will enjoy “pass-through” taxation, so you can claim LLC profits and losses on your personal tax returns.
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The family limited partnership can be a very useful asset protection tool for some people. If you were to establish a family limited partnership, you would be the general partner. Members of your family would be added to act as limited partners. You as the general partner would have sole decision-making authority with regard to the actions of the partnership. We will provide a hypothetical example to explain the advantages of a family limited partnership. Let’s assume that you are a real estate investor, and you own three different apartment buildings. You could convey each apartment building into a separate family limited partnership. If an individual is injured in one of the buildings, and they want to sue someone for negligence, they would have to go after the owner, which would be the family limited partnership. Your personal property, and the other two apartment buildings, would be completely out of play. Plus, you can leverage your interests in the apartment buildings to limit the equity, so there would not be much to take. There is asset protection in the other direction as well. If you or any of the general partners are personally sued, assets in the partnerships would be protected. In addition to the asset protection advantages, family limited partnerships can facilitate asset transfers among members at a transfer tax discount. This can be a huge benefit if you are exposed to the estate tax.
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Yes, many people utilize buy-sell agreements. With the agreement called the cross-purchase plan, the partners in the business determine the value of a share. Each partner takes out an insurance policy on every other, and the total will equal the value of a share in the business. When one partner dies, the insurance policy proceeds will be used to purchase the share that was owned by the deceased partner from his or her family.
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The answer to this question is yes, if the value of the farm exceeds the amount of the estate tax exclusion. At the present time, the federal estate tax credit or exclusion is $11.18 million. This is the amount that can be transferred before the estate tax would kick in. Here in New York where we practice law, there is a state estate tax in place as well, and at the present time, the exclusion is considerably lower than the federal exclusion. Fortunately, there are estate tax efficiency strategies that can be utilized to mitigate your exposure if you own a great deal of valuable land.
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