Glossary

Accountant / Certified Public Accountant (CPA)

A professional who is trained in the recording and reporting of financial transactions, generating financial statements, and giving recommendations about financial decisions. A CPA is an accountant who has satisfied the requirements necessary to become a certified public accountant.

Administration of the succession or estate plan

Ensuring that the actions needed for the maintenance and execution of the succession or estate plan are accomplished. Administration may include keeping appropriate financial or business records, transferring ownership interests as agreed upon, and having regular meetings to update and execute the plan as needed.

Agent

One who is authorized to act on behalf of another (the principal). For example, in a general partnership, all partners are authorized as agents to make business decisions, enter contracts, and the like on behalf of the business, which binds all other partners.

Appraisal

The determination of what constitutes a fair market price for an asset, typically calculated by professionals in the field based on the sale price of similar property or income-generating potential of the property.

Articles of organization

Document filed with the secretary of state when forming an LLC to legally register the business entity with the state. Includes basic information about the LLC: company name, duration, principal office street address, registered agent to receive legal notices, management (member managed or manager managed), name of organizer(s), owner(s), manager(s).

Assessed value

The value that a taxing authority gives to property to which the tax rate is applied.

Assumed business name (d/b/a)

The name under which a business operates or is commonly known; “doing business as” (d/b/a).

Attorney

A professional who is authorized to practice law in the state.

Bequest

Giving property by will; the property that is given via a will.

Business assets

Items or property of value owned by the business for a business purpose.

Business balance sheet

A financial statement that lists the assets, debts, and owners’ investment as of a specified date.

Business entity or organization

An entity recognized by the law to have legal rights and responsibilities, also known as a “legal person” that can own assets, enter contracts, sue, be sued, etc. A business entity is created by one or more natural persons to carry on a business that defines the owners, the relationship between owners and managers, tax status, and the relationship to others who have dealings with the business. If the business entity has the characteristic of limited liability, the entity must be created by registration with the state, and judgments or debts incurred by the business can only be recovered from business assets—for example, sole proprietorship, general partnership, LLC, C corporation, S corporation, B corporation.

Business succession

The transfer of ownership and/or control to new people who have ownership interests and/or management control in the business.

Business viability

The ability of a business to pay its debts as they come due and continually make a profit year after year.

Buy-sell agreements

A legally binding contract that stipulates how a business owner’s interest may be bought and sold if that owner dies or leaves the business. Typically, the buy-sell agreement requires the ownership interests to be sold to the remaining business owners or the business must buy back the interests.

Capital gains/losses

Capital gain is the increase in the value of a capital asset (investment or real estate) that gives it a higher value than the purchase price. A capital loss is the decrease in value compared to the purchase price. The gain/loss is not realized until the asset is sold. A capital gain/loss may be short term (one year or less) or long term (more than one year) and must be claimed on income taxes.

Capitalize/capital contribution

Giving the LLC ownership over assets (property, money, accounts) in order to carry out the business purpose. The owners of the LLC make a capital contribution when they put business assets that they own into the LLC’s name, and in return, the owners get membership interests in the LLC.

Closely held business

A business entity with a limited number of owners, typically family members in farm businesses. Rules about buying and selling ownership interests ensure that the business cannot be owned by anyone outside of the family (see buy-sell agreements).

Comparable market analysis

Estimate of fair market value of property through examination of recent sales prices or rental values of similar properties.

Contract

An agreement between two or more parties creating obligations that can be enforced through the judicial system.

Corporation (C corporation, S corporation, B corporation)

A type of business entity that is established according to the laws of the state and is taxed under the Internal Revenue Code according to the type of corporation that is established. Corporations have limited liability, have ownership that is separated from management, issue stock/shares, exist in perpetuity, and operate as a “legal person” (i.e., can own assets, enter contract, sue and be sued, etc.).

Cost of production / cost of goods sold

All direct costs incurred in order to produce the products that you sell, such as equipment, seed, irrigation, chemicals, labor, and so on.

Deductible

In an insurance contract, the amount of money you pay in a claim. The insurance pays any remaining losses after the deductible has been met.

Distributions

The profits generated by the LLC that are designated for owner-members based on their percentage ownership interest in the LLC. The LLC may choose to retain profits rather than pay them out to owners, but the amount of distributions is attributed to the owners and is reported on owner-member tax returns.

Double taxation

Tax treatment of a C corporation, which pays taxes on corporate profits based on the corporate tax rate, and then the remaining profits distributed to owners are taxed as dividends on owners’ personal tax returns.

Easement

An interest in land owned by another person, consisting of a right to use or control the land for a specific limited purpose. For example, in a conservation easement, the easement holder (land trust or government) has a right to forbid certain practices on the land while the landowner can still use the land for other purposes.

equitably

here is another term

Equity position

An investment made in a business by a third party in exchange for some ownership interest. Giving an equity position includes the third party in ownership of the business, which might not be in the best interest of the business, succession, or estate plan.

Estate planning

The preparation for the distribution and management of a person’s estate at death through the use of wills, trusts, insurance policies, and other arrangements.

Estate tax

A tax levied on the net value of the estate of a deceased person before distribution to the heirs.

Fair market basis or value

The amount for which property would be sold in a voluntary transaction between a buyer and seller, neither of whom is under any obligation to buy or sell (arms-length transaction). Various factors can have an effect on the fair market value of real estate, including the uses to which the property has been adapted and the demand for similar property.

Family successor

A family member who plans to take over farm management as the principal operator when the current generation retires or dies.

Farm or farmland

Operation or land that is engaged in producing agricultural products for sale. Includes crop production, seed production, nursery production, ranching or other animal husbandry, apiculture, aquaculture, and so on.

Farm successor

Person who plans to take over farm management as the principal farm operator when the current generation retires or dies. The succession could be a family member (family successor) or from outside the family (nonfamily successor).

Financial planner

A qualified investment professional who helps individuals and businesses meet their long-term financial objectives by analyzing their goals, risk tolerance, stage of life, and so on. They assist with investment strategies, retirement planning, tax planning, risk management, and/or estate planning.

General partnership

A business entity in which two or more people operate a business for profit and agree to share all profits and losses and financial and legal liabilities. Partners are all agents for the business and can bind the business to contracts, loans, or legal judgments without the consent of the other partners. A general partnership does not have limited liability, so personal assets of all the partners can be claimed to satisfy judgments or debts against the business.

Generation (Gen) 1

The “grandparent” generation in the family who managed the farm and may still own land or assets. Typically retired from daily farm management (though not always).

Generation (Gen) 2

The “parent” generation that is at or nearing retirement age and is typically the active farm manager.

Generation (Gen) 3

The “child” generation that is in early adulthood and beginning careers either on or off the farm.

Gift/gifting program

To transfer ownership of an asset without a fair market exchange. LLC membership interests can be transferred (gifted) to other family members during life for estate tax planning purposes.

Heir

A person who is entitled to receive a deceased person’s property due to family relationships under the state’s laws of intestacy, which govern the distribution of an estate when there is no will. In common use, can also refer to a person who inherits under a will.

In perpetuity

Forever; with no defined end time.

Insurance policy

A contract between an insurance company and an insured person or business. The insured person or business pays premiums for coverage, and the insurance company pays any losses that are covered in the policy. It describes the specific risks covered, exclusions, duration of coverage, amount of premium, and deductibles, if any.

Interest(s)

An ownership stake in an LLC. Refers generally to ownership stakes and specifically to the percentage of profits that is attributed to individual owners that determine voting rights, distributions of profits, and other aspects set out in the operating agreement.

Lease

A contract in which an owner of real property gives another person or business the right to possess and use the property in exchange for rent payments. A written lease should contain all conditions for use the land and the rights and responsibilities of tenants.

Lien

A legal right or interest defined by state law that gives a creditor an interest in a debtor’s property until the debtor pays the debt.

Limited liability

A characteristic of business entities that are defined and registered by state law that limits any debt or judgment against the business to be paid only from business assets, not the personal assets of the business owners.

Limited liability business entities

This is a glossary

Limited liability company (LLC)

A form of business entity that is defined and registered by state law that confers limited liability to its owners, can be structured to separate ownership from management control, and can elect pass-through taxation. Created by filing articles of organization and may be governed by an operating agreement.

Membership interests

Ownership stake in an LLC that represents a percent interest in the business and corresponds to voting rights and distributions.

Net profit / net income

The amount of total revenues from the business that exceed total expenses. Net profits / net income can be used to pay off debt and invest in new assets or business activities, saved as operating capital, or distributed to owners.

Nonfamily successor

A person who is not a member of the current operator’s family who plans to take over farm management as the principal operator when the current generation retires or dies.

Operating agreement

Describes the rights and responsibilities of LLC members, setting out the terms and conditions that all members agree to, such as voting rights; manager duties, qualification, election, and removal; distribution of profits; procedures for adding new members and who qualifies; meetings; buy-sell agreements; dissolution of the LLC if desired; mediation or arbitration of conflicts; and so on. If the LLC does not create an operating agreement, existing state laws will govern any dispute among members or managers.

Operating capital

The business’s cash on hand used for daily operations and to pay bills or debts as they come due.

Operating loan

A loan given to a farm to meet cash-flow needs between when expenses are due and when payment is expected from the sale of farm products.

Operator (farm)

The farm operator is a person who makes day-to-day management decisions. The operator could be an owner, a hired manager, or a tenant. There can be more than one operator per farm; for example, if the retiring and successor generations are both making day-to-day management decisions, they may both be operators. If land is rented, the tenant or renter is the operator.

Option to purchase

A contract provision in which a person has the right to purchase real estate in the future.

Pass-through taxation

A taxation in which a business is not taxed directly on profits. Profits are “passed though” to the owners, and the owners report the amount on their personal tax returns. LLCs can elect pass-through taxation.

Personal assets

Assets that are owned by an individual, not a business.

Personal property

Movable tangible items or intangible items that are owned by a person or business entity; not real property (land and anything attached to the land).

Pierce the limited liability veil

When a creditor shows that an LLC is not being operated as a separate legal business entity in order to claim the personal assets of owners in order to satisfy a debt or judgment.

Present value

The current value of assets or a future stream of cash flow given a specified rate of return.

Probate

The process in which the deceased person’s debts are paid and remaining property is transferred to heirs and beneficiaries. If the deceased person had a will, the executor named in it presents the will for probate in court. If there was not a will, an administrator will be appointed to represent the estate.

product liability
Product liability insurance

Insurance coverage for claims or lawsuits resulting from the farm’s products—for example, if a farm product was contaminated and caused food-borne illness.

Productivity/efficiency

Measures of the efficiency of production, maximizing the amount of output per unit of input.

Property insurance

Insurance coverage for damage to farm buildings, machinery, equipment, fixtures, products, or other items that should be covered. Damage could result from weather, theft, vandalism, and so on.

Rate of return

The gain or loss from an investment over a specified time period, expressed as a percentage of the investment’s initial cost.

Real property

Land and anything growing on, attached to, or built on it, except anything that can be severed without damage to the land (such as a crop that can be harvested).

Realized value

Value of an asset upon the sale of the asset.

Right of first refusal

A provision in a lease or other agreement that gives a designated party the right to buy a property before the seller negotiates any other offers. It may give the designated party the right to meet any other offers that are made on a property before a sale to an outside party.

Rights of LLC members

Financial rights such as sharing in the allocations of the LLC profits and losses, the right to a portion of remaining assets if the LLC dissolves, voting rights as defined in the operating agreement, inspection of LLC records, the right to sell the interest back to the LLC or other members (if closely held), or others defined in the operating agreement.

Risk

Events that keep a business from meeting its financial goals—for example, weather, accidents, labor markets, commodity markets, input costs, trade, regulatory changes, and so on.

Secured transactions / secured debt / security interests / UCC-1

Loans using personal property (not real property/land) as collateral on the debt.

Securities law

Laws that generally prohibit fraudulent business practices with the offer, purchase, or sales of securities such as ownership interests or equity positions in a business.

Sole proprietorship

A business entity in which one person operates a business for profit. The owner of a sole proprietorship does not have limited liability, so personal assets can be claimed to satisfy judgments or debts against the business. When a sole proprietor dies, the business assets (which are technically personal assets) are divided among the heirs with all other personal assets.

Survivorship

The legal right established in joint ownership of property allowing the surviving owner of the property to take the interest of the person who has died automatically without going through probate. Exists when property is owned by joint tenants with rights or survivorship or by tenants by the entirety.

Transfer on death (TOD)

Designation that allows beneficiaries receive assets at the time of the owner’s death without going through probate. It may be used on accounts, securities, and deeds in Oregon. Beneficiaries have no access to or control over the assets while the owner is alive.

Trust

A fiduciary arrangement that allows a third party or trustee to hold assets owned by the settlor on behalf of a beneficiary or beneficiaries. Assets held in a trust do not go through probate. Trusts can specify exactly how and when the assets pass to the beneficiaries. Trusts can be used for different purposes in estate planning and should be designed by an experienced estate-planning lawyer.

Undercapitalized

Holding insufficient funds to carry out the business purpose of the LLC. If an LLC is undercapitalized, the owners may be vulnerable to piercing the limited liability veil so that their personal assets are at risk in the event of a judgment or debt collection.

Valuation method

There are different ways to determine the value of the farm business, depending on the circumstances. The net balance sheet value is the current assets minus the liabilities. A liquidation approach would determine the value if all assets were sold and liabilities paid. The business can also be valued by calculating the present value of its earning potential over time or by looking at what similar businesses are selling for if they change ownership as a going concern.

Workers’ compensation insurance

Insurance that covers injuries to employees that occur in the course of employment. Oregon requires all employers to carry workers’ compensation insurance for all employees. Premiums are based on level of risk involved in the occupation.

License

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Getting Organized by Christy Anderson Brekken & Joe Hobson is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License, except where otherwise noted.