Consider converting your Limited Partnership

Monday, March 28th, 2022
Photo of farmer in the field with a clipboard

By Robert Moore, Research Specialist and Attorney, Agricultural & Resource Law Program

Prior to LLCs becoming available for common use, Limited Partnerships (LP) were used extensively to hold farmland.  LPs provide liability protection for the limited partners and usually allow the land to be distributed out to the partners without tax liability.  Additionally, the land in the LP can receive a stepped-up tax basis upon the death of a partner.  LPs were a good choice to hold farmland.

The primary disadvantage of an LP is the liability exposure of the general partner.  Because the general partner is tasked with management responsibilities for the LP, they receive no liability protection.  Therefore, any liability created by the activities of the LP will transfer to the general partner and put all of the general partner’s assets at risk.

LLCs were developed in the 1990’s and started to become popular in the early 2000’s.  LLCs can be taxed as partnerships and thus provide all the tax benefits of an LP.  Also, LLCs provide liability protection for all owners regardless of their management roles.  Therefore, LLCs provide all the benefits of an LP plus provide liability protection for the manager.  Due to the superior lability protection of LLCs, LPs have been made obsolete in Ohio.

If you have an LP, you should consider converting it to an LLC.  The conversion will extend liability protection to all the owners while maintaining the partnership taxation structure.  Converting from an LP to an LLC is relatively easy.

The conversion is performed by completing Form 700 provided by the Ohio Secretary of State.  The form can be filed through the mail or by submitting online.  A $99 fee is required to be paid when the conversion is submitted.  The form asks for the identification and structure of the current entity and the name and structure of the future, converted entity.

Any asset held by the LP is automatically owned by the LLC after conversion.  For real estate, an affidavit is recorded with the county recorder stating the LP has been converted to an LLC.  Because both the LP and LLC will have a partnership taxation structure, the same tax identification number can be used after the conversion.  An operating agreement should be drafted for the new, converted LLC as the old LP agreement will no longer be in effect.

Consider the following example.  XYZ Farms Ltd. is an LP and holds farmland.  The owners of the LP wish to convert to an LLC to provide liability protection for the manager partner.  Form 700 is filed with the Ohio Secretary of State along with the $99 fee.  The conversion form states that XYZ Farms Ltd. is converting to an LLC and will have the new name of XYZ Farms LLC[1].  After the conversion, the LLC files an affidavit with the county recorder stating that XYZ Farms was converted from an LP to an LLC and the farmland is now owned by the LLC.  The owners of XYZ Farms LLC draft a new operating agreement with terms and provisions applicable to an LLC.

LLCs have replaced LPs as the entity of choice to hold farmland.  LPs that were established prior to the availability of LLCs can be converted to LLCs relatively easily.  Owners of an LP should consider converting to an LLC to provide liability protection for the managing partner.

 

[1] Form 590, “Consent for Use of Similar Name”, and Form 610, “Articles of Organization”, must also be filed with the conversion form.