Business Entity to House Oil/Mineral Interests

Law & Legal
1

My family has inherited some oil and mineral interests throughout several states. While we haven’t seen substantial income from the properties over the years, there has been a recent spike of interest and production in our holdings. For several reasons, we have been considering setting up a business entity such as an LLC or Family Partnership to “house” these interests.

One reason we believe creating this entity would be helpful is to make the process of inheritance/succession easier for all. Our thought is that if we change the name on the deeds, within each County in each state where we have interest, to the business entity (John Doe Oil LLC, LLP, etc.), this would be a one-time change and thus would not have to record deeds during each succession. We also believe there may be some benefits and ease of management/marketability as a result of the business entity.

We understand the basics regarding tax and liability but would like any feedback re: what is common in the industry for mineral holders? If anyone has advice on which entity would make the most sense - we would appreciate your input. Thank you!

2

Dear Ms. Tario,

Go past the basics and have your CPA explain the very real advantages to a family limited mineral partnership.

Here is a thumbnail:

What Does Family Limited Partnership - FLP Mean? A type of partnership designed to centralize family business or investment accounts. FLPs pool together a family’s assets into one single family-owned business partnership that family members own shares of. FLPs are frequently used as an estate tax minimization strategy, as shares in the FLP can be transferred between generations, at lower taxation rates than would be applied to the partnership’s holdings.

3

Thank you for the response Buddy. Are there obvious reasons that I am missing why I can’t achieve similar benefits with an LLC? The formation costs associated with the LLC are less expensive and seem to be somewhat of a norm. Any additional thoughts or advice is appreciated. Thank you!

4

I would be interested in hearing why one is better than the other. I have seen others with LLC and thought it might be because of small expense, thus fairly disposable.

5

Talk to your CPA. This is not legal advice. The rules are different across state lines.

In general, FLPs are a little more complex and require more administrative work. With that, FLPs have benefits. You can accomplish the goal of lowering estate taxes with both entities.

If it is a single asset with one owner, an LLC will likely provide the most flexibility. If you have several family members as owners and want to protect multiple assets, an FLP is likely better. Again, your CPA will know your situation best. Here are a few hints and list of differences and benefits of FLPs and LLCs:

  • For the two types of entities, dissolution rules and distribution rights are different.
  • You have flexibility in making distributions with an FLP, where LLC distributions must be made in proportion with ownership.
  • In an FLP, the General Partner (GP) is responsible for managing the business.
  • In an LLC, management of the entity is determined by the founding members and can be members or outsiders.
  • LLCs protect all members’ liability while the general partner in an FLP will have unlimited liability for the partnership’s debts.
  • Both qualify for gift tax exclusion and the lifetime estate and gift tax exclusion.
  • FLP and LLC entities are both pass-through entities for tax purposes.

My understanding is that in most states, there is more case law and precedent for FLPs than LLCs. This might be important when discounting the value of small ownership share when gifting to your heirs.

Talk it over with your accountant and lawyer. Good luck.

6

RT,

Excellent expansion on a thumbnail. What I do not understand completely is that this is a Fed Rule, why is it different amongst states?

Reagan “R.T.” Dukes said:

Talk to your CPA. This is not legal advice. The rules are different across state lines.

In general, FLPs are a little more complex and require more administrative work. With that, FLPs have benefits. You can accomplish the goal of lowering estate taxes with both entities.

If it is a single asset with one owner, an LLC will likely provide the most flexibility. If you have several family members as owners and want to protect multiple assets, an FLP is likely better. Again, your CPA will know your situation best. Here are a few hints and list of differences and benefits of FLPs and LLCs:

  • For the two types of entities, dissolution rules and distribution rights are different.
  • You have flexibility in making distributions with an FLP, where LLC distributions must be made in proportion with ownership.
  • In an FLP, the General Partner (GP) is responsible for managing the business.
  • In an LLC, management of the entity is determined by the founding members and can be members or outsiders.
  • LLCs protect all members’ liability while the general partner in an FLP will have unlimited liability for the partnership’s debts.
  • Both qualify for gift tax exclusion and the lifetime estate and gift tax exclusion.
  • FLP and LLC entities are both pass-through entities for tax purposes.

My understanding is that in most states, there is more case law and precedent for FLPs than LLCs. This might be important when discounting the value of small ownership share when gifting to your heirs.

Talk it over with your accountant and lawyer. Good luck.

7

I wish I could be eloquent with legal language, but I think your question is answered in that companies are incorporated and regulated at the state level (Texas Secretary of State and the like elsewhere).

Federal rules become important for tax purposes.

At the end of the day, everyone wants the entity that allows the most flexibility for their situation and they want the entity that results in lower taxes!

8

I have a similar situation as the above writer but mine is dictated by a federal law that requires the owner of mineral rights to be U.S. citizens. My wife is not.

My rights are in two states, Colorado and Wyoming, which makes it even more difficult and to top off the sundae, we live in Europe.

A Wyoming law firm told me after extensive research (and a whole lot of dollars paid to them) that we had to form an LLC to hold the rights so that she and her children could own them, through the LLC, after I die.

Any comments from the experts on this forum as to the validity of this opinion?

9

Could you tell me what law that would be that says foreigners can’t own mineral rights in the U.S.? I would not believe in that law until I read it for myself.

vittorio nicosia said:

I have a similar situation as the above writer but mine is dictated by a federal law that requires the owner of mineral rights to be U.S. citizens. My wife is not.

My rights are in two states, Colorado and Wyoming, which makes it even more difficult and to top off the sundae, we live in Europe.

A Wyoming law firm told me after extensive research (and a whole lot of dollars paid to them) that we had to form an LLC to hold the rights so that she and her children could own them, through the LLC, after I die.

Any comments from the experts on this forum as to the validity of this opinion?

10

This is directly from what the lawyers sent…

Foreign citizens may not directly own an interest in federal oil and gas leases. However, pursuant to 43 C.F.R. § 3102.2, foreign citizens may own federal leasehold interests by holding stock in an entity, such as a corporation, which, in turn, owns the leasehold interests.

r w kennedy said:

Could you tell me what law that would be that says foreigners can’t own mineral rights in the U.S.? I would not believe in that law until I read it for myself.

vittorio nicosia said:

I have a similar situation as the above writer but mine is dictated by a federal law that requires the owner of mineral rights to be U.S. citizens. My wife is not.

My rights are in two states, Colorado and Wyoming, which makes it even more difficult and to top off the sundae, we live in Europe.

A Wyoming law firm told me after extensive research (and a whole lot of dollars paid to them) that we had to form an LLC to hold the rights so that she and her children could own them, through the LLC, after I die.

Any comments from the experts on this forum as to the validity of this opinion?

11

Ok, I still don’t understand. If you own mineral rights then they aren’t federal, as near as I can see. If you are talking about leasing federal acres so you would own the lease on them, that would be a different story. If you personally own the mineral acres they are private property and not federal and I think what the lawyers wrote would not apply. I would want a second opinion from a different law firm.

vittorio nicosia said:

this is directly from what the lawyers sent…

Foreign citizens may not directly own an interest in federal oil and gas leases. However, pursuant to 43 C.F.R. § 3102.2, foreign citizens may own federal leasehold interests by holding stock in an entity, such as a corporation, which, in turn, owns the leasehold interests.

r w kennedy said:

Could you tell me what law that would be that says foreigners can’t own mineral rights in the US? I would not believe in that law until I read it for myself.

vittorio nicosia said:

I have a similar situation as the above writer but mine is dictated by a federal law that requires the owner of mineral rights to be US Citizens. My wife is not.

My rights are in two states, CO and WY, which makes it even more difficult and to top off the sundae, we live in Europe.

A Wyoming law firm told me after extensive research (and a whole lot of dollars paid to them) that we had to form a LLC to hold the rights so that she and her children could own them, through the LLC, after I die.

Any comments from the experts on this forum as to the validity of this opinion?

12

Mr. Kennedy…

I do not own the surface rights, only the underlying mineral rights. And, according to many on this forum, that opinion based on research by the law firm is correct since they are on federal lands.

If you believe this to be in error, please quote law that you rely on to base your opinion.

r w kennedy said:

Ok, I still don’t understand. If you own mineral rights then they aren’t federal, as near as I can see. If you are talking about leasing federal acres so you would own the lease on them, that would be a different story. If you personally own the mineral acres they are private property and not federal and I think what the lawyers wrote would not apply. I would want a second opinion from a different law firm.

vittorio nicosia said:

this is directly from what the lawyers sent…

Foreign citizens may not directly own an interest in federal oil and gas leases. However, pursuant to 43 C.F.R. § 3102.2, foreign citizens may own federal leasehold interests by holding stock in an entity, such as a corporation, which, in turn, owns the leasehold interests.

r w kennedy said:

Could you tell me what law that would be that says foreigners can’t own mineral rights in the US? I would not believe in that law until I read it for myself.

vittorio nicosia said:

I have a similar situation as the above writer but mine is dictated by a federal law that requires the owner of mineral rights to be US Citizens. My wife is not.

My rights are in two states, CO and WY, which makes it even more difficult and to top off the sundae, we live in Europe.

A Wyoming law firm told me after extensive research (and a whole lot of dollars paid to them) that we had to form a LLC to hold the rights so that she and her children could own them, through the LLC, after I die.

Any comments from the experts on this forum as to the validity of this opinion?

13

First, let me state that I could be wrong, but I don’t think I am. CFR 3102.2 has to do with foreigners “LEASING” government minerals from the government and did not say anything about aliens OWNING. There is a difference between owning mineral acres and leasing a federal leasehold interest. If you have leased interests from the government, what your lawyers have told you is correct. If you own and have title to acres that are your personal property that you bought or inherited, I think your lawyers wasted a lot of your money and wish to waste more. I searched the Government Printing Office and read the entire rule. 3102 is titled Qualification of Lessees. 3102.1 is Who May Hold Leases, subsection 3102.2 is in regards to Aliens who wish to acquire interests in a lease. If you own the mineral rights, I don’t think it applies. If you are leasing the mineral rights from the government, then I think it does. I still suggest that you read the regulations yourself, not just an excerpt, and get a second opinion from a lawyer. I wish you better luck in the future than I think you have had.

vittorio nicosia said:

Mr. Kennedy…

I do not own the surface rights, only the underlying mineral rights. And, according to many on this forum, that opinion based on research by the law firm is correct since they are on federal lands.

if you believe this to be in error, please quote law that you rely on to base your opinion.

r w kennedy said:

Ok, I still don’t understand. If you own mineral rights then they aren’t federal, as near as I can see. If you are talking about leasing federal acres so you would own the lease on them, that would be a different story. If you personally own the mineral acres they are private property and not federal and I think what the lawyers wrote would not apply. I would want a second opinion from a different law firm.

vittorio nicosia said:

this is directly from what the lawyers sent…

Foreign citizens may not directly own an interest in federal oil and gas leases. However, pursuant to 43 C.F.R. § 3102.2, foreign citizens may own federal leasehold interests by holding stock in an entity, such as a corporation, which, in turn, owns the leasehold interests.

r w kennedy said:

Could you tell me what law that would be that says foreigners can’t own mineral rights in the US? I would not believe in that law until I read it for myself.

14

Hit maximum characters in this post so please write me at pratomorone@alice.it.

r w kennedy said:

First, let me state that I could be wrong, but I don’t think I am. CFR 3102.2 has to do with foreigners “LEASING” government minerals from the government and did not say anything about aliens OWNING. There is a difference between owning mineral acres and leasing a federal leasehold interest. If you have leased interests from the government what your lawyers have told you is correct. If you own and have title to acres that are your personal property that you bought or inherited, I think your lawyers wasted a lot of your money and wish to waste more. I searched the Government Printing Office and read the entire rule 3102 is titled Qualification of Lessees 3102.1 is Who May Hold Leases, subsection 3102.2 is in regards to Aliens who wish to acquire interests in a lease. If you own the mineral rights, I don’t think it applies. If you are leasing the mineral rights from the government, then I think it does. I still suggest that you read the regulations yourself, not just an excerpt and get a second opinion from a lawyer. I wish you better luck in the future than I think you have had.

vittorio nicosia said:

Mr. Kennedy…

I do not own the surface rights, only the underlying mineral rights. And, according to many on this forum, that opinion based on research by the law firm is correct since they are on federal lands.

if you believe this to be in error, please quote law that you rely on to base your opinion.

r w kennedy said:

Ok, I still don’t understand. If you own mineral rights then they aren’t federal, as near as I can see. If you are talking about leasing federal acres so you would own the lease on them, that would be a different story. If you personally own the mineral acres they are private property and not federal and I think what the lawyers wrote would not apply. I would want a second opinion from a different law firm.

vittorio nicosia said:

this is directly from what the lawyers sent…

Foreign citizens may not directly own an interest in federal oil and gas leases. However, pursuant to 43 C.F.R. § 3102.2, foreign citizens may own federal leasehold interests by holding stock in an entity, such as a corporation, which, in turn, owns the leasehold interests.

r w kennedy said:

Could you tell me what law that would be that says foreigners can’t own mineral rights in the US? I would not believe in that law until I read it for myself.

15

Mr. Nicosia, you can selectively backspace [erase] a few of the quoted paragraphs, leaving just what you think is pertinent, or cut and paste. Or you can answer without quoting anything as we have enough samples of what has already been said. I hope you looked up the regulation in its entirety. I hope we can resolve whether I am right on the forum so others in the same situation as yourself will have something searchable. I only butted in because I thought there was a chance that your lawyers were taking advantage of you. I know from experience that lawyers like any other employee may do what is in THEIR best interest rather than yours if not adequately supervised.

16

I will be contacting another law firm in Wyoming on Monday to ascertain the validity of the first opinion.

Thank you.

17

The Mineral Leasing Act of 1920 (30 U.S.C. 181), as amended, specifies that aliens may hold interest in Federal onshore minerals leases only through stock ownership in companies organized under the laws of the United States, or of any State or Territory. The law also states that citizens of countries that deny similar or like privileges to United States citizens or corporations shall not be eligible to hold interest in Federal onshore oil and gas leases through stock ownership in U.S. companies.

18

Dear Mr. Nicosia,

As someone who is out of their element, I might suggest that an LLC is formed that is owned by a Nevada (shoe box) corporation. That may help in many ways, including privacy.

19

Thank you for your advice, Mr. Cotten

20

Mr. Cotten, do you have a reason that you believe that Nevada is better than Wyoming for an LLC?

Dear Mr. Nicosia,

As someone who is out of their element, I might suggest that an LLC is formed that is owned by a Nevada (shoe box) corporation. That may help in many ways, including privacy.

Best, Buddy Cotten Mineral Manager