I am considering setting up a limited liability partnership for the mineral rights we have that are producing and paying royalties. We are in North Dakota and I understand these are a flow thru operation meaning no tax on the partnership only on the individual partners income. Has anyone else done this and what tax advantages (expense deductions) might there be?
John,
If you have significant acreage and several family members, I believe you are very wise to set up an LLC. I've been involved in setting up and managing a similar circumstance that covered properties in at least 6 different states.
The LLC setup can be expensive to set up but will probably be worth it especially in ND as there will be production for a long, long time. An attorney can help you set up the operational rules in the LLC to accommodate the family desires. LLC'scan be as tax effective as you want them to be. LLC's by definition, limit double taxation.
The kicker may be that an LLC managing minerals over the years will retain the value of the mineral rights. If the mineral rights are split up and fractionated, the unit value will deteriorate and problems arise due to neglect.
How much is "significant"? Thanks DJ Short
A reasonable cut-off depends on the number of members, time and cost of the managing member, location, and geologic potential of the land. In the heart of the Bakken, with a good lease and operator on board, 100 net mineral acres an LLC is obviously a good idea. Somewhere between 10 and 20 net mineral acres is too costly to manage without family strife and bad feelings. At the lower acreage range, it is usually best to consolidate interests into a managing partner and distribute royalties in amounts determined on the basis of third party payments. Either way, each recipient of distributions or royalty must deal with their won individual taxes so that no one shares in the other's tax burden. GLH
Debbie Short said:
How much is "significant"? Thanks DJ Short
I sister and I inherited 160 acres gross, 40 acres net in Divide County ND T162N-R99W, S32, NW4. We think that Baytex got permission to do something with it in December (I think the 22nd). We are leased until October 31, 2013. My sister and I get along, I'm not worried about a fight. She in Fargo and I'm in Kentucky.
Gary,
What issues did you run into with property in multiple states?
LLCs based in resident state, with properties own in “foreign” states. Satellite LLCs based in the same state as the property, and or registered as a “foreign” LLC within the state the property is located. It seems some of the combinations can be challenging. Even with that, individual State laws differ on the way the LLC would convey/acquire real property which would seem to present a few issues.
Luckily our LLC, Owners, and property are all in the same state with the exception of 2 very small tracts with no activity.
I’ve also seen LLCs setup for working interests to limit the liability to other assets and or entities. We have considered doing the same.
Gary,
You say LLC, I say LLP, there is a difference yes? My wife and I will be the “partners” and upon ones demise their share is given to the children with the surviving spouse retaining 50% then upon the others demise then that share goes to the children. So what kinds of tax advantages (deductions) might one be able to take? Can the LLP deduct the cost of setting up the LLP? New to this and since pretty much all that happens is there is a check that shows up once A month I am trying to figure out what other type of expenses could be written off such as a salary for the “managing partner”', etc…
Gary L. Hutchinson said:
John,
If you have significant acreage and several family members, I believe you are very wise to set up an LLC. I've been involved in setting up and managing a similar circumstance that covered properties in at least 6 different states.
The LLC setup can be expensive to set up but will probably be worth it especially in ND as there will be production for a long, long time. An attorney can help you set up the operational rules in the LLC to accommodate the family desires. LLC'scan be as tax effective as you want them to be. LLC's by definition, limit double taxation.
The kicker may be that an LLC managing minerals over the years will retain the value of the mineral rights. If the mineral rights are split up and fractionated, the unit value will deteriorate and problems arise due to neglect.
Gary L Hutchinson
Minerals Management
We have 25% shares with 3 family members. the 4th is spit in 2 with 12.5% each-also family. Do we sign over the deeds to the LLC when the LLC is being formed?