If you’re eager to own a property for hunting purposes, but you’re concerned about shouldering the financial obligation, consider pooling resources with other people through a Limited Liability Company (LLC).
Creating an LLC gives you more options and additional benefits buying land solo doesn’t offer, but is it the best decision for your situation?
Pooling resources makes owning larger tracts of land possible.
Mark Williams, our Land Specialists serving regions in Kentucky and Illinois, says entering an LLC isn’t a dicey proposition. Most often, pooling efforts and resources with trustworthy friends makes owning a large property a reality rather than a dream. Some groups buy land to hunt, while others buy as an investment opportunity. Either way, the collective effort creates possibilities, not roadblocks.
LLCs create land equity for hunters.
Many hunters who hunt a large tract of land either hunt public land with other hunters, join a hunting lease or buy large acreage through an LLC with other people. The latter often provides the most flexibility, control and benefits.
Rob Saunders, Whitetail Properties principal partner, leased property to hunt for years, but came to understand what many hunters realize — he was improving the property for the landowner and paying them to do it through the lease. Now, he believes an LLC is more beneficial because he can improve the property and build land equity through ownership.
Plus, not all landowners allow their leasing members to conduct certain projects, so an LLC gives owners more power and control over land management practices. Another bonus: Private landowners aren’t competing with other hunters like they’re often required to do on public land.
LLCs provide additional protections.
An LLC acts as a barrier between its partners and potential lawsuits by creating a layer of liability protection.
“Anytime you have a farm, operate large equipment and have friends or strangers hunting your property, you (as the landowner) run the risk of a lawsuit,” Saunders says. “A neighbor could walk through your property, step in a hole and sue you – and you're liable. With an LLC, a person is less likely to sue an individual. Instead, they have to sue the LLC, which has limitations concerning the amount of equity an individual has put into the LLC.”
LLCs can make properties eligible for extra tax deductions.
Suppose you own land individually and want to put in a road or mend a building or barn to improve the property. Those expenses may not be deductible in an individual ownership structure. However, if you own the land in the LLC and the agreement says that one of the goals is to improve the value of the property for the business, everything that is spent on improving the property is deductible.
If forming an LLC to buy hunting land seems like the best option for your situation, consider these seven things before you sign the paperwork.
1) Ensure everyone in the group has similar property and management goals.
Some land buyers are seeking property ownership primarily as an investment. Sure, they may hunt the land, but that’s not the primary focus. So, for instance, they may want to cut its timber, lease the land or flip the property for profit. That mentality doesn’t mesh well with someone who wants to establish a sanctuary for game animals.
Conflict centered on hunting practices can also arise.
“If you have guys who have an ‘if it’s brown it’s down’ mentality, or someone wants their kids to participate and harvest a 2-year-old buck, that’s not going to pair with guys who want to hunt mature trophy deer,” Williams says. “This needs to be addressed in the agreements, or you need to look elsewhere for LLC partners who align with your approach to herd and land management.”
2) As you’re preparing your LLC, candor and inclusion are critical.
Communicate with your partners. Discuss all the elements of an LLC’s operating agreement and separate contracts. (More to come on both topics below.)
“If you prepare your LLC well on the front end, then you avoid complications that can follow,” Saunders says. “If you do a poor job and don’t make sure your LLC covers contingencies, you can run into a lot of problems.”
Williams says being thorough and addressing the details ensures everyone knows the rules before making – and committing to – a significant financial investment. Make things official. Do this and it’ll go a long way in helping you and your partners avoid anger, confusion, frustration and arguments.
“Just be sure to include everyone in planning conversations so they can share their opinion and concerns,” Williams says. “Being proactive and communicating throughout makes signing and finalizing the contract easy and painless.”
3) Separate contracts can help partners avoid unwanted red tape.
Texas-based attorney Nate Gilbert has helped countless hunters form LLCs for land ownership. He also specializes in developing quality leasing documents for hunters including liability waivers, disclosures and lease agreements for hunting leases.
While Gilbert says an LLC’s operating agreement can be as specific as landowners want it to be, he warns against including items like details about food plots, hunting practices, manual labor contributions and anything else of that nature.
Instead, he advises his clients to consider separate contracts for these and similar items.
“The operating agreement is between you and the business,” Gilbert says." So you’re in breach of contract if you don’t follow that agreement, which can cause you to lose the liability protections of the LLC. If you get too tedious about hunting practices, you’ll create red tape because you’ll have to amend your operating agreement every time something changes.”
Amendments can create additional expenses and take a lot of work and time, especially in some states.
4) Items best suited to the operating agreement include:
Owner information and breakdown: Document LLC partners and each partner’s ownership percentage. You should also include a distribution breakdown of the profits and losses.
Capital calls: A capital call is when group members reach into the LLC’s cash stores to make a purchase or investment. The operating agreement should define when the LLC can make capital calls, and put a cap on how many times a year partners can reach into the LLC’s cash stores.
Decision making: Consider documenting how the group will make decisions. Most agree to vote on big decisions, and designate one person for day-to-day operations.
Exit strategy and new members: In the instance of death or if a partner wants out, the operating agreement should define how exiting the LLC will work . In one of the first LLCs Saunders was in, the agreement granted first right of refusal to the remaining partners if a partner should need to sell his ownership share due to financial hardship, divorce or death. Partners also had the right to purchase the exiting partner’s ownership at a reduced price. The group agreed to these measures to ensure they wouldn’t be forced into accepting new partners in the existing LLC.
5) Items best suited to separate contracts include:
In these separate contracts, consider anything you foresee changing or adjusting that applies to the business or property in a contract.
“Provisions are best kept in separate contracts so the rules are recorded, but can be tweaked, if necessary,” says Gilbert.
For example, because an LLC is a business, each person must contribute equally. Some groups allow individuals to contribute time or money at a comparable rate. Williams does this with a partner in his LLC. One owner lives in Georgia and the others, himself included, live in Kentucky. The group allows the Georgia member to contribute financially to make up for the physical work he can’t commit.
You might also use a separate contract to outline the number of days each person will work. In the contract, you might also define how much an hour of work is worth financially. Also, explain what happens if someone doesn’t contribute time or money. A consequence might be loss of certain hunting days (like the rut or Thanksgiving) or loss of a number of days during the hunting season.
6) Know all the costs.
Understand your expenses and ensure everyone involved knows the financial commitment. Estimate the land cost, annual taxes, and annual projected cost to maintain food plots, equipment and the property. As a team, you can also decide to sell the land’s timber or lease a portion of the property for ag production. These income opportunities can help offset expenses. Williams said knowing what the land costs now – and in the future – helps members understand what to expect so they can save and prepare accordingly.
7) Leverage a tax advisor’s expertise.
If everyone commits to the financial obligation of purchasing a hunting property via LLC, it’s critical to lean on the expertise of a certified public accountant. Most CPAs offer consulting and litigation services and have expertise in financial planning, tax preparation, auditing and review. Having a professional tax advisor who everyone trusts is helpful when making group decisions.
“I usually require my clients to meet with a CPA,” Gilbert says. “In an LLC, everyone is joining together. Because I don’t know each person's tax situation, I ask the group who their designated CPA is for the group, and I send all the documents over to the CPA to review.”
Once you hash out the details and establish rules, regulations and penalties, it’s time to make the Operating Agreement official in an LLC. Schedule an appointment with an attorney who specializes in LLCs. Saunders says when everyone agrees to the rules, signs the document and is aware of their actions and obligations, each individual is protected by the contract, making the LLC business flow and operate more professionally.
Gilbert’s final takeaway? Don’t overcomplicate it.
“Don’t borrow the McDonald’s operating agreement and cut and paste it to make it fit your hunting LLC,” he said. An LLC can be weighted down with all kinds of corporate formalities and red tape that does little to enhance the LLC that’s serving as a vehicle for a group of investors to purchase rural acreage.
“Keep it simple because you must be able to follow the operating agreement,” he says. “Otherwise, what’s the point? The more complicated it is, the more difficult it will be to follow.”
Contact a Whitetail Properties agent to find a property to buy. They can also provide additional group-buying tips and likely refer a reliable attorney to help you create a hunting LLC.