Should My Family Set Our Royalties Up as a Business?

My siblings and I are talking about setting our royalties up as a business. Which one has more benefits at tax time (Llc, llp, s-corp or c-corp)? Is anyone currently doing the same and if so which one did you choose? Any information you'd like to share will be helpful.
Thank you!

None really if you are a mineral owner. Most will cost you more in taxes or filing and administration fees. As an individual in Texas you don’t pay state income taxes. I’m not sure how a business is treated with state taxes in Texas.

There may be other reasons to set up an entity in your case, but tax savings will not be a benefit for most owners.

Are the any estate tax benefits to an LLP?

If you were asking whether some entity forms are better than others, if you are in Texas, the LP may have some franchise tax benefits if you have royalty income in the entity of over $1 million/yr. There are many reasons to choose to put minerals inside an entity, but Rick is correct it is not for saving income taxes, as a general rule.

Estate taxes are another story. If you are worried the minerals could exceed the estate tax caps, putting the minerals inside an entity with restrictions on who you can sell your partnership shares to, can allow you to get a significant discount on the value. You can do gifts of partnership shares and gift as much as $14-5 million in assets but still stay under the estate tax caps (it depends on how much of a discount you can justify to the IRS, but 35-50% is not uncommon).

Remember it is not really whether your minerals are currently producing a lot of income that should guide the decision. The issue is potential income. If you are sitting on minerals in a developing play, a single big well can add millions to an estate if the owner suddenly dies. The general rule of thumb is the IRS values producing minerals at 3x last years royalty income. If a big well just came in that produced $1 million in royalties last year, that is $3 million is the estate tax cap used up if there is an unexpected death.

In Kansas if you set up all of your producing minerals into an LLC, it is non-taxable for state income tax. That is one advantage over keeping minerals as an individual. That scenario really benefits a person who is a non-resident of Kansas from having to pay any Kansas income tax on royalties.

We want to keep our land and mineral rights all together instead of splitting up between the four of us. Doing a little research on my own, I’ve found in Texas that it’s more beneficial to set it up as both LLC & S-Corp.

Thank you for all the information, I will pass it on to my siblings! I do have a question, setting it up like this would be each be an owner/employee/shareholder in the company? Or how exactly is it worded?

Also I forgot one more question. Can the LLC or SCORP write off a depletion on the land at the end of the year?