Operating any successful farm depends on having smart, strategic thinking people, no matter what the farm structure. Incorporating your farm might be the next step to look at in your operation. There can be many benefits to incorporating depending on your circumstances.
Incorporating enhances financial management: The requirement to file a balance sheet as part of the corporate tax return provides shareholders an indication as to how well the farm business is doing on an accrual basis. Rather than the more general information offered by cash-based income and expense or profit and loss statements.
Offers income splitting benefits: Bumper crops or high cattle prices in some years can easily move farmers into a top marginal tax situation. Incorporating may allow farm families to take advantage of some unique income splitting opportunities. Farms can pay reasonable salaries to lower-income family members for the services they provide, taking advantage of their lower marginal tax rates. Incorporated farms can add lower income-earning adult family members as shareholders, and also pay them by way of dividends. Be cautious of the tax laws when paying wages to minors.
Should the land be in or out? One major criticism of farm incorporation starts after farmers roll land into a corporation; then discover that getting it out creates a tax problem. Once assets are rolled into a corporation tax-free, they cannot come out tax-free back to a shareholder. Some farmers personally hold farm land to roll over to the next generation of farmers tax-free. Others, transfer corporate shares just like land under the right circumstances and following all the rules.
Easier farm succession: Corporations don’t die, but shareholders can. A benefit with an incorporated farm comes with offering a seamless conversion of the share ownership to the next generation. The older generation can take back preferred shares for the agreed-on farm value and common growth shares can be issued to the next generation. Transferring shares can be done incrementally and with little or less value than trying to buy or transfer the farm assets all at once.
Sets up an organized structure: Incorporation requires a shareholders’ agreement. This requires setting up rules under which the shareholders will operate. Once in place, if one wants out due to death, disability, divorce or some other issue, there is a template. An important side benefit of incorporation is that roles and responsibilities are defined. Who’s the CEO? Who’s the secretary? With that comes a clear understanding of the roles and responsibilities of all employees, shareholders and family members.
Enhanced communication and risk mitigation: Incorporation forces shareholders to learn to adopt business meetings with agendas and recorded minutes. In a well-run corporation, communication on and off the farm moves to a higher level. Another benefit of incorporation is that it can provide a layer of liability protection for the shareholders, outside of personal guarantees for loans. This is especially significant for farms with multiple enterprises diversified into custom work, like spraying or trucking, or those operating other businesses with greater risk liability such as oil patch related ones.
I’m not suggesting every farm should incorporate, but if you are considering it, you should sit down with trusted legal, financial, accounting and other professionals as required to review the pros and cons of this for your individual family farm situation.
Image licensed through Shutterstock