The Farming and Ranching industry is not the same as it was 40 years ago. In today’s world it is BIG Business and many are still on the fence to decide what is the best way is to run their agricultural business. Countless farms & ranches operate as proprietorships, many others operate as corporations. You may have also heard about partnerships… but let us save that for a rainy day (a farmer’s favorite type of day).
Just like a pair of cowboy boots, there is no “one-size fits all” for what is best for your agricultural business. Whether a corporation is right for you will depend on your current circumstances and your future plans. There can be many significant advantages to using a corporation to operate a farm/ranch, but there are also drawbacks. You need to consider whether the advantages will outweigh the disadvantages in the long run.
When to consider a Corporation for your Agricultural Business.
If you have significant annual income (more than $80,000 per annum) and/or if you have significant debt that you are repaying annually, then a corporation may be right for you.
What are the main Advantages of Corporations?
- Taxes, taxes, taxes: The main advantage is the 12.5% corporate tax rate. This is very relevant when the farm/ranch makes more profit than the shareholder needs for their personal use each year. If the funds are left in the corporation (say to pay down debt), then retained profits are taxed at 12.5%. If the profits are paid out to the shareholder (the farm/ranch owner), then the personal tax rates of the owner apply.
- Limited liability: There can be benefits in a corporation from limited liability. Put simply, it means that you are not personally responsible for the debts of the corporation. Of course, in the case of bank debt, a corporation will be required to add personal guarantees to their bank loans, therefore making limited liability effectively moot for bank loans.
- Estate planning: With the use of a special share structure, you can control the company while allowing your children to participate in any increase in value of the company.
- Income splitting: By providing certain shares to your spouse and adult children, there is the ability to provide dividend income to spouse/children. If they have little/no other income, this can result in significant tax savings.
What are the main Disadvantages of Corporations?
- Professional Fees: A corporation is a separate legal entity and it requires its own corporate tax return, which is significantly more detailed than a personal tax return. For this reason, the accounting fees are higher than for a personal tax return. There is also an annual lawyer fee for the completion of the annual corporate filing.
- Bookkeeping/Banking: The Corporation needs a separate bank account and the level of bookkeeping is normally higher than for a non-corporate farm.
Some other Common Questions on Farm Corporations:
- Is there Taxation on the Creation of a Farm/Ranch Corporation? Generally, the answer is “no… unless you want there to be”. The Income Tax Act allows for tax free transfers of assets from a proprietor to a company (technically this is called a Section 85.1 transfer). Sometimes, when these assets are transferred, the farm/ranch owner chooses to incur some tax liabilities. Yes… it sounds crazy that someone would want to incur taxes……but sometimes a little pain now can result in very significant tax savings in the future.
- Would I Transfer all of my Land into the Corporation? Generally the answer is “no” and the farm/ranch owner transfers just the minimum amount of land that covers any bank debt being assumed by the corporation. Normally, most of the land stays outside the corporation.
- Would I Transfer the Farm/Ranch House into the Corporation? Generally, the answer is “maybe” as this can be tax advantageous, but individual circumstances would be assessed before this decision is made.
Give Seamas O’Fuarthain or Dylan Anderson, our two agricultural specialists at JMH & CO a call to discuss what options best apply to your operations. They will be happy to shed some light for you on this manner.