Every farm business is different, and finding a suitable business structure to adopt is key to run it successfully. Joel Bokenfohr, manager of business structures and policy with Alberta Agriculture and Forestry (AF) examines options to consider.
“Farms grow, wind down, change, and bring in new partners,” says Bokenfohr. “When considering a business structure to follow, it is important to select something for the long run that can also be reviewed regularly, in case your business circumstances change. There are many business options to choose from, all with different legal, liability, and tax repercussions. As a business owner, it is important to take some time and examine which arrangement will work best for you and your farm business.”
Sole Proprietorship
The easiest and simplest arrangement is a sole proprietorship. “A sole proprietor is anyone who engages in business to seek a profit,” says Bokenfohr. “You are automatically a proprietor as soon as you engage in business to do so. In Alberta, you will need to register a business name if you will be operating under a name other than your own. The greatest advantage to a sole proprietorship is that it is simple.”
This structure is the starting point for many businesses and can be more efficient as only one person runs it, explains Bokenfohr. “An important benefit of this structure to farmers is that cash based accounting can be utilized. Any losses incurred from their business operation are eligible to be applied against other sources of income, including any type of off-farm income, and reduce personal taxes payable. In the start-up phase, this can be a huge benefit to help with cash flow, and they can stabilize their income levels through inventory purchases and optional inventory adjustments.”
Partnership
A partnership is when two or more individuals engage in business to seek a profit. A partnership, like a proprietorship, is automatic. It is created as soon as the members engage in business to profit.
“It is strongly recommended that a partnership agreement be drafted, with particular attention paid to the partnership continuing if one partner passes away,” adds Bokenfohr. “In agriculture, it is often popular to see spousal partnerships or parent-child partnerships to assist with income and transition planning. With benefits there are also costs. This arrangement could require separate bank statements, accounting records, and shared liabilities.”
Read more about Partnerships on the AF website.
Corporation
A corporation is generally created when a business grows substantially, and it is no longer practical to remain as a partnership or sole proprietorship. The corporation is a single legal entity. Therefore, liability falls on the corporation, not the owners or managers.
“Signs it is time to incorporate can include continuous income deferrals and significant pre-buys to manage tax, as well as paying high personal tax rates,” explains Bokenfohr. “When considering whether or not to incorporate, it should also be noted that any of the assets owned previously by the farmer via a proprietorship or partnership can be transferred into a corporation on a tax-deferred basis. Other considerations when incorporating should include keeping the land in or out of the business, what classes of shares to create, and how to draw earnings. Corporations are complex and therefore require more professional advice. These entities also generally come with higher setup costs and filing fees.”
Additional Business Structures
Additional business structures can include entities such as joint ventures and new generation cooperatives.
Joint ventures allow individuals to combine resources but retain ownership to create larger operations. Explains Bokenfohr, “Essentially, it provides the opportunity to create a business structure that will combine all operations of each of the members and provide diversification, but it also allows each farmer to operate on their own land.”
Read more about Joint Ventures on the AF website.
“Another unique entity is the new generation cooperative,” adds Bokenfohr. “This model may help farmers mitigate some risk in an industry where they feel that the best way to conduct business is to enter into business with surrounding producers to help sell their products. It is based on the belief that if they market and sell the products of the group as a whole, they will help create economies of scale, and reduce some of the risks associated with factors like sale price and selling costs. Having strong management, organization, and membership rules are key to setting up effective new generation cooperatives.”
“Utilizing the right business structure helps you make the right investment and income planning decisions, as well as helping you improve operational management and farm succession planning,” says Bokenfohr. “It is important to review this decision with a qualified advisor who can guide you in making the right decision for your farm business and family.”
For more information on selecting a business structure, or to re-examine your current structure, read Selecting a Business Structure for Your Farm Business.
For more farm management information, go to the Farm Manager webpage, or contact Joel Bokenfohr at 780-427-4329.
Source : Alberta Agriculture and Forestry