There are both pros and cons of incorporating a family farm, and no two farms are alike. As a rule of thumb, when family income — farm plus non-farm — reaches about $75,000, the tax advantages may merit investigating incorporation. The cons include initial setup costs and annual costs to maintain the corporation. The assets the corporation owns will have varying tax implications. Statistics show the number of family corporation farms in Canada remains steady. We asked three experts to weigh in on advice they’d offer farmers on incorporating. Kim Gerencser, Senior Manager at MNP Farm Management Consulting says, "Don’t do it just because everybody else is. It needs to make sense for your finances, taxes and family."
According to OMAFRA’s factsheet, incorporation must make financial and legal sense. The objective is to point out advantages, disadvantages and problems which should be considered when contemplating incorporating a family farm. There are many potential tax risks involved in having a family farm corporation own a farm residence. Care should be taken to consider the corporation is distinct, holding only assets used in the business. Despite complaints, 96% of U.S. farms are family owned, according to USDA. So a "corporate" farm can be a family farm. Why incorporate? Operating as a business provides liability protection, which is important given farming’s risks.
Sole proprietorships are the most common farms. Higher sales farms tend to be LLCs or Corporations. Forming a corporation allows protection.
What’s the difference between family and corporate farms? They can be defined as mutually exclusive. However, LLCs can transfer assets over time. All farmers should consider using an LLC.
Sole proprietorships are simple. Partnerships can get complex. Corporations can get very complex. LLCs provide liability protection and flexibility.
An LLC provides state level benefits. An S-Corp provides federal tax benefits. LLC income is fully taxable. S-Corps have lower taxes, giving more investment capital.
In general, incorporate if you want to reinvest profits, have off-farm income, or have successors. Reasons include tax and strategy benefits. Consult professionals for guidance on the best structure.
Farmers choose sole proprietorships, partnerships, LLCs, corporations, or cooperatives. C-Corps have double taxation. S-Corps have limitations but are more flexible. LLCs efficiently transfer assets and provide liability protection.