Beginning farmers often face the tough decision of whether and how to incorporate their farm. From my experience speaking with farmers, and reading discussion forums, blog posts, and articles, it is clear that the issue of incorporation is going to be an individual one, and that the best option is going to depend on your own particular situation.
It is strongly recommended that new farmers take the time to sit down with a lawyer, and a CPA who know farming, as well as the local laws in the area where the farm is going to be established. Often a short meeting can provide invaluable information saving a great degree of uncertainty and often money in the long run. Some Extension offices, Universities, State-run agriculture or small business organizations, and non-profits also provide advice, though these opportunities differ in different states, and I don’t have the capacity to research the opportunities in each for the purposes of this post.
I know a number of farmers who have never incorporated, but this seems to become a more problematic and risky as the farm accumulates more resources and value. Incorporating the farm can also be important in terms of tax savings, liability, and many other issues.
There are basically 3 or 4 options for incorporation of a farm:
Partnership or LLC – (these seem to have similar benefits and drawbacks). According to one web post on Rodale’s NewFarm site the biggest to this arrangement “…is savings in self employment tax by renting ground that you own personally to the entity. But, this can be a little tricky (at least in the eyes of the IRS) depending on where you live. ”
S-Corp – which sets the farmer up as an employee of the corporation as well as a shareholder. Earnings from the corporation are returned to the shareholders in the form of dividends. Again from a NewFarm Post: the S-Corp has the same benefit as an LLC or Partnership. Plus the farmer is freed from paying SE tax on crop earnings. The farmer pays into social security and medicare through withholding like any other employee if they pay themselves a ‘reasonable’ wage. But “there are downfalls to an S-corp. There are limitations on employee benefits to shareholders that own more than 2% of shares in the corp. This may or may not be a concern depending on the situation. The other problem with S-corps is that they really need to be profitable to make sense. If there is a farm loss every year, you could eventually be limited on the amount of that loss that flows to your personal return. This can be significant in some situations.”
C-Corp – From NewFarm “C’s are not just for large companies and offer some significant tax benefits but unlike LLC’s or S-corp’s a C-corp pays taxes. You have the benefit of two 15% tax brackets but the earnings stay within the corp unless dividends are issued. A C-corp has more flexibility in providing benefits for shareholders. Record keeping is more complicated with this option because of shareholder meetings and such.”
Separating real-estate from the farm corporation often makes sense as well. It is also often possible to incorporate in a different state, and some states are cheaper to incorporate in than others. This may affect tax liability as well in some cases. Delaware, for example, is often chosen as a site for small businesses from all over the country because of it’s laws for incorporation and because it tends to be a cheap place to do this. The drawback is that if the corporation ever gets sued, from my understanding, you then have to travel to Delaware (or wherever else you incorporate) to deal with the litigation.
But there is another important issue that is often overlooked, and that is that incorporation does not necessarily offer complete protection from liability. For this reason Liability insurance is almost always a good idea for farmers no matter what their corporate status.
Please also see attorney Jason Foscolo‘s great guest post about farm incorporation at: http://www.beginningfarmers.org/farmers-need-to-incorporate-farm-incorporation-advice/
For more information on these liability issues, as well as other important financial resources, it is recommended that you visit both our Risk Management Page as well as our Farm Business Planning Page.
The following is a list links to articles, websites, and publications with information about farm incorporation:
Business Organizations Overview (National Agricultural Law Center): This publication provides a state-by-state listing of links to information necessary to file and/or create a business organization, along with the forms necessary to do so. If an online filing system is available, a link has been provided to it; if online filing is not available, the state will often provide downloadable forms. http://new.nationalaglawcenter.org/overview/bus-org/
Alternative Financial and Organizational Structures for Farm and Agribusiness Firms (Purdue): http://www.agecon.purdue.edu/extension/sbpcp/resources/organizeandfinance.pdf
Farm Organization Options (Michigan State): https://www.msu.edu/user/betz/estateplanning/2004%20EstatePlnning/Mich%20Kole%20Farm%20Organization%20Options.pdf
Farm Business Arrangements: Which One for You (North-Central Extension): http://agecon.uwyo.edu/FarmMgt/PUBS/NCREPub50.pdf
Positioning the Farm Business (Purdue): https://www.agecon.purdue.edu/cab/research/articles/Positioning%20the%20Farm%20Business.pdf
Special Problems of Farm Incorporation (Article) – From the National Agricultural Law Center (NALC): http://nationalaglawcenter.
Tax Consequences for Corporate Divisions of the Family Farm Corporation (NALC Article): http://
LLC’s – A New Tool For Small Agribusiness (NALC Article): http://nationalaglawcenter.
Incorporating the Family Farm: Considerations and Consequences (NALC Article): http://nationalaglawcenter.
Family Farm Corporation and the Doctrine of Corporate Opportunity (NALC Article): http://nationalaglawcenter.
Ten Limitations of Farm LLC’s (NALC Article): http://nationalaglawcenter.org/wp-content/uploads/assets/bibarticles/richardsongeyer_ten.pdf
Farm Incorporation Basics (Farmers of North America): http://www.fna.ca/index.php?Itemid=322&id=346&option=com_content&task=view