If one is thinking of retirement soon, farm incorporation is not an option.
The farm business becoming a limited liability company is something that has become increasingly popular in the agricultural sector.
Here are some of the advantages and disadvantages of incorporation.
One of the most significant advantages of incorporation is limited liability.
This essentially means that there is a limit put on the responsibility of the company shareholders to pay the debts of the company, in the event that the company runs out of money and becomes insolvent. The company is the farmer.
A company can be easier to split amongst shareholders or successors by allocation of shares.
It can be less complicated to divide shares in a farming company among children, than to divide a sole trader farming business among them.
One of the most beneficial features of incorporating are the significant tax advantages.
However, to benefit from the tax advantages, it is important to ascertain whether your business and scale suits the move to incorporation.
Essentially, if your farm business turnover is reaching the higher tax band, then it may well be more tax efficient to incorporate.
For example, if a self- employed person’s earning capacity was over the higher tax band, then they could be taxed at 55%, whereas the corporation tax for a company’s trading profits would be at the lower rate of 12.5%.
A farmer also needs to consider the amount of money he or she draws from the business for his or her own personal use.
There may be income available to a farmer outside of the company, for example, rental income or a spouse’s income, and then a farmer and his or her family has a reduced need to extract money from the company for personal use.
This is important, because if a farmer draws large amounts of money from the business for his or her own use, then the benefits of incorporation would be significantly reduced.
Money drawn down from a business would be subject to the normal tax regime, and it is only money that is left in the company that benefits from the 12.5% tax rate.
One of the main issues in determining if incorporation is the right move is the turnover of the farm business.
If the annual turnover in a farm business is reaching the higher tax band, then a farmer should seek advice from his or her solicitor in relation to the option of incorporation.
The above are only a very brief summary of the tax issues to examine, if considering incorporation.
If you are considering buying agricultural land in the future, it is tax efficient to allow profits to build up through a company.
Earnings can be retained within the company for the purposes of investment.
Existing loans would have to be renegotiated as the facility agreements would have been in the sole trader’s name.
In these circumstances, the bank would have to draw up a fresh facility agreement transferring the loan to the company.
This involves legal fees, land registry fees, time, inconvenience and negotiating a new loan with the bank.
However, it can also be an opportunity to negotiate more favourable terms with your bank.
The benefits of incorporation can also far outweigh any expense and inconvenience involved in the set up on incorporation.
Inheritance and Succession Planning
Consider the future, and both your short term and long term plans for the business.
If one is thinking of retirement soon, incorporation is not an option.
A successor will not qualify for young trained farmer relief in the event that he or she takes the gift in the name of a company.
He or she must farm for over five years.
If farmland is in the name of a company, it may not be considered an agricultural asset for agricultural relief, in respect of gifts or inheritances.
Costs and Administration
One must register the company name.
One must register with the Revenue Commissioners.
One must obtain clearance from the Department of Agriculture, Food and the Marine.
One must arrange to transfer the herd number into the company name.
Bank accounts will have to be set up in the name of the company.
Annual accounts need to be prepared, which usually involves higher accountancy costs.
Farmers thinking about incorporating their farming business should obtain professional legal and tax advice in relation to their own business and set of circumstances.
Karen Walsh, from a farming background at Grenagh, Co Cork, is a solicitor practicing in Walsh & Partners, Solicitors and Commissioners for Oaths, 17, South Mall, Cork.
While every care is taken to ensure accuracy of information contained in this article, solicitor Karen Walsh does not accept responsibility for errors or omissions howsoever arising, and you should seek legal advice in relation to your particular circumstances at the earliest possible time.
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