Legal Advice: Should I turn my farm into a company?
Incorporation is a smart business move for those who plan on growing their business.
Incorporation is an advantageous move for business owners, making it an increasingly popular move for many farmers. Having limited liability makes incorporation one of the most attractive features of incorporation.
This means that the burden of repaying debt is limited to the company shareholders. Therefore, should the company become insolvent, the shareholders will only have to repay the amount they invested into the company, as opposed to being personally liable and having personal assets seized. This can be crucial for farmers as, oftentimes, they are the company and hold all the shares.
A big worry for many farmers is how to divide up their estate in their will to ensure all beneficiaries get a fair share that is also tax-efficient. Many farmers struggle in finding a balance, specifically where some children work on the family farm and within the business and others do not. Incorporation simplifies this as a company is significantly easier to distribute to successors through the allocation of shares.
However, it should be noted that incorporation does have some consequences for successors and these must be considered also. For instance, farmers must note that farmland registered as a company may not be regarded as an agricultural asset and, subsequently, may not qualify for agricultural relief in respect of gifts and inheritance. In addition, a successor who accepts the company as a gift will not be eligible for young trained farmer relief.
Incorporation carries many tax benefits for business owners. However, to reap such benefits, a farmer must first consider whether their business model and scale will be suitable for the transition to an incorporated company. For example, if a farmer plans to retire in the near future, incorporation would not be a viable option.
From a taxation point of view, the most suitable farming business to make this move are those that are reaching the higher tax band. This is because those at the higher tax band would be taxed at up to 55% as a sole trader whereas an incorporated business only pays 12.5% corporation tax on company trading profits. However, there is one clear and distinct difference to bear in mind.
After-tax profit in sole traders are considered their money to use as they see fit, whereas after-tax profits in the company can only be used for the purposes of the trade/company. However, farmers should also contemplate the amount of money they take from their business for their own personal use.
If a farmer is drawing substantial sums of money from their business, this money will not enjoy the benefit of the reduced rate of 12.5% and will be subject to the normal rate of tax. The 12.5% corporation tax is limited to company funds only. For some farmers, this will not be a significant issue as they may receive income from another source, such as leasing lands or spousal income.
Farmers should also consider their turnover before deciding to incorporate their business. Those who are at the higher tax bracket on their annual turnover should discuss this option with their tax advisor and solicitor.
Incorporation is a smart business move for those who plan on growing their business. The tax benefits enable profits to build up in an incorporated company and these can then be reinvested when it comes time to expand.
Of course, incorporation also comes with some disadvantages as well. These include the costs associated with making the transition and accountancy fees, as well as securing finance from the bank and the requirements of giving personal guarantees. In spite of these, many business owners will find the move to incorporation highly beneficial and such benefits will outweigh the initial expenses and inconvenience.
It must be emphasised that one should always seek tax and legal advice before incorporating their business.
Karen Walsh, from a farming background, is a solicitor practicing in Walsh & Partners, Solicitors, 17, South Mall, Cork (021-4270200), and author of ‘Farming and the Law’. Walsh & Partners also specialises in personal injury claims, conveyancing, probate and family law.
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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.
