The structure of an agricultural business is important for a variety of reasons, including taxation, set-up simplicity, and flexibility in succession planning. It is important to understand the needs of your business and to choose a structure that aligns with your business goals.
While taxation is often a prime concern for business owners, it should not be the primary reason to consider a particular legal structure. Some business owners may prefer simplicity while others may consider flexibility in implementing a succession plan as the top priority in choosing a particular legal structure.
Each kind of legal structure has advantages and disadvantages. As a business grows or evolves, a particular business structure may become more or less attractive and need to be addressed. Having a good team of advisors will help you make the right business structure decisions for your farm or processing business.
Legal structure refers to the legal business entity under which the business operates. The three most common business structures are sole proprietorships, partnerships, and corporations. Joint ventures are less common, but may be useful in certain circumstances. The structure of business ownership determines how decisions are made, who will report the income of the business, who will pay taxes, and who is legally responsible for the business. The legal structure also influences the control of the business and available methods of transferring ownership.
The ownership structure of a farm business refers to how the assets are owned. While ownership may appear to be obvious, it is not always the case in a farm business, especially if a second generation is working in the business. It is not uncommon to encounter farm businesses where some assets are owned by the individual and used by a corporation that operates the business. Partnerships sometimes own very few assets, while partners retain direct asset ownership. Understanding the ownership of assets is critical for tax planning, financing, succession planning, and changing the business structure (such as when a business partner wishes to leave the business).
Written agreements should clearly document the contribution of assets to the business and explain if and how the asset owners will be compensated for use of their assets. Agreements clarify how someone may enter or exit the business structure in the future. Agreements also outline a process in the event of death or illness.
What can you do?
- Understand your current business structure
- Consider if your current structure fits your business goals
- Understand the pros and cons of other business structures
- Discuss different structures with your advisors