12.5% tax is one of the pros and cons of incorporating a family farm
More and more farmers are incorporating the family farm business.
The main and most well known benefit of incorporating any business is that the business will have limited liability.
This means that the company is its own legal entity and that only the company, and not the owner of the company, can be sued for its obligations.
The personal assets of the director or shareholders of the company cannot be seized to recover the company debts, should the company become insolvent.
A second major advantage is that concerning succession planning.
All farmers find succession planning worrisome, as they try to provide for all of their children in the most tax-efficient way.
It is hard for most parents to strike a balance balance between leaving the farm to the one child who is running the business, and the other children, to ensure that everyone is looked after and has a good start in life.
A major benefit in favour of incorporation as opposed to a farm operating as a sole trader business is that a company be easily split amongst shareholders or successors by the allocation of shares. Forming a limited liability company can also have substantial tax benefits.
In order for a farm business to benefit from these, it is necessary to establish whether incorporation will be beneficial in terms of the scale of the business.
Where the farm profits are reaching the high tax band, it will likely be more efficient to incorporate, to avail of the low corporation tax of 12.5%.
It is important to consider the amount of money the farmer draws from the business for personal use. Where income is available outside the company, for example a spouse’s off-farm income, less money for personal use will be drawn down from the business.
It is beneficial not to draw money from the company, as money drawn down from the business is subject to the normal tax regime, and the benecan fits of incorporation would be significantly reduced, if only the money that is left in the company benefits from the low 12.5% tax rate.
This is a summary of some of the advantages of incorporation. In short, if the annual turnover in a farm business is reaching the higher tax band, then it is advisable for a farmer to seek advice from his or her tax consultant or accountant in relation to the option of incorporation.
It can be also be extremely beneficial to farmers who plan to expand the farming business to incorporate their farm, because it is tax-efficient to allow profits to build up with- in the company, which can be retained for investment purposes.
There are of course disadvantages to incorporation of a farm business, not least the issue of initial costs, accountancy costs, and difficulties in securing loans, or the requirements to give personal guarantees.
Farmers thinking about incorporating their farming business should obtain professional legal and tax advice in relation to their own business and set of circumstances, before doing anything. I cannot stress this enough. Incorporation must make financial and legal sense.