Recently in my column, I discussed a variety of advantages in incorporating your farm or ranch business. Those advantages included a small business tax rate (i.e. saved taxes), continuity of operation (i.e. easier to pass on the operation, saving taxes with less complications), the ability to pay salaries to spouse and children (again, saved taxes), and employee benefits for owners (e.g. paying cash bonuses and gifts to employees, including family).

Now, I will briefly discuss some of the various disadvantages of incorporating a farm or ranch (or any business for that matter), so that you can make a fair decision.

First off, there can be Extra Costs, including legal, registration and accounting fees, to establish a farm corporation, as well as annual accounting and legal fees once the corporation is operating. There can also be Extra Administration with more rules, regulations and formal documentation affecting a corporation than for a sole proprietorship. Usually these requirements can be met with minimal effort.

There can be potential High Costs for Dissolving a Corporation, as assets transferred to shareholders are deemed to be sold to the shareholder at the fair market value of the assets. As well, legal and accounting costs will be incurred when a corporation is dissolved. It is possible to reorganize the corporation whereby the assets of an existing corporation are transferred to two or more other corporations without incurring capital gain on the transfer, also known as a butterfly split. Seek out expert accounting advice in such circumstances.

A farmer or rancher can also experience a Loss of Freedom and Individual Identity. A farm can potentially be more complex business organization than a sole proprietorship. It does require some time and knowledge to fully understand and master its operation. Many farmers enjoy owning land, buildings, machinery, livestock and grain in their own name. When a corporation owns these a farmer or rancher may lose this pride of ownership. Further, individuals thinking about setting up a farm or ranch corporation must have the Ability to Work Together. Individuals who have difficulty getting along beforehand may find their differences intensified in a corporation.

There are a number of other small issues that will need to be considered if you are to set up your corporation. For example, you may find it more advantageous for members of your family to own their vehicles personally, and to be reimbursed for usage related to the business. You must also keep close track of money transferring between the shareholders and employees and the corporation. For example, loans to shareholders must be repaid by the end of the corporation’s next fiscal year. If not repaid, the amount will be included in the shareholder’s income for the year the money was borrowed, resulting in increased personal taxes. Using corporate monies for any personal uses should be tracked very carefully to avoid penalties.

There are some disadvantages to incorporating your farm or ranch, or your business in general. The main concern is to keep on top of the legal and accounting aspects of the business, and to keep good track of what is going on. The time that you spend to set up and maintain your corporation could prospectively result in significant tax savings and other benefits to you and to your family members and employees. Consider this option carefully and seek out legal and accounting advice before you make any bold moves. Doing so will help you to have a full understanding of all of the implications, potential pit-falls, and will ultimately save you a lot of money and grief.