Resources
Agricultural Business Structures
Determining the ownership and legal framework of your farming enterprise is a decision you live with for quite a while. Basically, you should consider whether you want to be the only owner – a sole proprietorship - or whether you could do better with the expertise and assistance of a partner or partners. You will also probably want to assess whether it makes more sense to incorporate. There are numerous farm business arrangements used in today’s business world such a joint ventures, syndicates, cooperatives, etc. This factsheet will evaluate the three most common structures – sole proprietorships, partnerships, and corporations.
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Sole Proprietorship
Sole proprietorship is by far the most common form of business structure in the farming community. It is the simplest form of organization and requires the least effort to set up. The farm assets are owned by the farmer as an individual and net income is reported by the farmer on the personal income tax return.
Advantages:
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Simple form of organization and easy to set up.
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Net income is kept by the owner – there is no sharing of profit.
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Losses, if they exist, may be used against personal income.
Disadvantages:
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Transfer of the business may be more cumbersome than it would be for corporations.
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You are on your own with no expertise or financial support from a partner.
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Unlimited personal liability.
Partnerships
Partnerships offer an immediate advantage simply because of the sharing aspect. Start-up capital, operating capital, and business expertise and decision making are all on a shared basis in partnerships. A partnership exists when there is an agreement between two or more people to share the costs and/or other resources toward the operation of a business venture. The burden of debt and risk is also shared. From a taxation point of view, partnerships are very similar to sole proprietorships. Income is distributed, according to the partnership agreement, and the partners pay income tax on their share of the profits. The business itself is not subject to tax.
Advantages:
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Partners can bring complementary talents to the business.
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More capital to start and operate the business.
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Partners share the liabilities and the risks of the business.
Disadvantages:
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Each partner has a say in running the business which may lead to conflicts from time to time.
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Profits are shared.
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Leaving a partnership can sometimes be a complicated affair.
Corporations
The corporation is a legal entity which exists separately and distantly from the people who own it – the shareholders. Corporations issue shares, each of which represents a portion of ownership. Limited personal liability is one of the key features of an incorporated business, however, this may be compromised if personal guarantees are in place. All assets and liabilities are the corporations. The corporation, unlike proprietorships and partnerships, pays income tax, just like an individual. The tax rates are different than those for individuals, however.
Advantages:
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Limited personal liability.
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May pay less tax to the governments.
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Continuity of the business is usually more certain if you decide to rollover your share.
Disadvantages:
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Usually fairly expensive to incorporate.
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Initial losses are not deductible against personal income.
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A more cumbersome structure of business.
Before deciding on the form of business structure, it would be wise to fully assess your situation. Each structure has pros and cons and would work very well in certain circumstances. Be sure to fully evaluate this important aspect of business planning before deciding.
This resource information has been provided courtesy of the Department of Fisheries, Forestry and Agriculture’s Business Development Branch. https://www.gov.nl.ca/ffa/programs-and-funding/programs/fbm/
The Business Development Branch has resources to assist with management of a farm. The branch offer short courses, consultation, publications, and financial assistance to eligible applicants. For more information, please contact the Farm Management Specialist in your area:
Afton Madore
P.O. Box 2006 Corner Brook, NL A2H 6J8
709-637-2474
Ann Marie Whelan
P.O. Box 8700 St. John's, NL A1B 4J6
709-729-6749
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