Incorporating isn’t free. Nor is running a corporation. The differences aren’t massive, says accountant Geoff Garland, but they’re big enough that you’ll want to make sure you’re getting value for the extra legal and accounting expenditures.
Garland says it doesn’t take a tremendous amount more to administer the farm books for a typical farm corporation compared to a sole proprietorship. Mostly, it’s the addition of payroll account and sending in remittances, since managers are paid a salary.
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The year-end accounting is more involved and will cost you more. “For an average farm with decent records, you’re probably looking at $700 to do a basic T1 with a financial statement for a sole proprietorship,” says Garland. “It’ll cost about $2,000 for a corporation compilation and your two tax returns.”
That’s almost three times as much in annual accounting fees, in addition to the $7,000 that Garland estimates it will cost you in legal and professional fees to set up the corporation and prepare related legal agreements.
In fact, when Garland talks to clients about incorporating, he begins by asking them how much they need to live on. Then he subtracts that figure from their net income, including off-farm and net farm income. If there’s an insignificant amount left after the draws, he tells his
Photo credit: Mark Spowart
clients it isn’t worth adding a layer of complexity to the business.
Lawyer George Sinker says legal and government filing fees for incorporating typically add up to $1,500 to $1,600. But there are additional costs you need to consider.
Once the farm is incorporated, then the rollover asset transfer agreement could be another $1,000 to $2,000, depending on how much and what kind of assets are involved. For example, land is more complex than equipment.
Then a shareholder agreement needs to be prepared, and that’s where additional costs can start adding up. Lawyers charge hourly rates for negotiating and sorting out what would work best for the parties involved.
Once incorporated, the annual costs for year-end annual resolutions are typically $150 to $200. “Clearly, you need to be aware of the totality of the costs,” says Sinker.
“The upside to sole proprietorships is that they’re easy to administrate,” says Sinker. You have one GST business number, one business account and one easy-to-understand financial statement.
Moore believes farmers should look hard at how much benefit they’ll get from the additional professional fees. “Instead of paying $500 for personal income tax filing under a sole proprietorship, you’ll pay $1,000 to $2,500 per year,” Moore says. “A corporation is a guaranteed income for accountants and lawyers.”
Challenge #4 Farm liability
In theory, a corporate structure means your personal assets are beyond the reach of creditors and lawsuits. In practice, however, it’s much murkier.
Most credit institutions will insist on personal loan guarantees, whether the farm is incorporated or not, says accountant Geoff Garland, so setting up a farm corporation may not actually help you protect personal assets if the farm gets into trouble.
He also suggests keeping the value of reduced legal exposure in perspective. Incorporating may help other businesses curb their liability, but for farmers, most of the risk of injury or damage is to themselves or to their own property, to to the public or to employees.
Moore meanwhile is skeptical about whether corporate liability protection can be trusted. “Liability reasons I think are the biggest lie about incorporating,” says Moore. “Any lawyer worth his salt will list everyone remotely involved to the case, including the corporation, you personally and your Aunt Emma.”
Sinker meanwhile says that in today’s world, liability is a serious concern and should be considered. “There’s lots of litigation out there to go around,” he points out. “It’s becoming more common for farms.”
More and more legislation pertaining to agriculture is being created and in more populated areas of the country, there’s more conflict between farmers and urbanites. “If you are a sole proprietor, and you have a good insurance broker, your liability insurance should protect you,” says Sinker. “Being incorporated just adds another layer that the claimant has to go through to get at your personal assets.”
