Choosing a legal structure for operating an agricultural business

There are various legal forms for operating a business. However, in the agricultural sector, due to its specific features, businesses are mainly operated in three particular forms: sole proprietorship, general partnership (partnership) and joint stock company, better known under the name of “Company”.

Each of these legal forms has advantages and disadvantages from a personal, financial, legal and fiscal point of view; and each of them should be analyzed in order to establish what form of legal structure might be most appropriate for the business. It is therefore necessary to analyze several factors to make an informed choice:

a) All business income is used to cover the cost of living of the individual (s). If the individual withdraws, for personal purposes, all the profits that the business generates, there is a good chance that the fact of incorporating will not result in any tax savings.

b) The individual is alone and has no one to associate with. When changing the legal structure, it will therefore be necessary to go directly to a company.

c) What is the individual’s short, medium and long term business plan? Is he planning a lot of investments that will lower his income?

d) Has the individual benefited from all possible tax benefits? Does it plan to make drainage, clearing or leveling expenses – which are tax deductible in the year they are incurred – or does it plan to purchase animals?

The table below presents the main advantages and disadvantages of legal structures.

Thus, the choice of a legal structure for the operation of a farming business must be carefully analyzed with the help of competent people in order to avoid unpleasant surprises later on.

Individual company

Partnership

Joint stock company (company)

Benefits :
• Simplicity;
• Alone to decide;
• Possibility of tax savings, if business at a loss;
• Possibility of deduction for capital gains on eligible farm property.

Benefits :
• Simplicity;
• Alone to decide;
• Possibility of tax savings, if business at a loss;
• Possibility of deduction for capital gains on eligible farm property.

Benefits :
• Limited liability;
• Permanence of the company;
• Generally lower tax rate (13% for first $ 500,000 of profit);
• More flexible tax planning: – salaries / – dividends / – value freeze;
• Transfer to a child facilitated;
• Possibility of deduction for capital gain if disposal by the shareholder of shares;
• Possibility of deduction for capital gain if disposal of assets by the shareholder in favor of the company.

Disadvantages:
Income tax rate can reach 52%.

Disadvantages:
• Income tax rate
can reach 52%;
• Joint and several liability;
• Same decision-making power for each partner;
• Training costs: – notary / – accountant.

Disadvantages:
• Additional tax declarations;
• Corporate tax loss not transferable to shareholders;
• Higher incorporation fees and annual fees;
• Deduction for non-eligible capital gains
on disposal of goods by the company.

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Marc St-Roch
CPA, CA, M. Fisc., Tax specialist at SCF Conseils

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