To incorporate or not to incorporate

Posted on: January 21st, 2009 by Richard Cressman

My question for Richard

We have been talking with our accountant about incorporating the farm. My parents own everything. I work for wages and my brother who still has one year of school left plans on coming home when he is finished. I have been married for two years and my wife has a job off the farm but would like to be more involved in the day-to-day operation. We have also talked about a partnership. That is what my father had with my grandfather.

 

Richard’s Reply

There is no correct answer to this question. There are advantages to incorporating and there are going to be disadvantages as well. Sit down with both your accountant and your lawyer and have them discuss both the advantages and disadvantages with you, your wife, your parents and your brother. Literally sit there and write down all the points talked about. Also, it might be advantageous to search out other farmers who are incorporated and others who are not and get their opinions; particularly individuals who have been operating as a corporation or partnership for more than 15 years. Consider all of these opinions. Consider where you and your brother see the business in 10 or 20 years; how you intend to grow the business. All of these considerations and advice will lead you to a well researched and sound business decision. But farming is more than a business so there is another side to incorporating or operating as a partnership that does not have direct legal and financial implications. It is a side of the incorporation decision that often goes unacknowledged until we are looking back, when it is too late. It is the emotional side of ownership that can cause much angst within the business and the family, years after the decision to incorporate or operate as a partnership was made.

The first question to ask is where will each of the business partners live? I would recommend if at all possible that each partner in the business attempt to own the house or farm where they each live. I will repeat that last statement, “I would recommend if at all possible that each partner in the business attempt to own the house or farm where they each live.” I cannot emphasize this enough. You mentioned that your wife works off farm and I am assuming that her income helps to support both of you. It probably allows you to take out a smaller draw or reinvest what you do take as salary or wages back into the farm. Or it may just allow you and your wife some luxuries that are not available to your parents or your brother.

Let’s consider a story of two brothers who had been working together for approximately 20 years. They had started out working with their father right out of high school. Everything – four farms, machinery, quota, and vehicles – was owned inside one corporation (it could just have easily been a partnership). They eventually bought out their father. Each of them with their respective wives controlled 50% of the shares in the corporation. The structure that their accountant had put together for them years earlier was textbook perfect.

However, the working relationship was far from perfect and they were on the brink of breaking up the business. I was sitting at the kitchen table with the one of the brothers and his wife. She said that she was very tired of living in a house where all she owned were the clothes in the closets and the dishes in the cupboard. She said everything else including the car was owned by the company. In her mind what she actually owned did not seem like very much. She felt that she had very little control over her life. Simple decisions like redecorating a room had to be approved by all members of the corporation as the corporation owned the house. Years earlier she had wanted new cupboards for the kitchen but the decision at that time was to not spend money on houses, rather it was better spent on milk quota and buying yet another farm. This decision although financially profitable was emotionally damaging. This was only one example of how lack of ownership caused deeper and deeper rifts between the brothers’ families. If each family had owned their own home, allowing the women to feel more control and independence of their own domains the likelihood of keeping this business alive would have been much greater.

Ownership is not just about dollars and cents. Ownership can be a very emotional issue. There is a particular attachment to the home that you will share with your wife and raise your family in. Don’t underestimate this attachment especially for your wife who is striving to build a new family with you while you are striving to also manage changing business and family dynamics with your family of origin. It all really comes down to respecting the financial need to work together and the emotional need to be independent.

Your brother is still single, but there could come a day when he will want to get married and there will be another young woman entering into this family. Taking the time now to plan how you are going to handle the ownership of your home/farm and where your brother and his future wife may want to live can save you a tremendous amount of angst down the road. Oftentimes frustration similar to what I have mentioned in the story above does not show up early on. It may go unnoticed until an unavoidable explosion occurs causing irreparable damage to the business and your extended family. Sometimes the stress can build for 10 to 20 years before it comes to a head.

Regardless of which type of ownership you choose — corporate or partnership, do not under estimate the emotional and psychological aspects of what each person feels they have ownership control over. When considering how to structure your business relationship think about situations like: If the home needs renovations who is going to decide how much money gets put into renovations? (kitchens are the emotional hotspots and commonly on the renovation wish list for farm wives). Or what happens if the spouse of one partner has a very high paying off farm job and wants to upgrade their home? If this is owned inside a corporation how do you go about providing that person ownership that equals their investment?

Here is another thought. What happens if you and your wife are content today to live in the house that you have, but down the road your brother gets married and a farm comes up for sale close by that has an extremely nice house on it in comparison to where you are living? Your wife who has been part of the family for more years than this new bride will find herself living in a house that does not have near the upgrades of this new purchase. How are you going to handle that potential situation?

After you have addressed some of the questions mentioned above please seek the advice of an account and lawyer as how to setup your ownership structure.


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