In any farming operation, whether incorporated or sole proprietorship, capital has to be put into the operations.
One sitution with an incorporated farm is when capital is required and a shareholder contributes assets or cash, sometimes the consideration that comes back to the shareholder is a shareholder loan (i.e. the farming operation owes the shareholder money). Therefore, it is prudent for the shareholder to become a secured shareholder, meaning they secure the loan the farming operation owes. This is important so that in the event the farm business needs to pay off creditors, the debt owed to the shareholder is secured, and thus will be paid off before any unsecured debts.
It is essential to remember that the key to mitigating any risk is to understand that you’re running a business. Even though it is your farm operation, it is still a business, and just as a prudent business person would want to secure a loan given to a corporation, you should also make sure you’re loan is secured when loaning to your incorporated farm.
Watch Tracy Hanson explain how to mitigate the risks of shareholder loans to your farming operation.
This workshop was funded in part by the Agriculture & Food Council of Alberta
Mitigating the Risks of Shareholder Loans in your Farm Business