The Benefits and Risks of Different Legal Structures for Your Family Farm

If you’ve ever wanted a simple explanation of the basic legal structures for a family farm, look no further. In under 5 minutes, Tracy Hanson, lawyer at Walsh LLP in Calgary, expertly explains and discusses the benefits and risks of sole proprietorships, partnerships, and corporations for a farm business.

Sole Proprietorship

This is when a person owes the farm business and controlles the assets. All of the income and expenses remain with the individual. From a risk perspective, if there are financial problems with the farm business, this will affect the assets that the individual owns.
Partnership 

A partnership is a separate entity for all purposes but income tax. A partnership is a relationship that exists between two or more people. The risk associated with a partnership is that the partners are liable for the partnership debts. The benefit of a partnership can come from the perspective of some tax and succession planning.
Incorporation 

Incorporating your farm business provides the greatest amount of risk protection. With incorporation, the assets are separate from ownership of the farm business. The incorporated farm is a separate entity, which carries on the business and carries the business risk. As a shareholder of the business, you are not liable for the debts of the company itself. However, from a financial perspective, financial institutions will require a personal guarantee by the shareholder so it doesn’t necessarily move financial risk away from the shareholders.

The best structure for your  farm business depends on what stage the business is at and succession planning.
For further information on legal organizational structures and the benefits and risks associated with them, please refer to the following:

Legal Organizational Structure by Agricultural Marketing Resource Center

So You Want to be a Farmer? (p.17-19) by Canadian Farm Business Management Council

This workshop was funded in part by the Agriculture & Food Council of Alberta

 

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