Farm Ireland
Independent.ie

Tuesday 6 December 2016

The pros and cons of switching your farm to company status

Theresa Murphy

Published 03/02/2016 | 02:30

There are both advantages and disadvantages to setting up your farm as a limited company.
There are both advantages and disadvantages to setting up your farm as a limited company.

Our legal expert outlines the benefits and drawbacks to putting your farm into a limited company structure.

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Question:  I am a young trained farmer who has inherited a farm from my granduncle. Although the farm is returning a good level of income I intend to expand the farm before I become totally reliant on it as a source of income. I have an off-farm job which will maintain me financially until I can rent/buy enough land for a more viable farm business. The farm makes about €30,000 net profit and I want to use this income to expand. Am I better to put the farm business into a company structure or to operate it as a sole trader?

Theresa replies:  The biggest difference between operating a business as a limited company and operating as a sold trader is the rate at which tax is paid on the profits. With corporation tax still resting at 12.5pc by comparison with the higher band tax rate of upwards of 50pc, it is certainly worth any farmer's time considering the pros and cons. In recent years operating a farm business as a limited company has certainly become an option for dairy farmers as well as larger tillage and drystock farmers. The following are some of the main considerations involved.

Incorporation

Incorporation or forming a private limited company can provide farmers with an opportunity to plan and manage taxes more efficiently but succession and finances are the critical issues to consider.

A limited liability company is a separate legal entity. In most cases the land and buildings are not transferred to the company, but the stock, tools and equipment are transferred. If the machinery with loans attached are transferred, the owner will need to get agreement from the financier or bank to proceed with incorporation. You will also need to transfer your herd into the company name.

Where entitlements are transferred into the company it is advisable to check with your agricultural consultant to ensure entitlements are 'activated' to prevent losing them to the national reserve.

The benefits

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The main beneficiaries are farmers in expansion mode, that is those who are buying land, building on the farm or investing heavily in new machinery.

Paying the lower rate of corporation at 12.5pc is an advantage as all of the money made by the farm can be used to pay the debts or loans once the tax has been paid. This allows you to pay off loans much quicker than if you had to pay tax at upwards of 50pc on the money before you made the repayments. Farmers who pay tax at the higher rate and do not intend to spend all of their income in that year should also benefit.

Other farmers who would benefit from incorporation are those with an off-farm income which would push their on-farm earnings into the higher tax bracket. Where this farmer is not drawing heavily on the farm income allows more monies to be available for farm improvements etc.

If you intend to maintain yourself with the income obtained from an off-farm job, while using the profits of the farm to expand, a company structure is worth considering.

Another significant advantage is that no Universal Social Charge (USC) or Pay Related Social Charge (PRSI) are payable on company profits.

However, if you choose to pay yourself a salary from the company you will pay the full rate of income tax on that money, including where it pushes you into the higher tax band.

So although there are tax advantages for monies applied to loans and investments, it is not a means of avoiding income tax on your personal income.

Family considerations

Family members can also be included as directors or shareholders and this would make the transition smoother when they take over the farming enterprise.

Also, where a spouse is employed by the company PRSI contributions will be made on his/her behalf which adds to that spouse's future state pension entitlements.

This may be relevant if your granduncle intends to stay active in the farming business after he has transferred the farm.

Theresa Murphy is a barrister based in Ardrahan, Co Galway.

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