Company formation tends to be tax and investment driven rather than collaboration.
Corporate arrangements may be confined to two collaborators or numerous interested parties and families. For example a dairy farmer can lease his land and milk quota to a company, a non dairy farmer can lease in his land, a partly retired farmer can lease his land and swop in his stock for shares, and another party can offer finance for shares and so on. There is nothing to prevent a group of parties like these coming together to form a company and organising between them how it is run. The company concept can be applied to any farm enterprise(s).
Farmers best positioned to benefit from incorporation tend to be paying high levels of income tax, have moderate drawings and have operational scale. Forming a company can be particularly beneficial as a vehicle for expansion and development, but can also be used as a vehicle for collaboration.
The main constraints associated with company formation are
- The company becomes the farmer irrespective of the number of farmers within the company
- Dissolution, if required, can be costly and problematic
- Taking money out of the company can give rise to significant income tax
- While audited accounts may not be required there are still company law and filing compliance requirements
The key benefits of company formation include
- Shareholding reflects input
- Shareholders decide how the business is to be run and who has responsibility for what
- Land can be included or not
- Children and/or grandchildren can have a shareholding
- CGT, CAT, and Stamp Duty reliefs still apply
- SFP can be sold, leased or transferred to the company
- Companies pay corporation tax on company profits at 12.5%, they do not pay PRSI or USC
- Sale of stock and machinery to the company at the onset can be tax efficient
- Income can be salary, rent, fees or a mix
- The company carries out its own investment and can borrow in its own right
- An excellent vehicle to develop scale and efficiencies
- Limited liability
- Your shareholding is transferable and grows with the company
Shareholders, employees and company stakeholders/directors are liable for income tax on any income or earnings received from the company. Changing your farm from your current status to a company will require cessation of income averaging (if previously availed of) and stock relief can’t be availed of in the last year of your current status.