Unless you are planning on having a hobby farm or simply want to live in the country, starting your farm is essentially starting up your own business. You are an entrepreneur just as much as the shopkeeper on Main Street. This means you should seriously consider how you intend to structure your business before making any significant investments.
There are three structures to a business, sole proprietorship, partnership and corporation. There are advantages and disadvantages to each. Planning out your structure in advance can help you in the long term come tax time.
A sole proprietorship is an unincorporated business that is owned by one individual. It is the simplest kind of business structure and the easiest to setup. The owner of a sole proprietorship has full responsibility for making all decisions. They receive all the profits, claim all losses, and most importantly does not have separate legal status from the business. If you set up your business as a sole proprietor, you also assume all the risks and liabilities of the business. The risks extend even to your personal property and assets. You will pay personal income tax on the net income generated by your business. Your business’s financials are reported on your personal tax return and you will have a December 31 year-end.
You may choose to register a business name or operate under your own name or both. From an accounting perspective, this will increase what you pay to file your annual personal tax return if you already hire an accountant. If you are filing your tax return personally, and you are starting a farm business, it would be worth contacting a local accounting firm. Tax legislation changes every year and a small mistake could cost you big time. The important deadlines for a sole proprietorship are April 30 and June 30. Your income tax payable balance is due April 30, however, you have until June 30 to file your return.
You may be required to register for the goods and services tax/harmonized sales tax (GST/HST) if you provide taxable supplies in Canada.
There are a number of different kinds of partnerships, legally speaking, but for the most part, you are doing this type of business structure with someone or several other people. You can still be personally liable. You will still report the financial information on your personal tax return as a factor of your partnership share. Usually this a percentage. It does not necessarily have to be 50%.
A partnership is an association or relationship between two or more individuals that join together to carry on a business. Each partner contributes money, labour, property, or skills to the partnership. In return, each partner is entitled to a share of the earnings of the business. The business profits (or losses) are usually divided among the partners based on the partnership agreement.
Like a sole proprietorship, a partnership is easy to form. In fact, a simple verbal agreement is enough to form a partnership. However, most partnerships are governed by a written agreement setting out rules for partners entering or leaving the partnership, the division of partnership income, and potential issues. It is in your best interest to contact a notary and have a formal partnership to protect all parties involved if this is the route you pick.
A partnership is considered to be a person for GST/HST purposes. You will need to make sure that all receipts and invoices have the name of your partnership on it so that filing the taxes is straightforward. Having a separate bank account, and a written partnership agreement will make it more clear that your farm partnership is the business is not a sole proprietorship.
Corporations are treated as a separate legal entity so you can get some separation of your personal and business. There are legal costs to set up and annual accounting fees. It can enter into contracts and own property in its own name, separately and distinctly from its owners.
It may have some of the following features:
- it is a separate legal entity with a lasting existence
- it can generally raise large amounts of capital (money or other assets) more easily than a sole proprietorship or partnership
- the shareholders cannot claim any loss the corporation incurs
- When forming a corporation, the owners transfer money, property, or services to the corporation in exchange for shares. The owners of these shares are shareholders.
You can buy and sell shares of a corporation without affecting the corporation’s existence. A corporation continues to exist unless it winds up, amalgamates, or gives up its charter for reasons such as bankruptcy. A corporation has to file a corporation income tax return no later than six months after the end of every tax year, even if it does not owe taxes. Like a partnership, corporations have their own GST/HST registration.
If you decided to go the corporation route for your farm business, it is very important that you keep a separate business account. Absolutely nothing for the company can be in your personal name. If you have a farm that you want to incorporate, it is best to consult your accountant because there will be tax consequences.
What should you choose?
If you are just starting out and there is no legal requirement for you to have a corporation (some supply management systems require quota to be held by a corporation), a sole proprietorship or partnership is likely going to suit. You can apply the losses from starting your farm to your off-farm income to reduce your taxes owing. On the flip side, if your farm fails, you are personally liable.
A corporation is going to be a better route if you are making a very large investment, plan to farm full-time or are working on succession planning. Each situation is going to be unique and different. Hopefully, this provides you with an overview of how you can structure your business.