Iowa Farmer Today
01-22-07
Many ways to do business on the farm
By Gene Lucht, Iowa Farmer Today
So much for just buying a tractor and pulling into the field -- those days are long since
gone.
Today, farmers must not only decide on seed and fertilizer, rental rates and marketing
plans, they must also decide on a farm-business structure.
It’s not as easy as it sounds.
“The vast majority of farms are sole proprietorships,” notes Thomas Lawler, an attorney
with Lawler & Swanson, P.L.C. in Parkersburg and Greene. “Partnerships are also
popular.”
But, farmers can form various types of corporations, such as C or S corporations. They
can also form limited liability companies (LLCs).
Each type of structure has its advantages and disadvantages, Lawler explains. Also,
many farmers over time may move from one structure to another.
The reasons often are related to taxes and the passing on of the business from one
generation to the next.
But, Lawler cautions farmers if they are considering a switch, they also should consider
how it could affect government farm program payments and limitations on those
payments.
For example, they may need to change some government contracts. He advises those
farmers to check with their local USDA Farm Service Agency (FSA) office on those
program payment issues before they make a change.
FSA officials say farmers should contact them when any change in ownership structure
takes place to make sure the right names and information are on record.
“They just need to keep us informed,” says Bruce Cordes, an Iowa FSA spokesman.
Lawler says the same advice goes for other USDA agencies if farmers have a contract
with any of them.
But, the most important thing to remember when looking at farm business structure is to
determine the goals for the farm business.
“What is it you want to do?” asks John Baker, an attorney at Iowa State University’s
Iowa Concern Hotline who works with estate and beginning farmer issues.
Too often, Baker says farmers think only of tax consequences and make decisions
based on reducing business taxes. While that is important it is not the only one, Baker
explains.
Farmers should consider ease of business operation, taxes on the business, liability
concerns, ability to expand and grow, passing on the farm down the road, retirement
consequences and many other items.
Also, those factors may change as children decide to either join or leave the operation.
Baker says there are advantages and disadvantages to each structure:
Many businesses incorporate to limit liability. Another reason is to find a way to share
risk with others. Yet another reason is to put a succession plan in place.
Lawler says because of the strengths and weaknesses of the different types of business
structures, it is not unusual to see farmers follow a pattern.
Many start out as sole proprietors. Then, as the business grows, they may form a C
corporation. As they near retirement, they may decide to change to an S corporation.
Doing some of those things may allow the farmer to make other investments so his or
her retirement is not based entirely on income from the farmland he or she bought over
the years.
Making farmland the retirement plan can work, but it is also very limiting, Lawler
explains.
It actually can make it more difficult to pass on the farm to children or to help a beginning
farmer because the owner needs the land to generate as much income as possible.
That can make it difficult to offer a break on rent to a younger farmer.