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Should You Incorporate Your Farm?

With farm income down in 2015, here are a few questions to ask yourself if you're considering incorporating your farm.

Holly Spangler, Prairie Farmer Senior Editor

January 22, 2015

3 Min Read

Year end. It's a good time on the farm. (Please read with sarcasm.) Always followed, in terms of popularity of course, with tax season. Which is almost where we're at now.

For our 2014 year-end, the rush and flurry of Christmas preparations met the rush and flurry of number crunching, of cash flows and balance sheets and meeting with the accountant. This year, our accountant tacked on an extra meeting: legal advice regarding incorporation. Over the years, we've batted around the idea of forming a corporation. Is this the year? Will it save us anything? What about liability? Are the tax benefits substantial enough to offset the extra fees ad hassle? What I'm saying is, it's an ongoing conversation, for a lot of farm families.

In our particular case, we're not looking to incorporate until we have to. Fortunately, Dwight Raab agrees with that tactic.

Raab is head of the Illinois Farm Business Farm Management Association, so he has the opportunity to see a lot of farm books and to aggregate those numbers into solid comparisons. He harkens back to an old FBFM colleague who used to say of incorporating, "Look for reasons not to do it, rather than reasons to do it. Once you do it, it's hard to undo – especially if it's a C corporation."

In our situation, we're looking at an S corporation, which would provide savings on self-employment tax, if not on actual income tax. (Self-employment tax savings come because the corporation pays your salary.) Both our accountant and our attorney recommend seriously considering an S corporation when you have $45,000 to $50,000 in earned income on your Schedule F. "That's a good time to start looking," says our attorney, Steve Holland.

Holland handles farm and small business legal matters in our corner of the world, and has done his fair share of work with farm business. "Some people want to incorporate because, 'I want to be a corporation.' Don't do it for that reason," he advised.

Raab adds that sometimes a farm business will incorporate to limit liability. "Say you have a trucking business that involves liability, like a dozen trucks running down the road. You could carve out an LLC for trucks, and limit liability to that entity."

S corporations will still provide limits of liability, without the tax bracket burden of a C corp – the type of corporation many farms entered into during the 1970s and '80s, when they chose to incorporate. C Corps are much harder to get out of. Today, S corps are much more flexible, with many of the same benefits.

Raab says, "An S corporation is kind of a partnership with limits of liability."

Like anything, S corps have their downsides. In Illinois, you'll pay a $500 filing fee, and a $500 annual fee. You'll file an extra tax return, and you'll have to learn to operate with more structure. Say, for example, you go to put new tires on the truck and only have the corporation checkbook with you. You can't use it.

In the end, we decided this was not the year to incorporate our farm. Lower grain prices mean a lower net income, both in 2014 and 2015. The same may be true for a lot of us.

How about you? Is your farm incorporated or are you thinking about it? Comment below or drop me an email with your questions, concerns or plans. 

About the Author(s)

Holly Spangler

Prairie Farmer Senior Editor, Farm Progress

Holly Spangler has covered Illinois agriculture for more than two decades, bringing meaningful production agriculture experience to the magazine’s coverage. She currently serves as editor of Prairie Farmer magazine and Executive Editor for Farm Progress, managing editorial staff at six magazines throughout the eastern Corn Belt. She began her career with Prairie Farmer just before graduating from the University of Illinois in agricultural communications.

An award-winning writer and photographer, Holly is past president of the American Agricultural Editors Association. In 2015, she became only the 10th U.S. agricultural journalist to earn the Writer of Merit designation and is a five-time winner of the top writing award for editorial opinion in U.S. agriculture. She was named an AAEA Master Writer in 2005. In 2011, Holly was one of 10 recipients worldwide to receive the IFAJ-Alltech Young Leaders in Ag Journalism award. She currently serves on the Illinois Fairgrounds Foundation, the U of I Agricultural Communications Advisory committee, and is an advisory board member for the U of I College of ACES Research Station at Monmouth. Her work in agricultural media has been recognized by the Illinois Soybean Association, Illinois Corn, Illinois Council on Agricultural Education and MidAmerica Croplife Association.

Holly and her husband, John, farm in western Illinois where they raise corn, soybeans and beef cattle on 2,500 acres. Their operation includes 125 head of commercial cows in a cow/calf operation. The family farm includes John’s parents and their three children.

Holly frequently speaks to a variety of groups and organizations, sharing the heart, soul and science of agriculture. She and her husband are active in state and local farm organizations. They serve with their local 4-H and FFA programs, their school district, and are active in their church's youth and music ministries.

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