The Rural Voice, 1991-10, Page 18t
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14 THE RURAL VOICE
SHOULD I INCORPORATE?
A business lawyer is often asked
by farmer clients, "Should I incorpor-
ate?" Although the answer depends
upon the particular circumstances of
each farmer, there are advantages to
incorporation over other business
structures for farmers to consider.
A corporation is a separate legal
entity, distinct from its shareholders
(owners), directors, and officers. It is
the corporation that owns and operates
the business and incurs all debts and
liabilities. Any shareholder has only
limited liability for the debts of the
corporation. Therefore, a shareholder
is only liable to the extent that he has
invested money in the corporation. In
contrast, in a partnership or sole pro-
prietorship, the owner or partner is lia-
ble to the extent of all personal assets.
Secondly, a corporation has a per-
petual existence. Therefore, owner-
ship of a farm business may be trans-
ferred within a family easily within a
corporate framework. As long as the
corporation owns all the assets, busi-
ness can continue uninterrupted on the
death of a shareholder or director.
Conversely, a sole proprietorship's
business ceases automatically on the
death of the proprietor. A partnership
also dissolves on the death of one of
the partners. Therefore, new partner-
ship agreements and new documen-
tation are required to continue the
operation of a business partnership.
Thirdly, if owners wish to give em-
ployees a share in the growth profits
of the business without giving them
management rights, a corporation
should be used. Otherwise, it would
be necessary to bring employees into a
partnership with the owner, which
usually also provides the employees
with management rights.
Fourthly, a corporation has a very
flexible structure and can be used for a
variety of purposes. It need not be
limited solely to the business of farm-
ing. Moreover, the rights and obliga-
tions of the directors, officers, and
shareholders, are all clearly structured
by the Ontario Business Corporations
Act., 1982, providing everyone with
greater certainty.
A partnership, on the other hand,
may be limited in what it can do by
terms of the partnership agreement.
As well, while partnerships are regu-
lated by statute, it is possible that
partners' rights and liabilities could be
affected adversely by a fellow partner.
Fifthly, with respect to tax, a cor-
poration is taxed as a separate entity,
apart from its directors, officers, and
shareholders. Any profits are paid out
in the form of a dividend to the share-
holders. Directors and officers can be
paid a salary by the corporation.
By comparison, a sole proprietor is
taxed individually at a personal tax
rate. Partnerships are also taxed at a
personal level. The personal tax rate
is higher than the corporate rate in On-
tario. Further, if a person is a share-
holder of a corporation, the dividends
that are paid out are taxed at a lower
rate than the normal personal tax rate.
The advantages of incorporation
for a farmer should be given serious
consideration. Whether or not a
farmer should incorporate can only be
determined after a thorough review of
the farmer's affairs with legal and
financial advisors.0
Agrilaw is a syndicated colwnn produced by a
full service London law firm. Marlene
McGrath, an associate lawyer, specializes in
corporate and commercial law, wills, and
estate planning. Agrilaw is intended to provide
information to farmers on subjects of interest
and importance. The opinions expressed are
not intended as legal advice. Before acting on
any information contained in Agrilaw, readers
should obtain legal advice with respect to their
own particular circumstances.