Economic and Policy Update

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Graphic owner: UKZN SAEES: school website

July 22, 2016 Volume 16, Issue 7 Edited by Will Snell & Phyllis Mattox

Are You Thinking About Incorporating? - Tarrah Hardin Onboarding New Employees - Steve Isaacs Kentucky Grain Markets Map - Jordan Shockley Policy Briefs - Will Snell

Economic & Policy Update Are You Thinking About Incorporating?

When one is starting a new farm business or whether they have been farming for many years, it is common that at some point, they will consider if they should operate as a sole proprietor or incorporate. This decision should be thought through very carefully as there will be long-term impacts of the decision. Each entity should be examined carefully to determine the benefits and risks are for all those involved. There are three types of corporations: Limited Liabilities Corporation, S Corporation, and C Corporation, each having their own tax structure. This short article will address some of the reasons businesses should incorporate and the tax structure of each type. One of the reasons people incorporate their business is to protect personal assets such as their home, personal vehicles, and savings. No one wants to think that their business will fail or will have to file for bankruptcy. However, should this become reality, personal assets may be at risk in order to pay off creditors that are associated with the unincorporated business. Incorporating reduces the risk of losing personal assets in the event of the exit of a business. In many situations farming is a family affair with multiple households involved. Creating a corporation legally puts families into business with each other and establishes guidelines of ownership, such as issuing shares to members. Not only does this help protect each family but allows the business to continue if something devastating should happening. As farm ownership and management evolves, the corporation will stay intact until the members of the corporation decide to dissolve it. When thinking about whether or not to incorporate, individuals have three options, and with these options come different tax structures. A Limited Liability Company (LLC), can be taxed like a sole proprietor that flows straight to the individual’s tax return, as a partnership that also flows directly to each partner’s tax return, or can be treated like a traditional corporation with its own return. However, when doing so one needs to be mindful of double taxation of the corporation profits. With C Corporations, the entity files a corporate tax return and pays taxes on a corporate level. However, if the corporation provides the owners with dividends throughout the year, then the owner will pay personal taxes on the dividend amount. S Corporation taxes pass through to the personal tax return and no corporate tax is paid. Another difference between C and S Corporations is ownership. S Corporations can have no more than 100 shareholders and cannot be owned by other corporations. C Corporations have more flexibility, along with LLCs. When thinking about turning a sole proprietorship into a corporation several details need to be examined. When doing so, a farmer should surround themselves with trusted advisors to help guide them through the process and have their best interests in mind. If you have any questions about corporations, please feel free to contact your local Area Farm Business Management Specialist.

Tarrah Hardin, tarrah.hardin@uky.edu Area Farm Management Specialist PAGE 2 Educational programs of Kentucky Cooperative Extension serve all people regardless of race, color, age, sex, religion, disability, or national origin. UNIVERSITY OF KENTUCKY, KENTUCKY STATE UNIVERSITY, U.S. DEPARTMENT OF AGRICULTURE, & KENTUCKY COUNTIES, COOPERATING.


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