Choose the right business structure

Amy Hamilton.

Choosing an appropriate business structure is one of many important considerations when starting a new farming business.

It's a decision that can have wide-ranging implications as the farming operation grows and the goals and needs of the owners change over time.

Flexibility is a key consideration, but one that can create difficulty as the business matures.

Tax is also often a key consideration, and one that sometimes gets in the way of the implementation of a good structure.

The top effective tax rate for all common ownership structures is currently 33 per cent (individuals, companies, and trusts), meaning that tax savings are less of a consideration than they might have been in the past.

As a result the commercial objectives of the business owners have become more important.

Protecting assets from business risk has also become a significant driver behind which business structure to use, particularly in light of the recent changes to health and safety legislation.

When setting up a family-owned farming business why would we choose a trust or a company over personal ownership in a partnership or as a sole trader?

Companies continue to have many advantages over other business structures.

They provide limited liability for the shareholders. A company has a separate legal identity to its shareholders.

Companies also provide flexibility of ownership in that shares can easily be bought and sold.

The taxation of profits at a flat rate of 28 per cent provides for the deferral, in the first instance, of 5 per cent tax until a dividend is eventually paid.

It is essential that the rules of engagement for the company are clearly set out through the constitution and shareholders' agreement.

Trusts, while often under attack in the courts for varying reasons, continue to provide flexibility in the distribution of income and assets to a wide group of people (beneficiaries) who, for example, might otherwise not be shareholders in a company.

The effectiveness of trusts in protecting assets from spouses or new relationships, or to keep farming assets in the family has been steadily eroded by the courts in recent times.

Careful management is required for a trust to continue to provide all of the advantages historically associated with that structural choice.

There will, however, continue to be circumstances where a sole trader or partnership remains a useful business structure.

The simplicity and ease of setting up as a sole trader or partnership should always be tempered by the additional risk being taken on by the owners and the adverse consequences that can arise on death.

So what type of structure is appropriate for a farming business in 2016?

While there is definitely not a one-size-fits-all answer to this question, it is difficult to go past a company as an appropriate business structure for any farming business.

The ownership structure should be reviewed on an annual basis to ensure that it continues to be fit for purpose.

For example, assessing the ownership of shares - should these be held personally or is it appropriate to transfer to a trust so that wealth ultimately accrues in the trust rather than personally?

Whether your farming business is large or small, you are just starting out, or you are looking towards retirement, your choice of business structure is a key element that requires careful consideration and constant review.

A company will be the right structure for many, but your individual circumstances will dictate whether it is the right structure for you.

This information is general in nature and readers should seek specialist advice before making financial decisions.

- Amy Hamilton is a Agri Specialist at Crowe Horwath Waipukurau.