FB—Lancaster Farming, Saturday, April 7,1984
Should I Incorporate?
This is a question I often receive
when discussing ways to enter a
farm business. It is not an easy one
to answer because there are a
number of advantages to farm
families if they form a corporation.
Unfortunately there are also many
disadvantages. Before answering
the title question a number of
factors must be considered. These
factors would include reasons for
incorporating, problems with
incorporating, property to go into
the corporation, shareholders, and
tax consequences.
What it can do for you
A corporation could save some
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Brockett’s Ag Advice
By John E. Brocket!
Farm Management Agent
Lewistown Extension Office
taxes. It could make estate
planning easier. It would help you
to bring a third generation into the
business, pay some personal in
surance expenses, own your
automobile, and borrow money.
What Taxes? If properly formed
and if the business is profitable, a
corporation could save Federal
income taxes. How? A corporation
is an “entity” or a “person”. As
such, it becomes the employer of
everyone who works on the cor
porate farm including the
shareholder owners. An employer
can deduct as a business expense
certain fringe benefits it pays for
hired help. Thus items such as
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premiums from health insura)
retirement plans, or buy person
life insurance can be paid by the
corporation as a business expense.
These would reduce the taxable
income of the corporation and
ultimately you if that corporation
was a sub chapter S corporation.
Estate Planning? Sure you can
sell, will or gift shares of the
corporation to children or a spouse
(or anyone else). This makes it
easier than a partnership or sold
proprietorship when it comes to
reducing the estate.
Borrow Money? Yes a cor
poration can borrow money if the
asset value is high enough to
warrant it. However you may have
to co-sign the note.
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What it can’t do for you
A corporation can not make your
business profitable. It also may
cost you more in other areas such
as taxes, social security payments,
workmens compensation, records
and tax preparation.
What Taxes? Pennsylvania
taxes may be higher unless the
state chooses to let family cor
porations off the hook, (at present,
Pennsyvlania only recognizes one
class of corporation so all cor
porate net income is taxed at
corporate rates - 10.5% in 1983).
The Federal government allows a
sub chapter S corporation to pass
profits and losses through to stock
holders the same' way a part
nership does, (investment credit is
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also passed through to the
shareholders). Therefore even if
the corporation has a loss, the
shareholders will pay more
Pennsylvania tax with it than with
a partnership because they can not
deduct the loss for Pa. taxes.
Transfer Tax: If you sell, give or
transfer real estate into a cor
poration, Pennsylvania will charge
a 2% transfer tax on market value.
Social Security: In time this will
no-longer be a factor because self
employed social security taxes will
be the same as employer-employee
social security (FICA) taxes.
However they are lower now (1984 -
self employed people will pay
11.3% whereas the total of em
(Turn to Page F 9)
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