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What's a corporate farm?
Published 9/7/2007 in News : Area coverage By H Wire
Salina Journal
If you doubt that terms like "farm household" or "family farm" might need clarification, consider this statistic from the U.S. Department of Agriculture: More than 90 percent of farm household income is derived from off-farm sources.
The figure, which comes from a 2005 report, "The 20th Century Transformation of U.S. Agriculture and Farm Policy," underscores the dramatic change in rural America over the past century, and the extent to which traditional terms such as "corporate farm" are, at best, ambiguous.
There are, according to USDA, just more than 2 million farms in the United States, but only one in 10 could be called a "commercial" farm.
That small number of commercial farms dominates the market, generating 72 percent of all agricultural sales.
The USDA terms farms "commercial" if annual income exceeds $250,000. Smaller operators are labeled "intermediate" farms, which bring in about 18 percent of the nation's farm income, and the smallest, "rural residence" farms, which earn a mere 10 percent of total farm income.
"Corporations, by their nature, don't accept the responsibility that the individual proprietor does," says Gary Melander, 68, a lifelong Saline County resident and farmer. "The individual proprietor has a lot of responsibilities; corporations can avoid a lot of that responsibility."
Although Melander's distrust of ever-growing farming operations puts him at odds with the status quo, his preference for the family farm is quite mainstream.
But family farms -- operations that rely primarily on the owner and the owner's immediate family -- often do business under a corporate umbrella.
"There may well be good reasons for mom and pop to incorporate," said Ken Wasserman, an attorney with the Salina-based firm Norton Wasserman Jones & Kelly. "Sometimes there are estate planning benefits."
Placing the farm's assets into a corporation makes dividing it among surviving children fairly straightforward.
"It's a lot easier to do that with corporate stock rather than pieces of real estate."
Corporations are just one structure for "layering" the operation. Others include limited partnerships, limited liability companies or trusts, he said. Often there are financial reasons for incorporating.
"If it's a family-owned business and they are generating more than $30,000 a year, it's certainly something they should look into," said Brad Palen, an account manager at Kennedy & Coe who specializes in agriculture issues. "(The corporation) is treated as a separate tax entity, so it has its own tax rates. The first $50,000 (in income) is taxed at 15 percent. If the farmer has $50,000 or more of farm income, it's a way to shelter income at a lower rate."
There may be other benefits. Corporations get tax breaks for offering health insurance, so the farmer likely will be able to reduce the cost of coverage, he said. But incorporating isn't a free ride.
"There's some complexity involved," Palen said. "You have a separate set of books. You have to keep a balance sheet."
And there are some tax traps to watch out for, he said. He strongly recommended seeking expert advice before taking the plunge.
There doesn't appear to be a record of how many farm operations are incorporated, but an informal assessment suggests that the percentage is fairly low -- among the 100 Saline County farm operations that received the most farm subsidies in 2005, only 20 are designated as being corporations or trusts.
Clarity and precision in labeling farm operations is needed when debating the merits and disadvantages of each.
"Because we have defined the family farm so imprecisely, there is often misplaced emphasis on the prevalence and economic power of corporations in agriculture," wrote William Flinn and Frederick Buttel, in a paper titled "Sociological Aspects of Farm Size: Ideological and Social Consequences of Scale in Agriculture."
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