Many larger farmers have switched to limited liability companies, but many are still evaluating their options and wondering if partnership is a better choice.
Each case is different and must be fully evaluated before taking any such step.
While tax bills are generally the biggest factor, you should also consider capital investment plans, succession, and non-farm income sources.
Partnerships can offer significant, albeit limited, tax savings, along with certain other financial incentives such as enhanced TAMS grants and successor partnership incentives.
Limited companies can offer unlimited tax savings, but not the same enhanced grant supports.
It’s about evaluating the merits of each structure in your case.
Factors favoring inclusion
■ You are currently paying taxes at the high tax rate.
■ Your medium-term earnings forecasts look positive.
■ You have a moderate level of personal drawings.
■ Your farm building allowances are running low.
■ Farm Partnership is not relevant.
■ You have not received certain TAMS grants in the past five years.
■ They have significant value in storage and agricultural machinery.
■ You may consider buying land in the future.
Factors that favor a partnership
■ You don’t currently pay the high tax rate.
■ You have plans for a significant investment in farm buildings or you have recently made a significant investment in farm buildings.
■ A successor farm partnership is a viable option.
■ You have received certain TAMS grants in the past five years.
It comes down to money and weighing the financial merits of both options over a period of say five years.
It is easy to determine the added value of TAMS grants that a partnership structure could attract, which will be a maximum of €48,000.
The successor partnership program offers additional tax credits of up to €25,000 so there could be a total benefit of up to €73,000 if you go down the partnership route before we consider the tax position.
So how much tax savings would justify founding a company compared to a partnership?
Given that the cost of forming a company is €2-3,000 more than the cost of forming a partnership and annual accounts and returns cost up to €1,500 more, there must certainly be a tax saving in going the partnership route.
The extent of these savings depends on whether lower grants or tax credits from the inheritance system come into play.
I encounter such scenarios regularly. John is a 55-year-old dairy farmer with an average taxable profit of €90,000. His wife Mary is a full-time teacher and earns €40,000 a year.
Own withdrawals from the farm amount to €35,000.
Her son Seán is 29 years old and works full-time on the farm and is paid 22,000 euros.
John’s tax bill is out of control; This, coupled with Seán’s succession, has led him to consider either a limited liability company or partnership.
Further farm buildings are planned, the costs are estimated at €120,000. These could benefit from the higher TAMS rates for registered partnerships with an additional €28,000 in grants. A follow-on farm partnership is also being considered.
Current tax position
John is treated as a single person as Mary claims all of her credits and bands, leaving John with an income tax, PRSI and USC liability of €33,284.
Seán pays taxes, PRSI and USC on his €22,000 salary of €2,158. So the combined farm tax cost is €35,442.
Tax liability in the partnership
We assume winnings will be shared 50/50. The relevant agricultural profit before Seán’s wages is €113,000, which is now divided into €56,500, each resulting in a combined tax liability of €31,494.
This is a tax saving of €3,948 compared to the existing sole proprietorship structure.
tax liability in a company
To fund the $35,000 net after-tax personal withdrawal requirement, John requires a $45,000 salary from the company, which results in him paying $10,300 in income tax, PRSI, and USC.
Seán’s position remains unchanged with a tax expense of €2,158.
Assuming the same agricultural profit and after deducting John’s salary, the company will have a corporate income tax bill of €5,625, resulting in a total tax liability for John, Seán and the company of €18,083 — a saving of €17,359 compared to the current position.
By forming a partnership with his son, John saves €3,948 annually in taxes compared to his current status as a sole proprietor.
By starting a business, John saves €17,359 — a net tax benefit over the partnership of €13,411.
However, the tax savings must be weighed against the possible loss of 28,000 euros in donations and 25,000 euros in inheritance tax credits.
This means that it will take four years for the tax savings from incorporation to be worthwhile.
Weighing the advantages and disadvantages of founding a company versus a partnership requires that all relevant aspects are included in the calculations and that not only tax savings are decided.
However, tax savings will have a major impact and the case study highlights how a company can decide later rather than sooner in a borderline situation to avoid clawing back TAMS grants.
Compiling a projected five-year tax profile is critical to deciding on the preferred trading structure, as in the event of expansion or improvement in operations, basing your plans on past years’ profits may not be relevant.
Martin O’Sullivan is the author of the ACA Farmers’ Handbook and is an agricultural business and accountant based in Carrick-on-Suir; www.som.ie
https://www.independent.ie/business/farming/agri-business/finance/limited-company-or-partnership-whats-best-for-your-farm-41465304.html GmbH or partnership – what is best for your business?