Lecture 5 - Business Structures

Sole Proprietorship

A business that is not separate or distinct from their owner. Owner is responsible for everything including debts, liabilities, legal battles. When an individual carries on a business in any area, without creating an alternative business (e.g. corporation).

• Simple, most common and cheapest.

• Operate under your own name, or must register a name if choosing to operate under a different name.

Pros of Sole Proprietorship

1. Total control of management

2. No unique legal requirements

3. Quick and easy to create

4. No ongoing formal requirements: You don’t have to hold annual meetings, file special reports, or keep formal minutes, unlike corporations or LLCs.

1. Less expensive than a partnership or corporation: Startup and maintenance costs are lower.

2. Can mix business and personal assets (draw money out of farm accounts with no consequences).

Disadvantages of Sole Proprietorship

1. Unlimited liability

2. Limited access to resources

3. Business dies with owner, can be willed to another person but turns into new business.

4. Potential for business name mix ups.

Sole Proprietorship Tax Considerations

1. Simpler taxes, income return and one income tax installments;

2. Farmers can use the cash method, which means they only report income when they actually receive the money.

3. Rollovers (Capital Gains Deferral): Farmers can transfer land or assets to their children without having to pay capital gains tax right away.

4. Income Splitting (Limited): Farmers have limited options to share income with family members (like a spouse or kids) to lower their total tax bill.

5. Controlling Income (Limited): If a farm is not incorporated (just run personally), it's harder to keep income in the business and spread out taxes

Farm Partnerships

Farmers entering into a partnership for the purpose of providing a service.

1. Two or more people

2. Carrying on business operations

3. Goal is to provide services and generate profit

4. Partnership Agreement required. Should have the rights and obligations of each partner laid out.

General Partnership

When two or more people agree to run a business together and share everything, like profits, responsibilities, and even debts.

Here’s the easy version:

• You and your partner(s) own the business equally (unless you agree otherwise).

• You each have the power to make decisions for the business.

• You’re each personally responsible for the business’s debts, even if the other partner caused them.

• Applicable to farming.

Limited Liability Partnership

Partners are protected from being personally responsible for the mistakes or debts caused by other partners, but they’re still responsible for their own actions.

Mostly used by professionals, like lawyers, accountants, or doctors, because in most provinces, LLPs are only allowed for regulated professions. Farmers can’t use LLPs because agriculture isn't considered a “regulated profession.”

Pros of partnerships

1. Access to more resources;

2. Management can be shared;

3. Can have limited partners: Some partnerships allow limited partners, who only invest money but do not take part in daily operations.

4. Income splitting with family members involved.

   • When money is shifted to lower earning family members to reduce total tax bill.

5. Bring child in to formally work

Cons of partnerships

• Unlimited liability – Partners are personally responsible for business debts.

• Easily dissolved – The partnership may end if a partner dies or goes bankrupt.

• Shared decision-making – All partners must agree, which can slow things down.

• Limited partners have no control – They invest money but can’t help run the business.

• More chances for conflict – Disagreements are common, especially in family partnerships.

• Less tax flexibility – Fewer ways to defer income or handle losses compared to a corporation.

Main kinds of Farming Business

1. General Partnership

2. Corporation

3. Co-operatives

4. Sole Proprietorship

Corporation

A type of business that is separate from the people who own it. It's like a legal "person" — it can own property, make money, pay taxes, and be sued.

It’s run by:

• Shareholders – who own the company;

  • Required to have at least one shareholder in a corporation.

• Directors – who make big decisions;

• Officers – who manage day-to-day operations.

A corporation with a single individual can have one shareholder, one director, and one officer, all of whom can be the same person

Pros of corporations

• Tax benefits: Incorporating a business in Manitoba offers several tax-related benefits (e.g. income splitting, lower corporate tax breaks, deferrals, deductibles).

• Flexible income distribution: Can pay salaries, dividends, etc. strategically.

• Easier estate planning: Shares can be passed on or sold easily.

• Limited liability: Owners aren’t personally responsible for business debts.

• Continues after death/sale: The corporation keeps going even if owners change.

• Stronger management and resources: Often better systems and support.

• Easier to get credit or financing: Lenders may prefer dealing with corporations.

• Can share ownership with family: By giving or selling them shares.

Cons of corporations

• Higher costs: More expensive to set up and run.

• Complex administration: Requires formal processes and record-keeping.

• Unequal ownership issues: Small shareholders have less control.

• Loss of personal control: It may not feel like “your farm” anymore.

• More owners = more conflict: Different opinions can cause disagreements.

• Legal duties and rules: Must follow formal laws and reporting rules, which can change.

Family Trusts

A legal arrangement where assets (like money, property, or investments) are managed by a trustee for the benefit of family members (the beneficiaries).

• You (the settlor) put assets into the trust.

• A trustee (someone you choose, often a family member or a professional) manages those assets.

• The beneficiaries (family members) get the benefits, like income or property, according to the rules you set up.

Joint Ventures

When two or more businesses or people team up to work on a specific project or goal for a limited time, but they stay separate businesses.

• It’s like a temporary business partnership.

• Each party shares costs, risks, and profits, usually based on an agreement.

• After the project ends (like combining or spraying operation), the joint venture usually ends too.

Co-operatives

A business owned and run by a group of people who work together to meet their shared needs, like buying supplies, selling products, or processing goods.

• Jointly owned: Everyone in the co-op owns a piece.

• Democratically controlled: Each member gets one vote, no matter how much they invest.

• Works for members: The goal is to help the members, not to make big profits.

Red River Co-op

• A consumer co-op serving Winnipeg and surrounding areas.

• Offers groceries, gas, and pharmacy services.

• Members earn patronage refunds based on purchases.

Types of Co-op Related to Agriculture

• Supply co-op: Members buy things like seed or fertilizer together.

• Marketing co-op: Members sell their products (like grain or milk) as a group.

• New generation co-op: Members must deliver raw materials (like livestock or crops) to a shared processing facility they own together.

Rollover (Taxation)

A way to transfer assets (like farmland) from one person to another, often from parents to children, without having to pay capital gains tax right away.

• Normally, when you sell something (like land), you might have to pay capital gains tax on any profit you made from the sale.

• With a tax rollover, you don't pay the tax immediately. Instead, the tax is delayed until the child sells the land later in the future.

Capital Gains Tax (Taxation)

You buy something (e.g., a piece of land, a house, or stocks).You sell it later for a higher price than you paid. The difference between the sale price and what you paid is your capital gain.You pay tax on that capital gain, which is a percentage of the profit.

Example:

• You buy land for $100,000.

• After a few years, you sell it for $150,000.

• Your capital gain is $50,000 (because $150,000 - $100,000 = $50,000).

• You would pay capital gains tax on that $50,000 profit.

In Canada, only half of your capital gain is taxable. So, if you made a $50,000 gain, only $25,000 would be added to your income for tax purposes.

Income Split (Taxation)

A way to reduce the amount of tax a family pays by shifting income from a higher-income person to a lower-income person. Since lower-income people pay less tax, the overall tax burden of the family can be reduced.

Defer Income (Taxation)

Means delaying the receipt of income until a later date, usually to take advantage of lower tax rates in the future or to manage how much tax you pay this year.

• Defer income by not taking a big salary this year but instead deferring it to next year when you might be in a lower tax bracket.