Agriculture Reference
In-Depth Information
The costs of taxes, records (which must be comprehensive), and operation of the
corporate business can be signifi cantly higher than the costs for other forms of organization;
for that reason the corporate form should be evaluated carefully before it is adopted by an
agribusiness.
Finally, in smaller corporations, the issue of limited liability is not always so clear. Banks
and other lenders may insist on personal guarantees from stockholders for loans before
lending a small corporation money. Boards of directors may be sued for a variety of reasons,
and the board may well be the owners of the corporation. So, while the corporate form
clearly offers more legal protection than proprietorship or partnership, specifi c circumstances
may make such protection relatively thin.
Closely held corporations
A special form of corporation has been designed to offset some of the disadvantages of the
regular corporation. This form is called the
S-corporation
. Subchapter S of the Internal
Revenue Code makes it possible for the owners of a corporation to elect to be taxed as indi-
viduals, in the same manner as owners of a partnership or proprietorship. So, the benefi ts of
incorporating as an S-corporation can be signifi cant. This type of corporation can avoid the
double taxation paid by a regular corporation.
An S-corporation must meet several qualifi cations: there cannot be more than 100 stock-
holders, the stockholders must be individual persons rather than corporations, and they
cannot be nonresident aliens. Additionally, the election to be taxed as individuals must occur
prior to the start of the corporation's fi scal year. Owners, therefore, cannot simply wait to see
which method of taxation would be better once the year is over and the returns prepared. In
addition, the S-corporation must be a domestic corporation. It must be a corporation that is
organized under state law. The S-corporation can issue only one class of stock if organized
after May 27, 1992. Finally, the S-corporation cannot have passive income of more than 25
percent of total receipts in three consecutive years. Examples of passive income would be
rent, royalties, interest, and dividends.
The rules to qualify for this status essentially guarantee that the S-corporation is relatively
small, and often family-held, and the corporation is production-oriented. While there
are a number of benefi ts, there can be many pitfalls to this form of organization and agri-
business corporations should consult competent legal and accounting professionals before
selecting it.
Fragrant Floral and Perfect Gifts, Inc.
Let's revisit Fragrant Floral and Perfect Gifts. Jessica and Erika have been in business
together about a year. And, after attending a management course at a local community
college, they are introduced to the corporate form of business organization. They decide
they like the idea of limiting their personal liability through the use of the corporation.
They also like some of the ways that the corporate form of organization eases transitions.
What if Erika wanted to move away, but did not want to give up her investment in the
business? In addition, they have been talking about expanding the business by establishing
another location—so access to investment capital becomes more important. A corporation
would help make this possible. After reviewing the advantages and disadvantages, they
believe they should become an S-corporation, to help better manage their personal tax
situation.
