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«ANA0IANA 5S 26 B94 Ownership AND Farm Transfers Issues for Multi-family Businesses Digitized by the Internet Archive in 2015 https://archive.org/details/ownershipfarnntraOOalbe Ownership AND Farm Transfers Issues for Multi-family Businesses Farm Business Management Branch Alberta Agriculture, Food and Rural Development Disclaimer This publication contains a discussion of issues related to preparing a farm business agreement. The purpose of the publication is to provide information that families can use to discuss alternatives with their lawyer and accountant. It is not intended for any other purpose. While every effort has been made to ensure that the information is the publication is correct at the time of printing, neither the Crown, its agents or employees, nor the authors of this publication, assume any responsibility or liability whatsoever for any financial loss or damage suffered as a result of the publication or use of these materials, or as a result of any changes in the law after publication of these materials. It is recommended that the professional services of a lawyer or accountant be sought in dealing with specific problems. Published by: Alberta Agriculture, Food and Rural Development Publishing Branch 7000 - 113 Street, Edmonton, Alberta Canada T6H 5T6 Editor: Gerard Vaillancourt Graphic Designer: Wendy Luedtke Typographer: Sherrill Strauss Copyright © 1994. All rights reserved by her Majesty the Queen in the right of Alberta. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical photocopying, recording, or otherwise without written permission from the Publishing Branch, Alberta Agriculture, Food and Rural Development. ISBN 0-7732-6062-5 Printed February 1994 Contents Preface Introduction i Family business issues 3 Matching Dreams To Reality 4 Is The Business Profitable 5 Can We Afford A Multi-Family Business 6 Do We Want To Farm Together 10 . Who Can Work Together • Goals Analyzing The Situation 1 5 • Profitable, Affordable And Desirable • Profitable, Affordable Not Desirable • Affordable, Desirable Not Profitable • Profitable, Desirable Not Affordable • Unworkable Situations Subsidizing Farm Transfers 18 • Wages Or Salaries • Reduced Asset Values • Lenient Repayment Terms • Redistribution Of Income • Off-farm Income Special Multi-Family Situations 20 • Disabled Children • Parents Remarr5dng • Marriage Of The Children • Divorce • Death Of A Farming Child • Liability For Debts Or Obligations • Liability For Wrongful Acts Or Omission Management AND OPERATING issues 23 One Business Or Two 24 Management Agreements 25 • Division Of Management • Functioning As Management • Decision Making Working Agreements 29 • Division Of Labor • Scheduling Sharing Profits 30 Withdrawing Money 32 iii Banking Procedures 34 • Separate Business Accounts • Common Business Account • Both Joint And Separate Operating Accounts Conservation Of Capital 36 Winding Up The Business 37 Asset OWNERSHIP ISSUES 39 Ownership Of Land And Buildings 40 • Individual Ownership • Pledge The Land As Security . Joint Ownership Of The Title . Life Estate Title • Sale With Mortgage or Agreement For Sale • Transfer To A Partnership Or Corporation . Transfer The Title Ownership Of Machinery And Equipment 44 • Individual Ownership • Joint Ownership • Owned By The Business Ownership Of Inventory (Livestock And Crops) 46 Growth In The Value Of Land 47 Housing 49 Wills And Estate Plans 51 • Fee Simple • Joint Ownership • Partnership or Corporation Taxation Issues 53 • Taxation On Land Transfers • Taxation On Machinery And Equipment Transfers • Taxation On Inventory Transfers • Tax Strategies Summary 57 IV Preface Most farm businesses are owned, managed and operated by families. While this adds a degree of continuity and stability to the operation, most will be owned and operated for a number of years jointly by two or more generations. This common ownership and operation of the business, with its eventual transfer to the younger generation, gives rise to the need for sound business agreements. This publication provides a basic understanding of some of the issues farm families face when considering a joint business operation. These issues should be considered before exploring more detailed publications on incorporation, partnerships, joint ventures or tax management strategies. This publication was written with the advice and expertise of Garry Bradshaw, management specialist. Merle Good, provincial tax specialist and Paul Gervais, agricultural economist, all with Alberta Agriculture, Food and Rural Development. Dr. Glen Mumey, Head, Department of Finance and Management Science and Dr. Len Bauer Professor, Rural Economy of the University of Alberta provided valuable insight to the overall direction of the publication as well as review of the specific material. Ted Darling, farm management specialist, with Alberta Agriculture, Food and Rural Development reviewed drafts of the publication and provided insight into the technical and extension aspects of the publication. i Introduction Two or more families operating a business together requires an understanding of the various personaHties and must have the abihty to communicate. This is especially true when these families involve parents and children or brothers and sisters. Business agreements, while not ensuring the people will work together, can help by outlining the ownership, management and operating arrangements. Formal agreements may seem too "formal" for families who prefer to "play it by ear" and deal with issues as they come up. This may be okay, but when it doesn't work it is often too late or too difficult to deal with a crisis. A few days set aside to examine issues early in the life of a business will pay off later. Although the final form of the business arrangement is important, it is often the process of working and talking through the issues and finding solutions that pays dividends. Developing a process to recognize and deal with major issues is important in today's fast moving and ever changing economic environment. Take a few minutes to look over the contents of the book before reading the detailed discussions. If you have already made many of the preliminary decisions, you may wish to jump ahead into the specifics of the various operating or ownership agreements. If you are just starting out, work through the issues and alternatives first. 1 1