Business Structure Basics For Aussie Farmers & Farming Families
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In Australia, the majority of farms actually maintain the same business structure: that of a family farm.
That's because a lot of farming corporations in Australia are still largely self-managed.
This is mainly because Australia's abundance of rural land makes it easier for farmers to manage their farmland and farming operations with their family and a few select employees.
The family farm business structure also makes it easier for Aussie farming families to maintain their operational standards.
With just a little due diligence, basic training for younger generations and new employees, and a commitment to maintaining operations that align with industry standards and perhaps even ISO 9001 certification standards (for quality management systems), Aussie farms can operate smoothly for decades and with minimal external disruptions. And why fix what isn't broken?
Sadly, however, the idea of the Australian farming family is slowly becoming a thing of the past, namely because of the growing detrimental impact of supermarket pricing and overly stringent produce quality standards.
So what will the Australian agricultural sector look like with fewer family farms? We'll be answering just that question today by outlining the other farm business structures that keep Australia growing.
Choosing the Right Business Structure for Your Farm
According to the Grains Research & Development Corporation (GRDC), there are generally considered to be five different types of farm business structures in the Australian agricultural sector. These five different farm business structures are as follows:
- Farm families - where land, irrigation, livestock, machinery, labour, management systems, and company capital are all owned and managed internally
- Leasing land - where land is leased from a landowner, but all other assets are owned and managed internally
- Share farming - where land is leased from a land owner, but all other assets are managed internally, with split ownership between all managing partners
- Contracting - where land, irrigation, livestock, and management systems are owned and managed internally, but labour, machinery, and company capital are managed externally (i.e. by external stakeholders, investors)
- Joint ventures - where all assets (land, irrigation, livestock, machinery, labour, management systems, and company capital) are all owned and managed internally by two managing partners
Various factors such as the size of your land, the crops or other agricultural products you're looking to produce, and long-term goals of your agricultural enterprise will naturally influence your decision on which business structure is the right fit for your farming company.
Farming families: the agricultural sector's 'sole trader'
With the five different types of farm business structures outlined, it's clear to see that owning and operating a family farm is basically the same as being self-employed. It's the agricultural sector's version of a sole trader. Starting as a sole trader is often the simplest and most cost-effective way to set up a farm business, mainly because you can manage all aspects of your farm with minimal need to run development decisions by other stakeholders.
However, this comes with one notable downside: you'll also bear all the risks and be personally liable for the finances of the business. In today's economic climate, family farms often don't have the support they need to operate sustainably in partnership with big name grocers.
Joint ventures: partnerships between farming operators
Partnerships (or 'joint ventures') are formed when two or more business owners or entities run a business together. This particular kind of farm business structure can be a strategic move for farmers looking to pool their resources, share their expertise, diversify their product output, and distribute their growing workload between shared labour resources.
But partnerships aren't always 50/50, and as such this farm business structure requires clear agreements be established between business owners, with an understanding among managers that operators with a greater stake may have more votes when it comes to decision-making and profit-sharing.
Contracting and leasing: the driving force of corporate farming
And that brings us to the farm business structures that many argue are the future for Australia's agricultural sector. Contracting and land leasing via established proprietary limited companies can offer independent farmers with access to larger corporate resources (including extensive liability protection and even name recognition and marketing resources). Simply put, corporate farming structures do allow for growth and investment at a larger scale, but it's important to keep in mind that these farm business structures also come with increased regulatory obligations and potential complexities in operation and ownership. After all, a company is an independent legal entity, which means it is separate from its owners in terms of finances and liabilities.
Trusts are another option for farm businesses, where a trustee operates the business on behalf of the beneficiaries. This can deliver tax advantages and asset protection, but trusts also require adherence to strict legal responsibilities and ongoing management, which can be complex. Even so, trusts provide Australian farmers with a little more autonomy than other corporate farming structures, whilst still ensuring that farmers have access to financial resources like loans which will allow them to develop at a similar rate to contracted or land leased farms.
It's critical to remember that no one-size-fits-all approach exists when considering farm business models. Each structure has its unique characteristics, and what works for one farm might not work for another.
Understanding Legal and Tax Implications for Farm Businesses in Australia
A crucial aspect of deciding on a business structure is understanding the legal and tax obligations that come with that particular farm business model. From registering your business and obtaining an Australian Business Number (ABN) to understanding GST requirements and tax concessions, each of the five farm business structures we've outlined today all have their own varying requirements. Careful planning with a tax professional or attorney specialising in agricultural enterprises can provide valuable foresight and protect your business interests.
These considerations are especially important if you're looking to transform a family farm into a joint venture or even a corporate farming structure. When transitioning from one business structure to another, or when starting anew, it's essential not to overlook the importance of thorough planning. The process often involves careful analysis of the operational, tax, and legal aspects, making sure to align the chosen structure with both current needs and future aspirations of your farming business.
To Sum Up
There are logistical, legal, and fiscal considerations that need to be made when looking to not only establish a farming enterprise, but even change its business structure. Here are five vital considerations Australian farmers should bear in mind when examining farm business structures:
- Risk and Liability: Understanding personal liability in different structures can influence your choice. Sole traders and partnerships can expose farmers to personal financial risk, whereas a company or trust can provide liability protection.
- Succession Planning: The longevity and future handover of the farm can be significantly affected by the chosen business structure. It's essential to consider how easily the business can be transferred or shared among family members or successors.
- Financial Complexity: Each structure comes with its set of financial implications such as tax obligations and possibilities for funding. Choosing a more complex structure like a trust or company may offer benefits but also comes with additional financial reporting and administrative requirements.
- Control and Decision-Making: While a sole trader retains full control, other structures involve shared decision-making. Identify the level of control you're willing to have or share in the business before deciding.
- Capturing Value from the Business: Consider how profit distribution and reinvestment will work within the structure. For instance, companies may provide dividends to shareholders, while a trust might distribute income to beneficiaries.
Due diligence is paramount in navigating the pros and cons of each business structure. Factors like tax implications, setup costs, and compliance requirements will further refine your choice.
Before making any decisions, it's strongly recommended that you seek professional advice tailored to your situation. Legal and financial advisors specialising in agricultural business can provide insights that safeguard your interests and set a solid foundation for your farm's future.
