Economic and Marketing Information
FOR INDIANA  FARMERS
Prepared by the Agricultural Staff of Purdue University, Lafayette, Indiana
October 30,  1970
The Mysteries of the Farm Corporation
By Robert C. Suter, associate professor of agricultural economics, and Phillip J. Scaletta,
associate professor of business law and labor laic, and member oj the Indiana Bar Association
The farm business is becoming larger every day.
To continue to maintain ownership and control over
large amounts of capital, the farm family should be
cognizant of the alternative methods of farm property ownership. The farm corporation is one of
these alternatives. It has several features not generally available in a sole proprietorship and some
not easily handled in a partnership.
A corporation consists of a group of persons
authorized to operate as a legal entity with certain
rights and/or privileges distinct from those belong-
j ing to the persons themselves, either the incor-
" porators or the owners. The corporate form of
organization, created by and under a legal authority,
acts as a single artificial being. An incorporated
business irrespective of changes in membership is
endowed with the capacity of succession. In other
words, it can be incorporated for a limited number
of years, or it can be extended into perpetuity.
The power to charter corporations is a right of
the sovereign state. The federal government, following the enactment of the Constitution of the United
States, delegated (or left) this power to the various
states. In Indiana, various specific corporation acts
related mostly to mining and to manufacturing were
passed in the 1880's. These various acts were
eventually joined and improved upon and, in 1929,
the Indiana General Corporation Act was signed
into law. Further amendments were made in 1967
and again in 1969.
The decisions (1) as to whether or not to incorporate, and (2) how to incorporate, are closely related
to the many rules, regulations, and intracacies of the
Internal Revenue Service. In the last 10 years
incorporation of the family-operated commercial
farm has become much more popular as a result
of some of the changes the Federal Government
"^made in its Internal Revenue Code which created
the Sub Chapter S alternative in 1958. The purpose
was to encourage the incorporation of small businesses by eliminating the dual taxation of income.
The Advantages of   Incorporation
The corporate form of business organization enjoys several advantages. One is the limited liability
privilege which does not exist for either the sole proprietorship or the partnership. In a non-incorporated
business, an individual's personal assets are subject
to claims against the business as well as any judgments which may be brought against the individual
for injuries and damages caused by his or her employees. In an incorporated business the shareholders are liable for the debts of the corporation
and for any liability caused by negligent employees
who injure others in the course of their employment,
but only to the extent of their investment in the
corporation.
Secondly, a large corporation is not directly affected by the death of a single shareholder. More
continuity in the business operations (from one
generation to the next) can be obtained by incorporating. However, the death of a major shareholder
in a family owned corporation is much more likely
to cause major adjustments in the business than
with a large corporation. Hence, while more continuity can be obtained, that continuity must be
properly planned  in  the  closely  held  corporation.
Third, the corporate form of organization can lead
to reduced federal estate taxes, state inheritance
taxes, and settlement costs by providing a smoother
and more gradual transfer of farm property within
the family. Incorporation can lead to considerable
flexibility in estate planning and management. It's
much easier to transfer—give or sell—a few shares
of stock each year than it is to transfer a fractional
yet undivided interest in farm real estate or other
property. Through outright sales, gifts, stock options,
and other methods, parents can slowly, gradually,
and  with   a   minimum   of   taxes,   transfer  part   of