Ag-at-Large: Repercussions, Inc.

Incorporated Farms have received a bad rap, so bad that nine Midwestern states have outlawed them. So why do they continue to grow in California?

Incorporation provides substantial advantages to farms of all sizes, notably in the transfer of the farm to subsequent generations, for income tax planning, employee benefit programs and risk management.

In California the 5,750 farms that were incorporated by 2007 represented 7.1 percent of the total of 81,033 farms. More than 80 percent of those incorporated are classified as family held corporations. Thirty three years earlier only 2,601 farms in the state were incorporated.

This doubling of the use of the corporate structure was investigated by Hoy Carman, emeritus professor in the Department of Agricultural and Resource Economics at the University of California, Davis. His report appeared in the July/August issue of Update, published by his department.

He found that corporate farms on the average are substantially larger, have more assets and higher product sales than farms that use other business frameworks.

For example, the state’s corporate farms had average sales of $2,187,321, compared to average sales of $162,179 for farms operating as individual proprietors.

Average size of the corporate farms was 784 acres in 2007, while those classified as individual proprietors averaged of 200 acres.

The value of land and buildings at the corporate farms was $6,315,180, while farms in other business categories had land and buildings worth $1,292,699. The average value of machinery and equipment was $396,451 where corporate structures were followed, and only $63,809 on farms operating as individual proprietors or as partnerships.

Surprisingly, the corporate structure is not reserved for large farms alone, nor are all single proprietor and partnership operations small. Carman found that 2,954 California farms have an estimated market value for land and buildings of more than $10 million, and 2,058 of them were either individual proprietors or partnerships.

California farms with income greater than $1 million numbered 5,693 in 2007. Of those 34.2 percent were single proprietors, 33.2 percent were partnerships and 30.3 percent operated within a corporate business structure. The breakdown was not that different for the 1,365 farms with income over $5 million: 25.5 percent single proprietors, 34.4 percent partnerships and 37.9 percent corporations.

Carman learned that the corporate structure is used by 22 percent of greenhouse, nursery and floricultural operations. 16.1 percent of vegetable and melon farms, 9.5 percent of oilseed and grain farms and 9.1 percent of cotton farms.

Fruit and nut tree farms employing the corporate structure are at the average of 7.1 percent, as are poultry and egg farms. The largest number of corporate farms, 2,674 of the total of 5,750, are operated by fruit and nut tree growers, confirmation that the majority of the state’s farms produce their products from vines and fruit and nut trees.

Carman concludes that most of California’s farm corporations are owned and operated by farm families, and they range in size and product sales from very small to very large, growing the same crops as single proprietor family farms.

“Incorporation continues to provide a framework for resource ownership as well as the allocation of income, control and risk and it can be an important tool for estate planning and the intergeneration transfer of the farm business,” he said.

His study leads him to believe that the number California farm corporations will increase, mostly among larger family farms interested in growth and the extended business life of the family farm firm.

Why the Midwestern states don’t see the same benefits was not incorporated in the scope of his study. Incorporation might not be traditional enough for them.