Piercing the Corporate Farm Myth

Faceless corporate family?

While perusing posts by my friends on Facebook over the weekend, I ran across something from a friend describing the consequences of the site being publicly traded. She was under the impression that anyone owning a share of the website would now have absolute access and rights to any content she posted. I kindly explained what it meant for a corporation to be available for public shareholders and that her fears were unfounded. The misunderstanding about corporations got me thinking about the public perception of family farms and corporate farms.

Everyone seems to love family farms. Everyone seems to hate corporate farms.

But according to the EPA, 90% of farms in the United States are family farms. Only 3% of the total farms are “corporate,” and 90% of those are still family farmed. (The other 6% are considered partnerships.) So, is it really that 10% of the 3% of the total farms in the country making such a negative impact that people are turned off by them?

No. The truth is, people don’t understand how corporations works. And people don’t trust what they don’t understand.

What really turns people off to “corporate” farming is the name alone. Our society vilifies corporations, especially in politics. Agriculture politics is no different. We perceive the corporate form as a bunch of greedy, faceless people who are willing to do or destroy anything to make a profit. On the other hand a “family farm” is seen as a collection of well-meaning, good-intention people doing things the right way. When 90% of corporate farms are also family farms, how do we make these two ideas fit together?

In order to make sense of it, we have to understand why a farm would want to be incorporated.

If a farm is not incorporated, then the individual members own every asset of the farm as individuals. This is similar to how you might own your house or car. If mom and dad are farmers without a corporate form, it is likely that they own the land and equipment in their own names. Employees are paid out of the individual profits, taxes are paid as individuals, and income is made as individuals. The farm itself is not capable of holding assets because it doesn’t legally exist.

Corporations are just a more legally sophisticated way of organizing the farm. Under the corporate form, the company itself is considered a legal entity and, therefore, can own the property, equipment, and profits. Mom and dad might still be in charge of the whole thing, but the business itself actually exists on its own. Instead of an individual’s name on the deed, the farm name can be on the deed.

One of the biggest advantages to the corporate form is liability protection. Imagine if dad owns the farm as an individual. He might own 500 acres, a couple pieces of farm machinery, and the house he lives in. If there is a major accident on the farm and dad is sued, not only could he potentially lose the 500 acres and farm machinery, he might also lose the house he lives in. Since all of his assets are owned personally, they’re all treated the same. In the corporate form, the corporation is the one actually conducting and owning the business. If a major farming accident occurs and the corporation is sued, dad might still lose the 500 acres and farm machinery, but it is unlikely he’ll lose the house too. That’s because the farm won’t own the house, nor his other personal effects, and won’t be available for the injured person to collect.

Major accidents on farms are not altogether uncommon either. If you’re hauling a large tractor and planter down the public road, it wouldn’t take much for a piece to come flying off and smash into a passing car. Or if a farm hand is working on machinery and makes a mistake, he could lose an arm. There could be some type of food contamination that ends up making people sick. The point is, there are a lot of situations where an accident can occur and the farmer is going to have to pay. The corporate form allows the farmer to only have to pay out of the farm assets, rather than including his family home, car, and other effects (in other words, his family doesn’t necessarily become destitute because the farm is sued).

The ownership control of a corporation also allows for flexibility in passing the business on to the next generation. When a corporation has stocks or shares, a future farmer can slowly acquire those shares over his lifetime so that he will eventually own the farm. Or mom and dad can leave the shares of the farm to multiple children so they all have an ownership interest in the farm, which is especially helpful if more than one child wants to take over the farm.

Finally, the corporate (and partnership ) form also allows for individuals that are not related to enter into farming together. I’ve posted before about farmers that don’t have their own children interested in farming allowing college kids that are interested to get involved on the farm. Maybe a couple of friends want to farm together. Or even a couple families. In that case, the corporation allows for flexibility in ownership. Each can own half of the business. Or the older farmer can slowly allow an unrelated youngster to own more and more of the farm. When all of the farm is owned as individual assets, it can become complicated, costly, and difficult to share that type of ownership.

Remember, just because individuals are not related does not mean they cannot have good motives. All of the examples I’ve given above are very likely the 10% of corporate farms that are not considered family farms. These are individuals that have come together to farm, even though their family is not involved. When you’re working that often and closely, these people become like family!

To take it a step further, imagine if we expected companies like Apple to remain unincorporated. Steve Jobs would have owned the assets of Apple in his individual capacity. If an employee had been hurt while manufacturing iPads, Jobs would have been sued personally. He might have lost half the corporation and his personal home. When he died, the assets of Apple would have been passed onto his kids, even if they had no interest in running Apple. They may have sold those assets piecemeal, resulting in the destruction of the company. Having a corporate form for Apple made good sense: it protects the individuals involved and allows the company to continue after those individuals are long gone. No one would ask the CEO of Apple to own the company as an individual.

So there you have it. A corporate farm isn’t evil. It isn’t something we should vilify. Rather, it is a smart business decision for farmers, especially family farmers, that want to ensure the continued success of their farms.

Let’s stop the negative rhetoric and distortions about “corporate farms.”

Image courtesy of FreeDigitalPhotos.net