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Today a company may have one shareholder,
one director and there is now no requirement to have a company
secretary. In exchange for limited liability that the shareholders
obtain, by having their liability limited to the value of their shares,
the directors (who are often also the shareholders) must comply with the
regulatory regime for a company. Included in this regime is a
requirement to have annual meetings, keep proper records, keep a record
of all charges, an interests register, act in the interests of the
company and its shareholders and ensure that the company is solvent at
all times. The constitution of the company which is either implied from
the Companies Act 1993 or is a written constitution provided at the time
of incorporation and can be subsequently amended, regulates the running
of the company. The appointment of directors, the sale of shares, the
holding of meetings, and the relationship of special interest groups to
the company are all regulated by the constitution.
One of the advantages of using a company for a farming enterprise is
that there is relative ease in transferring shares between shareholders,
making it somewhat more simple to increase a shareholder’s existing
holding or to exit a shareholder. Transferring shares does not trigger
depreciation recovered or involve any GST issues. In a two person
partnership, when one partner exited, the partnership was dissolved. In
a two shareholder company the shares are simply transferred to the
remaining party.
While limited liability is not a major issue for individuals investing
in farming, the use of a company can assist with the allocation of
personal liability in respect of secured creditors. A partnership
automatically implies joint and several liability. With a company,
personal guarantees provided to a bank can be limited to a nominated
figure.
From a taxation point of view a company enables a farming business to
have a number of taxpayers which include directors’ fees, shareholders’
salaries, dividends and company profits. All profits earned by the
company are taxed at 33¢ in the dollar while all dividends are paid,
with dividend imputation credits deducted, at 33¢ in the dollar.
Unlike partnerships where one of the shareholders resides in a dwelling
owned by the company or uses one of the company vehicles, there are
likely to be fringe benefit tax issues.
Loss Attributing Qualifying Companies
A loss attributing qualifying company is a company with five or fewer
shareholders, related by the first degree as defined in the Income Tax
Act. The shareholders are entitled to have any losses incurred by the
company passed down to them in proportion to their shareholding. This
essentially enables the shareholders to access losses in the same way
they would if they were a partnership but using a company structure. The
compromise that shareholders make in choosing this form of company is
that they become personally liable for any tax of the company, when it
makes a profit.
This form of company has become very popular with forestry investment as
it enables small groups of investors to use one company or for a larger
group to use a number of loss attributing qualifying companies, in
partnership, to invest in a forest which by its nature makes significant
losses in its early years.
Please refer to our
disclaimer.
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