Value of corporatizing commercial farms

 

 

By Robert Likhang ACMA, CGMA, CA(L), FCIS,
Partner at RL Business Advisers – Accountants, Tax & Business Consultants
[business@rl.co.ls / +266 27001023 / www.rl.co.ls]

 

 

 

RL LIKHAN PIC

 

 

 

 

 

 

INTRODUCTION
Our country’s farming is largely subsistence, where the owner of the field buys inputs and invests them on the field or another who has cattle raises them and sells or kills as need be, largely the field produce, or the cattle are used for family needs. In subsistence farming, the intention is not to run a business but to feed the family. The challenge with this is that the capacity is not well used to create excess outputs for commercial and export purpose.

Often those who go into commercial farming still maintain the same thinking as when they were in subsistence farming. Most farmers are still basically one-man owned and managed businesses, thus failing to synergize and leverage from other people’s talents and resources.

CORPORATIZING FARMING

Corporatizing farming businesses means separating the legal identity of a farm business as separate from its owners. The forms could be a cooperative, which involves all its members managing the entity, or be a company in terms of the Companies Act of 2011. I Shall dwell with the latter in this article and show the benefits of registering farming businesses under the Companies Act.

A company is a separate legal entity from its owners. The company can be suing and be sued. In case of liquidation (failure), the liabilities of the shareholders are limited to the amounts of shares paid or owing. This means that the shareholders cannot lose their personal belongings because the company has gone bust. This is different from a situation of sole owner or partnership where their personal belongings may be confiscated to pay for business debts at the time of liquidation.

Benefits of Incorporation

aration of the company and the shareowners comes with the limited liability comes out as the first advantage. We have experienced situations where farmers have lost a lot of personal belongings because the creditors have sought to be paid despite the performance of the year.

Imagine a disease infects the animals which have been purchased with a loan and the financier seeks the be paid all the same, or the same disease attacks the crops where inputs have been obtained at a loan, or climatic conditions

lead to a loss in outputs. The risks mentioned are always a high possibility with serious impact. The company will leave beyond the founders as the founders will pass on their shares to others and the companies continue to develop and grow.
As the business succeeds, the market value of shares will grow thus giving capital gains to founders when they sell their shares. Because of the marketability of the shares, new people with interest in such companies will buy shares, and the companies themselves can raise further capital by issuing new shares.

A company is run by a capable board of directors. Often those appointed into boards of companies possess the necessary skills and business acumen to direct the company’s business affairs. The Companies Act will require directors that are fit and proper, which means those who based on their past business transactions are fit to run the organization effectively.

The responsibilities both from law and corporate governance for the directors are very heavy, and this ensures that farms directed by the more capable board are more likely to grow and be successful. Corporate Governance so dictates that there should be independent directors, who are invited into the board based on their skill.

Governance also dictates that there should be diversity of skills. The two factors increase the capacity complexion of the board and increases chances of success for the farm business. This caliber of expertise is often not available with owner managed farm businesses.A very interesting aspect of choosing a board is that, in terms of the law, the board members are severally and jointly liable for failure of the business where there is proof of negligence, recklessness and noncompliance with laws, and this is true whether the board members are shareholders or not.

The farmer may be worried that his control is lost or is diluted, but he retains the legal power to appoint the same board, and he is relieved, unless he is a board member, from consequences of misjudgment.

It is easier for the company to obtain finance than for sole owners and partnerships, and that is because the companies become more reliable as a result of being better regulated. The additional legal benefit is the taxation, which is lower.

 

BURDENS OF INCORPORATION

Registration of companies has become much easier with the introduc tion of corporate reforms that even let to the new statute (from Companies Act 1967 to Companies Act 2011),

The company must file its financial statements annually with the Registry of Companies, and this means a requirement for accounting skills within
the firm or as outsourced from practicing accountants like RL Consulting.
There is an audit requirement, however the same may be relieved for smaller companies and less than 10 shareholders companies. Any change in shareholding requires that to be stated in the shareholders register, and changes of directors need to be filed with Registry of Companies.

Services relating to filing may be done by own management or outsourced to an independent company secretary, firms like RL Consulting also offer company secretarial services, and advisory on all matter relating to shareholders relationships and boards.

Conclusion
Companies can be better run as a result of principles of good corporate governance and the provisions of the Companies Act. Companies obtain financing easier as they are less risky compared to sole traders and partnerships, and they can obtain funding through raising capital from the stock markets.

These benefits should give farmers new reality and enhance

the commercialization programme.

Our commercial farming companies

should have bigger export market which

will earn us the foreign exchange we so much need.

 

 

Likhang

 

 

 

 

 

 

 

 

 

FMD Update 23 Aug 2019

 

 

 

 

 

 

 

 

 

 

SILO WORK 15 JULY 2019

 

Leave a Reply

Your email address will not be published. Required fields are marked *