Business Organizations

Business Organizations Farm & Ranch Business Management Chapter #10

A Business Organization Should: • Be simple • Provide access to sufficient resources such as capital, land, labor • Encourage planning ahead for as many years as possible • Increase efficiency of land, labor, capital, machinery • Distribute benefits fairly on the basis of contributions to the business

Factors to Consider • Who owns the business organization • Ability to acquire resources • Life of organization • What is the Liability of the owners • Who makes Management Decisions? • How to transfer ownership • Problems for tax planning? • Problems for estate planning?

Types of Farm Business Organizations • Sole Proprietorship • Partnership • Corporation

Sole Proprietorship • Most business use this • 85.7% of US farms • Easiest to form • Few government restrictions • Sole management decisions • May quickly expand or contract bus. • Receive all the profit, thus more work incentive • No disagreements with partners

Sole Proprietorship • Raising capital may be difficult • May not have time to make careful management decisions • Must like to make decisions • Responsible for all debts • May be physically unable to continue an enterprise

Raising Capital under Sole Proprietorship • Lease rather than own • Owner/Manager does all the work • Parents may cosign loans • Rent parents equipment • Off-farm income

Partnership • An association of two or more co-owners • Death dissolves the partnership unless other arrangements made • Each member liable for all debts • Property may be owned by partnership or individual owners • Profit/loss divided according to specific agreements

Partnership • Goals of all partners should be same • Must respect opinion of partners • Business large enough to support all partners • Complete records, sound management, common sense with $ • Written agreement • Pooling of capital and knowledge

Partnership • Share management and labor • Each partner is liable for the other’s wrong doings • Unlimited liability of each partner may restrict credit use

Partnership Agreement • Written document • Transfer of ownership at the termination of the partnership • Machinery lease • Life insurance to help buy out partner upon death

Partnership Agreement • Purchase Liability Insurance • Who makes management decisions • Who does records • How are partners paid • based on contributions to partnership • Partnerships fail because of misunderstandings

Limited Partnership • One or more partners liable for debts and obligations • Limited partner can not participate in the management of business • Limited partners name can not appear in the partnership name • In writing • Specifically indicate share of profit • Consult an attorney • “Silent Partner”

Farm Corporations

Farm Corporation Advantages • Possible access to more capital • Pool money together

Farm Corporation Advantages • Separation of ownership and management • Ex: One or two children can manage the farm, while all the siblings share in the ownership

Farm Corporation Advantages • Ease of continuing in business • Upon death of a stock owner, only the stock is subject to probate, not the assets

Farm Corporation Advantages • Easily transferred ownership • Sell or give away stock in the bus. • Gifts of stock do not have to be recorded with the county clerk (more private)

Farm Corporation Advantages • Opportunity for tax savings • Some benefits (insurance, profit sharing plans) are tax deductible

Farm Corporation Advantages • Limited Liability • Shareholder’s liability limited to the amount of their contribution

Farm Corporation Disadvantages • Complicated and costly to organize • Filing fees • Articles of incorporation • Initial legal and accounting expenses

Farm Corporation Disadvantages • Continuing costs to maintain a corporation

Farm Corporation Disadvantages • May be difficulty in obtaining credit • lenders may be unfamiliar with the corporation • more complicated borrowing procedures

Farm Corporation Disadvantages • May be no freedom of action • Corporation money can not be spent on personal things • Management decisions must be made in accordance with corporation policies, bylaws

Farm Corporation Disadvantages • Lawsuits • If personal items are transferred to the corporation, they may be taken as assets of the corporation if sued

Farm Corporation Disadvantages • Minority stockholder problems • Second generation stockholders may not be satisfied with dividends and rights

Farm Corporation Disadvantages • Income tax laws are unique

Farm Corporation Disadvantages • Corporations may cause complicated and expensive termination • Only incorporate if you intend the business to continue indefinitely

S-Corporation • Mostly the same as a regular corporation • Is not taxed as a separate entity • All the tax items are passed on to the stockholders much like a partnership

Cooperatives

Cooperatives • Not intended to make a profit • Owned and controlled by the member-patrons • Profits are returned to the members based on patronage

Kinds of Cooperatives • Marketing Coops • grain elevators, dairy products, orange juice • Purchasing Coops • feed, fuel, fertilizer, supplies • Service Coops • food buying, feeder pigs, electricity • Processing Coops • Credit Coops • PCA, Federal Land Bank, Bank of Cooperatives

Purposes of Cooperatives • Improve economic well-being of farmers • Securing higher market prices • Securing more favorable input prices • Provide new or improved services • Provide credit • Become involved in processing

Characteristics of Co-op • Owned by members who use them • Member control • each member has voice in business affairs • each member helps select board of directors • Non-profit basis • Mutual interest and needs of members

Characteristics of Co-op • Members share risk in proportion to amount of business they do • Members select board of directors • responsible for management, policy, insuring that coop is managed according to the wishes of the majority of members

Financing a Cooperative • Sell stock in the Co-Op • stock can not appreciate in value • Use Co-Op funds to finance and invest in long-term assets

Business Organizations