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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

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Business organizations

Business Organizations

Farm & Ranch Business Management

Chapter #10

A business organization should
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
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
Types of Farm Business Organizations

  • Sole Proprietorship

  • Partnership

  • Corporation

Sole proprietorship
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 proprietorship1
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
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


  • 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


  • 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


  • 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
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 agreement1
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
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 corporation advantages
Farm Corporation Advantages

  • Possible access to more capital

  • Pool money together

Farm corporation advantages1
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 advantages2
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 advantages3
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 advantages4
Farm Corporation Advantages

  • Opportunity for tax savings

  • Some benefits (insurance, profit sharing plans) are tax deductible

Farm corporation advantages5
Farm Corporation Advantages

  • Limited Liability

  • Shareholder’s liability limited to the amount of their contribution

Farm corporation disadvantages
Farm Corporation Disadvantages

  • Complicated and costly to organize

    • Filing fees

    • Articles of incorporation

    • Initial legal and accounting expenses

Farm corporation disadvantages1
Farm Corporation Disadvantages

  • Continuing costs to maintain a corporation

Farm corporation disadvantages2
Farm Corporation Disadvantages

  • May be difficulty in obtaining credit

    • lenders may be unfamiliar with the corporation

    • more complicated borrowing procedures

Farm corporation disadvantages3
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 disadvantages4
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 disadvantages5
Farm Corporation Disadvantages

  • Minority stockholder problems

  • Second generation stockholders may not be satisfied with dividends and rights

Farm corporation disadvantages6
Farm Corporation Disadvantages

  • Income tax laws are unique

Farm corporation disadvantages7
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


  • 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
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
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
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 op1
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
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