Business Organizations

Business OrganizationsBusiness Organizations

Farm & Ranch Business ManagementChapter #10

A Business Organization A Business Organization Should: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 ConsiderFactors 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 Types of Farm Business OrganizationsOrganizations

• Sole Proprietorship• Partnership• Corporation

Sole ProprietorshipSole 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 ProprietorshipSole 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 Raising Capital under Sole ProprietorshipProprietorship

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

PartnershipPartnership

• 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 AgreementPartnership Agreement

• Written document• Transfer of ownership at the

termination of the partnership• Machinery lease• Life insurance to help buy out partner

upon death

Partnership AgreementPartnership 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 PartnershipLimited 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 CorporationsFarm Corporations

Farm Corporation Farm Corporation AdvantagesAdvantages

• Possible access to more capital• Pool money together


• Separation of ownership and management

• Ex: One or two children can manage the farm, while all the siblings share in the ownership


• Ease of continuing in business• Upon death of a stock owner, only the

stock is subject to probate, not the assets


• 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)


• Opportunity for tax savings• Some benefits (insurance, profit

sharing plans) are tax deductible


• Limited Liability• Shareholder’s liability limited to the

amount of their contribution

Farm Corporation Farm Corporation DisadvantagesDisadvantages

• Complicated and costly to organize– Filing fees– Articles of incorporation– Initial legal and accounting expenses


• Continuing costs to maintain a corporation


• May be difficulty in obtaining credit– lenders may be unfamiliar with the

corporation – more complicated borrowing procedures


• 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


• Lawsuits• If personal items are transferred to the

corporation, they may be taken as assets of the corporation if sued


• Minority stockholder problems• Second generation stockholders may

not be satisfied with dividends and rights


• Income tax laws are unique


• Corporations may cause complicated and expensive termination

• Only incorporate if you intend the business to continue indefinitely

S-CorporationS-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

CooperativesCooperatives

CooperativesCooperatives

• Not intended to make a profit• Owned and controlled by the member-

patrons• Profits are returned to the members

based on patronage

Kinds of CooperativesKinds 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 CooperativesPurposes 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-opCharacteristics 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-opCharacteristics 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 CooperativeFinancing 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

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