Business Organizations

Ag ManagementChapter 10Business Organizations

ObjectivesState the principles of business organizationsCompare characteristics of the three primary farm businessesDiscuss how to raise capital for each of the business organizationsCompare other types of business organizations and their unique characteristicsState how cooperatives function as a means of doing businessPrinciples of a Good OrganizationSimple OrganizationResourcesPlanningEfficiencyBenefit DistributionFactors to Consider When Setting up an OrganizationAgricultural Business Organizations3 primarySole Proprietorship 85.7%Partnership 11.2%Corporation 2.7%Sole ProprietorshipManaged by an individual85.7% of farms with sales over $25,000 per year are operated this way

Sole ProprietorshipAdvantagesDisadvantagesEasily formedFew Government regulations and restrictionsYou are the bossEasy to expand/contract the businessAble to take advantage of sudden opportunitiesReceive all the benefitNo problems with disagreementRaising capital may be difficultResponsible for purchasing, producing and marketingMust like to make decisionsResponsible for all debtsEnterprises may be stopped because of the lack of stability and permanence.Raising Capital Under a Sole ProprietorshipLease rather than own assetsDo your own workConsign several farm operating notesBorrow equipmentSpouse works in town to earn part of the family living expensePartnershipsAn association of two or more people who carry on a business together as co-owners with the goal of making a profit.

The Facts of PartnershipsDeath dissolves the partnership unless special arrangements are madePartnerships, do not pay income taxes, instead each partner must report their share of partnership income on their own income tax returnEach member is subject to liability for all debtsReal and personal property may be owned in the name of the partnership or it may be owned in the name of 1 or more partnersProfits and losses should be divided in accordance with a specific agreementPartnershipsAdvantagesDisadvantagesCapital and Know-How can be pooledLabor and Management can be dividedEach person can specialize yet remain in a position to help the other during peak labor periodsUnlimited liability of each partner may limit creditEach partner is liable for wrong doings in connection with the businessObjectives and opinions of partners may differIf either partner becomes ill or dies it may have a tragic effect on the partnership arrangement by causing an untimely legal dissolution of the organizationLimited PartnershipHolds one or more of the partners liable for the debts and obligations of the businessLimited partners can not participate in the management of the business

Farm Corporations C vs. S CorporationsC corporation is a regular corporationS corporation retain all the features of a C corporation however it is not taxed as a separate entity. All tax items pass through the corporation to the stockholders much like partners in a partnership.Other Types of OrganizationsLimited Liability Company (LLC)TrustCooperatives

LLCA legal form of business organization with daily activities like a partnership but with limited liability similar to a corporationTheoretically members have no liability for the obligations of the LLC.How LLCs are ManagedManaged just like a partnership

Ways LLCs are DissolvedA member diesA member undergoes bankruptcyMembers formally enact a resolution dissolving the LLC

TrustThe administration of assets on behalf of another: an institution or one or more individuals, living or dead.Testamentary trust are created by being written into a will.

Uses of TrustsProviding personal and financial safeguards for family and other beneficiaries; Postponing or avoiding unnecessary taxes; Establishing a means of controlling or administering property; and Meeting other social or commercial goals.

Establishing A TrustThe Grantor signs a document called a declaration of trust, which is similar to a Last Will and Testament. In the document, the Grantor typically names himself or herself as trustee, and transfers assets to that trust (i.e., the transfer is actually made from the Grantor to himself, as Trustee). Because the Grantor is named as the trustee, he or she maintains full control over the assets.After the Grantor (or the Grantor and Grantor's spouse in the case of a joint trust) dies, the person identified as successor trustee in the trust document generally assumes that role. The successor trustee transfers ownership of the assets in the trust to the beneficiaries named in the trust document. In many cases, the whole process takes only a few weeks, and there are no lawyer or court fees to pay. When all of the property has been transferred to the beneficiaries, the living trust terminates.

Revocable TrustA revocable trust is one in which assets are owned by the trustee, but the settlor reserves a power of revocation. Because the settlor can revoke the trust and therefore maintains control over the property, there are normally no tax advantages involved in this arrangement.Irrevocable TrustAn irrevocable trust is often used for charitable purposes by organizations or millionaires as well as for the management of inheritances. As the benefactor relinquishes control of the assets upon creating the trust, any charitable activities incur tax benefits even while the assets are invested to provide a financial endowment for later use by the charitable foundation. Maximum Time Length for TrustNo specified time during which a trust must remain in effect. Each situation must be evaluated separatelyCharitable trusts, on the other hand, may continue indefinitely.

CooperativesA legal entity distinct from its membersIt is not organized to make a profitInstead it is organized on 2 major premisesCooperatives are owned and controlled by member-patronsThe profits of the cooperative are returns to the members based on patronageKinds of Cooperatives Classified by functions or activitiesMarketing CooperativesPurchasing CooperativesService CooperativesProcessing CooperativesCredit Cooperatives

Marketing and Purchasing CooperativesFarmers pooling their saleable products and purchase needs in an effort to obtain increased market power.

Service CooperativesGroup efforts to improve the level of services received by farmers and ranchers

Credit CooperativesAcquire funds and provide them to members on a cost basis

Processing CooperativesOrganized to provide processing and packaging alternatives for the members

Purpose of CooperativesPrimary purpose is collective action by farmers to improve their economic well-beingCooperatives accomplish this bySecuring higher market pricesSecuring more favorable inputsProviding improved or new servicesProviding farmers with credit structured to farm and ranch needsAllowing farmers and ranchers to become involved in assembly and processingCharacteristics of Cooperatives

Ways Cooperatives are FinancedStock salesMembers can use cooperative funds to finance operations and invest in long-term assetsRetention of a portion of the profits in the cooperative. This is paid to members as patronage dividends. These are called retained earnings. Successful cooperatives will be able to repay members the retained earnings over a period of years.Wrapping Up CooperativesImportant competitive force in agribusinessProvide good and services to farmers and ranchers at lower cost than other sourcesHelped make agribusiness profitable by reducing operating costsSometimes able to get higher prices for agricultural productsHelps make agriculture more profitable by increasing incomeCompare OrganizationsSee text page 10-15

AssignmentComplete Assignment Sheets 1 & 2 (p. 151-155)