Business Organizations Farm Ranch Business Management Chapter 10

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 coowners • 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