Business Organizations
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Transcript of 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
PartnershipPartnership
• 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
PartnershipPartnership
• 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
Farm Corporation Farm Corporation AdvantagesAdvantages
• Separation of ownership and management
• Ex: One or two children can manage the farm, while all the siblings share in the ownership
Farm Corporation Farm Corporation AdvantagesAdvantages
• Ease of continuing in business• Upon death of a stock owner, only the
stock is subject to probate, not the assets
Farm Corporation Farm Corporation AdvantagesAdvantages
• 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 Farm Corporation AdvantagesAdvantages
• Opportunity for tax savings• Some benefits (insurance, profit
sharing plans) are tax deductible
Farm Corporation Farm Corporation AdvantagesAdvantages
• 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
Farm Corporation Farm Corporation DisadvantagesDisadvantages
• Continuing costs to maintain a corporation
Farm Corporation Farm Corporation DisadvantagesDisadvantages
• May be difficulty in obtaining credit– lenders may be unfamiliar with the
corporation – more complicated borrowing procedures
Farm Corporation Farm Corporation DisadvantagesDisadvantages
• 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 Farm Corporation DisadvantagesDisadvantages
• Lawsuits• If personal items are transferred to the
corporation, they may be taken as assets of the corporation if sued
Farm Corporation Farm Corporation DisadvantagesDisadvantages
• Minority stockholder problems• Second generation stockholders may
not be satisfied with dividends and rights
Farm Corporation Farm Corporation DisadvantagesDisadvantages
• Income tax laws are unique
Farm Corporation Farm Corporation DisadvantagesDisadvantages
• 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