Chapter 6 Types of Agribusiness

Proprietorships Advantages Simplest Easiest to organize Closest to American Dream Smallest businesses Few Government regs or restrictions Owner managed Choose products and services Receive all profits Disadvantages Personal assets collateral Unlimited liability Hard to get needed capital Lack in business skills Limited life Dies with owner

Partnerships General Two or more people manage Use formalized agreement What each contributes Profit sharing How to dissolve Each partner is liable Limited Partners are not liable for others debts Invest but not participate Limited partner not named Investment only Legal documentation of their role

Partnerships Limited Liability Protects existing personal assets Only risk investment Cannot legally help manage

Partnerships Advantages Obtaining capital Lower startup than corporations Only taxed once Partners have different skill sets Additional money Disadvantages Unlimited liability Lack of continuity Sometimes continued with family member after death

Written Partnership Agreements Name of Business Partners’ names and addresses Purpose and Nature, location of offices Date of start and duration Contributions of each partner Responsibilities of management Duties Salaries and spending authority Details of sharing profit or loss Accounting procedures Special restrictions Provisions of retirement Method of purchasing partners share Grievance procedures Details of dissolutions

Corporations Large investments of money On increase due to large capital Owned by many Legal entity Issue stock Elect board of directors Corporate charter

Types of Corporations Subchapter C (regular) Sell stock for investments Profits paid in dividends $$ of stock rises due to success BOD and stockholders make decisions Financially liable at all times Purina, CASE IH, Phillip Morris Subchapter S (Small Business or Family) Taxed like sole proprietor on profits Limited liability Avoiding double taxation Do not pay corporate tax Very popular in Ag

Requirements of SC S Owners must be individual or estates Stockholders US citizens Only one type of stock allowed Owners not members of affiliated groups May not own more than 80% of stock in another corporation Complete agreement to pass profits No more than 25% gross income from rents, royalties, dividends, interest No more than 80% gross income from outside US

Adv Disadv Advantages More money for investments Limited liability Right size to do needed things Perpetual life Ease of owner change Attracts talented employees Separate owner and management Legal entity Combined resources Stable level of production Stockholders do not devote time to company Disadvantages Initial cost Paperwork Complicated to establish Complex organization Two tax returns Double taxation Slow response time to market change Difficult to terminate Possible conflict BOD Must follow state laws Owners have limited control

Limited Liability Companies, LLC Advantages Primarily limited liability of members Avoid double taxation Pass through taxation Members divide ownership and voting rights Flexibility of partnerships Protection of corporation Disadvantages Work & expense of formation Postformation recordkeeping time consuming Expensive Laws still developing

Cooperatives Supply (purchasing) Buy supplies and resale to members Save on large quantities Sometimes manufacture own supplies Marketing Assist in marketing product of agriculturists Find buyher to pat highest price Some process Milk Vegetables Sunkist Land O’Lakes

Cooperatives Service Provide members with a service Not as numerous of other two Farm credit services Banks Credit unions Irrigation DHIA Rural electric Stats >21000 cooperatives Multi billion $ industry 1999 largest farmland Industries, Inc 1800 members farmers 19 states 4.5 billion dollars Oil, fertilizer, feed mills, insurance, warehouses

Membership Common Gives the right to vote Preferred Only opportunity to invest Encouraged to own common stock Control Democratic system Each member has 1 vote Criticized that they are run by a few elite members Many members fail to exercise their vote Characteristics Service at a cost Excess earnings returned to patrons Democratic control Limited ROI Most exempt from corporate tax 50% business must be with members

Cooperatives Advantages Member friendly Risk is limited Low operating expenses Income taxes lowered Broad capital base Legal entity Special antitrust laws Disadvantages Cooperative withholds part of dividends Members pay taxes on dividends Losses make higher prices for goods and services Lack of member participation Expensive to form and maintain Members have limited control

Franchises Franchisor sells the right to use its name to franchisee franchised outlets in US 2004 franchising accounted for 33% of retail sales Parent company prepackages business planning Management Training Adverstising Selling

Franchises Advantages Support from parent company Help in choosing location Convenient, consistent Name recognition Increased chance of success Disadvantages Large amount of money to purchase Must share sales or pay fee Constraints on management