Business Organization Structures October 6, 2005 There are several types of Business Organization structure. This part of the program will go through each of them and discuss the characteristics. Also, you have some additional materials in your books.

Objectives Identify strengths & weaknesses of the operation that will affect succession of the farm Identify what you hope to accomplish through Succession Planning Outline a Succession Plan Understand differences in business entities

Business Structure What form of business structure do you use for your farming business? Why is business structure important? Do you have the best business structure to meet your needs?

Farm Business Structure Missouri U.S. Sole Proprietorship 98,435 2,128,982 Partnership 5563 129.593 Corporation Other 2174 625 73,752 16,039 Data in slide from 2002 Data from the 1997 Census of Agriculture. MO US Sole Prop. 87,919 1,901,175 Partnership 7,708 243,654 Corp 2,543 74,574 Other 690 69,729 It will be interesting to see the change in Partnership/Corporation and “Other” in the 2002, since LLC’s were relatively new when the 1997 Census was taken. LLC’s became a legal entity in Missouri in either 1993 or 1994. Other includes cooperatives, estate or trust, institution

Missouri Farmers Full-time Farmers --- 61.035 Other (part-time) ---- 45.762 ------------ Total 106,797 Other could include part-time, as well as people who hire their farming out. The trend has been a decrease in full-time farmers, but yet the number of farms has been steady to slightly growing. 1997 Full-time 44,751 Other (part-time) 54,109 Total 98,860 Missouri is # 2 to Texas with 228,926 in total farms. Missouri ….. is # 2 in Number of Farms has 5% of all U.S. Farms

Factors to Consider in Choosing a Business Structure Legal restrictions Liabilities Type of Business Earnings distribution Capital Needs Number of employees Tax advantages/ disadvantages. Length of business operation Bring up the title of this slide and ask the participants “What are some of the factors that should be considered?” Once they are finished click and bring up the list.

Types Common to Agriculture Sole Proprietorship Partnership

Types Common to Agriculture ….. continued Limited Liability Partnership Limited Liability Limited Partnership Limited Liability Company (LLC)

Types Common to Agriculture ….. continued C Corporation S Corporation Cooperative Chapter 274 (stock) Cooperative Chapter 357 (non-stock)

Sole Proprietorship Pros Inexpensive and easy to start Simple to run, transfer or terminate Single tax A sole proprietorship can be started by simply beginning to conduct business and it is recommended to open a separate bank account to track business finances. If operating under a fictitious name such as Smith Farms, be sure that name is filed in Jefferson City. Tax – Has no double taxation on profits. All income and expenses are reported on the proprietor’s individual tax return. (also must pay self employment tax on income)

Sole Proprietorship Cons Unlimited Liability Ownership is limited to one person With a sole proprietorship there is no separate legal entity. Therefore, the proprietor has unlimited personal responsibility for the business liabilities. Ex. If the business cannot pay MFA for fertilizer and chemicals, MFA can sue you individually. Also Business creditors can go against both the business assets and personal assets, including your bank account, car and house.

Partnership Pros Flexible form of business Permits ownership by more than one person Avoids double taxation Few legal formalities There are both general and limited partnerships. Limited partners have limited liability to the amount of their investment. Taxes – no income is reported at the partnership level. All profits and losses are reported through the owners individual

Partnership Unlimited Liability Cons Unlimited Liability Partnership is legally responsible for business acts of each partner More complex transfer Terminates at death Unlimited liability for a general partnership (limited for a limited partner that has no management decisions)

Limited Liability Company New type of entity to Missouri - 1993 Characteristics of Corp., Partnership & sole proprietorship Members - not stockholders or partners Many times relatives

Limited Liability Company Pros Pros Limited personal liability Pass through tax advantage of a partnership

Limited Liability Company Cons Cons Differences in peoples opinions can cause problems Potential to be taxed as a Corporation

C Corporation Pros Can offer fringe benefits to owners Limited Liability

C Corporation Difficult to get assets out Cons Difficult to get assets out Difficult to sell business without double taxation If shareholders cannot agree could be problems

S Corporation Pros Limited Liability Profits taxed once Direct pass through of income and expenses to shareholders

S Corporation Limitations Cons Include: Less than 100 shareholders Domestic corporation Not more than one class of stock Not be a member of an affiliated group Not have non-resident alien shareholders Not be an “ineligible corp”; cannot deduct fringe benefits for owners or their families

Cooperatives Most of the time cooperatives are corporations Why different than regular corporation? Why different? Owned by those who conduct business with it. Purpose is to benefit its owners as investors. Flip side – an investor-owned corporation’s owners do not usually conduct business with the corporation.

Cooperatives Types Chapter 274 Chapter 357 1983 – Missouri had 103 locally owned cooperatives Chapter 274 – Financed by the members who use their services. New members are usually required to purchase a share of stock, remainder of a member’s investment will be earned over time. Non-stock cooperative. Minimum of 11 people. Chapter 357 – Member ship cost and then business operators. Stock cooperative. Minimum of 12 people.

Trends Historically – the trend has been as sales increase and the business becomes more complex the number of sole proprietorships decrease

Multiple structures Yes, farms may use more than one business structure. Ex. One entity owns the land, another for production assets. Why? Why would a farm want to do that? May be easier to meet retirements needs of parents if land is retained in individual ownership. Rental income from the land is assured, and it doesn’t affect social security benefits in retirement. Courts have been wrestling whether or not the parents would have to pay self employment taxes since 1995, so far it seems they would have to pay it. Keeping the land separate from the rest of the farm business assets creates additional options for meeting an objective of fairness to the off-farm heirs without their involvement in the farm business. Using two entities reduces the investment needed by the on-farm heirs to gain control of the operating side of the business. ** This is usually a big concern to on-farm heirs. ** For people who find the corporation attractive for a production entity, holding the land in a non-corporate entity may sidestep often severe income tax problems of corporate liquidation. May also want to invest in new cooperatives with neighbors for delivery of products or just to hold the stock.

All sorts of farming operations in Missouri

Questions This would be a good break and have them fill out the vision matrix and goals worksheet. Mary Sobba University of Missouri Extension Agriculture Business Specialist (573) 581-3231 sobbam@missouri.edu