Agriculture Business Organizations Spencer Ag Business Curriculum 2013

Business Organizations: When establishing a business, one must determine an organizational structure that the business can operate under in an efficient and effective manner.

Business Organization Principles: When selecting an organizational structure, consider the following: Simple as possible Provide sufficient resources Encourage planning for the future Increase efficiency Distribute benefits equally Manage Land, Labor, Capital and Management effectively

Types of Business Organizations: Sole Proprietorship Partnership Corporation Cooperative Franchise

Businesses in Society: The business firm is responsible for all of the following in a capitalistic society: production of products decisions concerning what products to produce methods of production level of employment product distribution pricing decisions The type of business structure will depend on how these decisions are carried out.

Make-up of Businesses in the U.S. 20.1 Million Businesses

Sole Proprietorships: The most common type of business firm in agriculture and the business world. Characterized by an individual owner who: supplies the working capital directs or manages the firm receives all profits bears all losses and risks (business and personal assets are liable)

Sole Proprietorships: Advantages: Low start up costs Freedom from regulation Owner in direct control Minimal working capital requirements Tax advantages to small owner All Profits to the owner

Sole Proprietorships: Disadvantages: Unlimited liability (business and personal) Lack of continuity Difficult to raise additional capital (one source available)

Partnerships: An association of two or more persons to carry on a business for profit as co-owners. Provides access to more capital and allows the firm to be larger and more competitive. Two basic types of partnerships: general partnership limited partnership

Partnerships: General Partnerships Each partner is involved with both ownership and management of the business. Each partner has unlimited liability for both his or her own business obligations plus those of the other partners. All partners are liable to the extent of both their personal and business assets.

Partnerships: Limited Partnerships: Two or more persons, with one of more general partners and one or more limited partners Limited partners: Contribute only a fixed amount of capital to the partnership Are not liable for any thing above the amount of their contribution Can contribute money and property, but do not contribute any personal services

Partnerships: Advantages: Ease of formation Low start up costs Additional sources of risk capital Broader management base Possible tax advantages Limited outside regulation

Partnerships: Disadvantages: Unlimited liability Lack of continuity Divided authority Hard to find suitable partners Difficulty in raising large amounts of capital

Corporations: Accumulation of large sums of money to finance massive business enterprises Separate entities from the personal owners of the business Personal owners are not liable for any debts of the corporation - no liability Greater appeal to investors—can only lose what is invested

Corporations: Structure: Owners are referred to as stock holders Stock holders elect a board of directors that are responsible for directing the corporation Voting of stock holders determines major decisions. Stock holders receive one vote for every share of stock owned The more stock owned, the more power you can exert

Corporations: Establishment Requests must be made to the state authorities and provide information on: name of corporation purpose of corporation length of existence names of board of directors If this is satisfactory, a charter is granted giving the corporation power to act.

Corporations: Establishment Next step is to adopt bylaws and a constitution that govern how business will be operated. Elect the officers to operate the business..

Corporations: Subchapter S: Developed to benefit small businesses, including those in agriculture. Designed for the smaller of family owned business that does not wish to sell large volumes of stock or to remain as a privately owned business entity.

Corporation: Subchapter S Qualifications Must have only one class on stock outstanding. Must have no more than 35 initial stock holders, all of whom must be individuals or estates. (no businesses or corporations) All stockholders must agree to become a Subchapter S corporation.

Corporations: Why Subchapter S: Taxes are lower than normal corporations Subchapter S corporations are taxed as partnerships. Avoids double taxation Still maintains limited liability for the owners

Corporations: Advantages: Limited Liability Specialized Management Ownership transferable Continuous existence Legal entity Possible tax savings Easier to raise capital

Corporations: Disadvantages: Closely regulated by state authorities More expensive to organize Charter restrictions Double taxation Management more complicated

Cooperatives: A variation of a corporation More democratic control than a corporation One member = one vote regardless of size or type of business, EXCEPT… Some states allow voting on a percentage of total patronage refunds.

Cooperatives: Usually organized to provide goods and services for its own members—not the general public Profits are returned to the members based on a percentage of business done at the cooperative Patronage refund—the payment returned to members of a cooperative based on volume of business

Cooperatives: Types: Marketing Purchasing Service Processing Credit

Cooperatives: Marketing: Purchasing: Members pool saleable products to gain more power and a better price when selling their products Purchasing: Producers pool the purchasing of inputs to secure a more favorable input price

Cooperatives: Service: Processing: Members pool efforts to provide better or new services Processing: Members pool their efforts to process, package, and add value to their products to sell in alternative markets

Cooperatives: Credit: Members pool their efforts to acquire funds at lower interest costs to be passed on to other members

Cooperatives: Advantages: Limited liability Specialized management Continuous existence Legal entity Substantial tax advantages Easier to raise capital Antitrust and regulatory exemptions

Cooperatives: Disadvantages: Incorporating statutes quite restrictive Cooperation among members is difficult Slow in organizing and getting started Members fail to recognize their ownership responsibilities Business community resentment against the cooperative Patronage refunds are not guaranteed

Franchise: What is a franchise? Business arrangement in which the parent company (franchisor) sells to another business (franchisee) the right to use its name and sell its products.

Franchise Advantages of franchises Nationally recognized name and reputation Training for owners and staff Personal ownership

Franchise: Disadvantages of Franchises: Large start-up and franchise costs Management regulations Restrictions on selling

Chapter 10 Review: What are the four major types of businesses? Which type of business is the most popular type of business in the U.S.? Describe a sole proprietorship. What are the advantages and disadvantages of a sole proprietorship? What are the two types of partnerships?

Chapter 10 Review: What are the advantages and disadvantages of a partnership? Describe a corporation. What are the advantages and disadvantages of a corporation? What is a cooperative? What are the five types of cooperatives? What are the advantages and disadvantages of a cooperative?