Business Structures, Markets, and Risk Management Lesson 2: Using Business Structures in a Market Simulation Sarah McKay, Graduate Student, Department of Agricultural and Applied Economics, Virginia Tech Kristin Carr, Agriculture Teacher, Riverheads High School, Augusta County Public Schools Marie Rothwell, Virginia Cooperative Extension Agent, 4-H Youth Development, Augusta County Shannon Wiley, Graduate Student, Agricultural, Leadership, and Community Education, Virginia Tech Hannah Scherer, Assistant Professor and Extension Specialist, Agricultural, Leadership, and Community Education, Virginia Tech

Overview of Today Recap from last lesson Business organization Simulation Group discussion on findings Group presentations Recap Questions Take-home

recap

Review of Business Structures What are the five business structures? 1. Sole proprietorship 2. Partnership 3. LLC 4. Cooperative 5. Corporation What are the three types of partnerships? 1. General − profits, liability, and management duties divided equally 2. Limited − varying investment percentage and liability; short-term projects 3. Joint ventures − general partnership for limited time or single project; may continue as filed partnership

Review What are key characteristics of an LLC? Hybrid of partnership and corporation Members vs. owners Members not personally responsible for debts/liabilities (unless negligent) What business structure is owned and operated by members using its services? Cooperative How can you tell if a corporation is public or private? Whether or not you can buy stock in the company

Review What are the key characteristics you might look for when trying to figure out what type of structure a business has? Owners History LLC vs. Inc. Public offering/stocks Taxation Organization

Sole Proprietorship Advantages Disadvantages Easy and inexpensive to form Unlimited personal liability Complete control Hard to raise $$$ Easy tax prep Heavy burden

Partnership Advantages Disadvantages Easy Full, shared liability Inexpensive Disagreements/shared decisions Shared financial commitment Shared profits Complementary skills

LLC Advantages Disadvantages Limited liability Limited life Operational ease Self-employment tax Sharing of profits (as see fit)

Cooperative Advantages Disadvantages Less taxation Raising capital Funding opportunities Lack of membership/participation Reduced costs Improved products and services Perpetual Democratic

Corporation Advantages Disadvantages Limited liability Costly Capital generation Time-consuming Corporate tax separate from owners’ Double taxation Paperwork/record-keeping burdens Competitive benefits

Business simulation Game

Game Objectives and Rules Market simulation with card-drawn scenarios. Goal is to make as much money as an individual at the end of the last round. Class will divide into three types of businesses: Sole proprietorship (1 owner) Partnership (2 owners) Private corporation (3-4 owners) In groups, decide the following before beginning the game: If you are a partnership, are you a general or limited partnership? If you a private corporation, how will decisions be made? Will there be a CEO or a democratic vote? Will you raise cattle or corn?

Live cattle prices are $134.225/cwt. Example of a Scenario Beginning assets Scenario Action (Expense)/Revenue Balance Ending assets 50 cattle at 1,200 lbs. Example: Beginning balance ---- $100,000 Example: Whether to feed a supplement that will add 50 lbs. per head but costs $55 per head Feed supplement because cattle prices are $139.775 per cwt or $1.40 per lb., which means I would get $70 per head ($55 + 15 extra profit if prices stay the same). $55/head Farm has 50 cattle. Expense = $55 × 50 = ($2,750) $100,000 − 2,750 = $97,250 50 cattle at 1,250 lbs. Example: Market day Live cattle prices are $134.225/cwt. 1,250 lbs. × 50 = 62,500 lbs. 62,500 lbs./100 = 625 cwt 625 cwt × $134.225/cwt = $83,890.63 = $97,250 + 83,890.63 = $181,140.63 $181,140.63 cash

Prices Corn May: 4.225 July: 4.206 August: 4.091 September: 4.108 Market day: 4.133 (October) Cattle June: 155.570 August: 147.520 October: 135.760 December: 127.000 Market day: 136.000 (March)

In groups based on Round 2 business structure: Answer the following using the large sticky paper. What business structure were you? What were the best and worst parts of the simulation? How did your business structure make this easier or harder? How did you make your decisions? What is your remaining balance?

Group Presentations

Questions?

Take-Home for Next Time Consider the following questions: What risks did your business face? How might you manage this risk? If you could do the simulation again, would you change your business structure?