Farm Business Organization and Transfer Chapter 14

Common Business Forms for Farms Sole Proprietorship (90%) Partnership (6%) Corporation (3%)

Sole Proprietorship Characteristics Advantages Owners owns and manages the business A single owner of the business Is established by starting to operate the business Income taxes paid at individual or joint returns rates Advantages Simplicity Freedom Flexibility

Sole Proprietorship Disadvantages Personal Liability for legal troubles of the business Size is limited by the capital available Lack of business continuity

Joint Ventures Operating Agreements Partnerships Corporations Limited Liability Corporations Cooperatives

Operating Agreements When two or more sole proprietors carry on some farming activities jointly while maintaining individual ownership of their resources. Tend to be informal Tend to be limited arrangements Enterprise budgets can be useful The general principal of the operating agreement is to share income in the same proportion as total resources are contributed, including both fixed assets and operating costs.

Partnerships An association of two or more persons who share the ownership of a business to be conducted for profit Two Types General Partnership Limited Partnership Characteristics Sharing of business profits and losses Shared control of property, with possible shared ownership of some Shared management of the business

Partnerships Partnerships do not pay taxes directly. Advantages Easier and cheaper than a corporation Allows for flexibility as children are brought into the business. Disadvantages Unlimited Liability of each general partner

Corporations Are separate legal entities that must be formed and operated in accordance with the laws of the state in which they were organized. It is separate from its owners, managers, and employees. It can own property, borrow money, enter into contracts and sue or be sued.

Corporations Characteristics Laws vary from state to state Three groups of individuals are involved in a farming corporation: shareholders, directors, and officers. Two types are C and S S corps can have no more than 75 shareholders Other corps can not own stock in an S corp

Corporations Taxes Advantages C corps can be double taxed S corps are taxes like a partnership Advantages Corporations provide limited liability for all shareholders/owners Allows for pooling of resources Credit easier because of business continuity Provides easy way to transfer business ownership. Tax benefits for fringe benefits Tax rates for C might be beneficial

Corporations Disadvantages More costly to form Most likely will continue to need legal advice and accounting services Requires directors meetings, board meetings and for the minutes of these meetings to be kept.

LLCs and Cooperatives LLCs Cooperatives Operated like a partnership however gives the benefit of limited liability (creditors cannot pursue personal or business assets owned individually) Cannot deduct the cost of fringe benefits Cooperatives Made up of independent farmers who wish to carry out one particular operation jointly.