Ag Management Chapter 10 Business Organizations

Objectives State the principles of business organizations Compare characteristics of the three primary farm businesses Discuss how to raise capital for each of the business organizations Compare other types of business organizations and their unique characteristics State how cooperatives function as a means of doing business

Principles of a Good Organization Simple Organization ResourcesPlanning EfficiencyBenefit Distribution

Factors to Consider When Setting up an Organization Ownership ResourcesLife Liability Participation Compensation TransferTaxesEstate

Agricultural Business Organizations 3 primary Sole Proprietorship 85.7% Partnership 11.2% Corporation 2.7%

Sole Proprietorship Managed by an individual 85.7% of farms with sales over $25,000 per year are operated this way

Sole Proprietorship AdvantagesDisadvantages Easily formed Few Government regulations and restrictions You are the boss Easy to expand/contract the business Able to take advantage of sudden opportunities Receive all the benefit No problems with disagreement Raising capital may be difficult Responsible for purchasing, producing and marketing Must like to make decisions Responsible for all debts Enterprises may be stopped because of the lack of stability and permanence.

Raising Capital Under a Sole Proprietorship Lease rather than own assets Do your own work Consign several farm operating notes Borrow equipment Spouse works in town to earn part of the family living expense

Partnerships An association of two or more people who carry on a business together as co-owners with the goal of making a profit.

The Facts of Partnerships Death dissolves the partnership unless special arrangements are made Partnerships, do not pay income taxes, instead each partner must report their share of partnership income on their own income tax return Each member is subject to liability for all debts Real and personal property may be owned in the name of the partnership or it may be owned in the name of 1 or more partners Profits and losses should be divided in accordance with a specific agreement

Partnerships AdvantagesDisadvantages Capital and Know-How can be pooled Labor and Management can be divided Each person can specialize yet remain in a position to help the other during peak labor periods Unlimited liability of each partner may limit credit Each partner is liable for wrong doings in connection with the business Objectives and opinions of partners may differ If either partner becomes ill or dies it may have a tragic effect on the partnership arrangement by causing an untimely legal dissolution of the organization

Limited Partnership Holds one or more of the partners liable for the debts and obligations of the business Limited partners can not participate in the management of the business

Farm Corporations Estate Never Dies Continuity of Business Tax Deduction Limited Personal Liability More Capital

“C” vs. “S” Corporations C corporation is a regular corporation S corporation retain all the features of a C corporation however it is not taxed as a separate entity. All tax items pass through the corporation to the stockholders much like partners in a partnership.

Other Types of Organizations Limited Liability Company (LLC) Trust Cooperatives

LLC A legal form of business organization with daily activities like a partnership but with limited liability similar to a corporation Theoretically members have no liability for the obligations of the LLC.

How LLC’s are Managed Managed just like a partnership

Ways LLC’s are Dissolved A member dies A member undergoes bankruptcy Members formally enact a resolution dissolving the LLC

Trust The administration of assets on behalf of another: an institution or one or more individuals, living or dead. Testamentary trust are created by being written into a will.

Uses of Trusts Providing personal and financial safeguards for family and other beneficiaries; Postponing or avoiding unnecessary taxes; Establishing a means of controlling or administering property; and Meeting other social or commercial goals.

Establishing A Trust The Grantor signs a document called a declaration of trust, which is similar to a Last Will and Testament. In the document, the Grantor typically names himself or herself as trustee, and transfers assets to that trust (i.e., the transfer is actually made from the Grantor to himself, as Trustee). Because the Grantor is named as the trustee, he or she maintains full control over the assets. After the Grantor (or the Grantor and Grantor's spouse in the case of a joint trust) dies, the person identified as successor trustee in the trust document generally assumes that role. The successor trustee transfers ownership of the assets in the trust to the beneficiaries named in the trust document. In many cases, the whole process takes only a few weeks, and there are no lawyer or court fees to pay. When all of the property has been transferred to the beneficiaries, the living trust terminates.

Revocable Trust A revocable trust is one in which assets are owned by the trustee, but the settlor reserves a power of revocation. Because the settlor can revoke the trust and therefore maintains control over the property, there are normally no tax advantages involved in this arrangement.

Irrevocable Trust An irrevocable trust is often used for charitable purposes by organizations or millionaires as well as for the management of inheritances. As the benefactor relinquishes control of the assets upon creating the trust, any charitable activities incur tax benefits even while the assets are invested to provide a financial endowment for later use by the charitable foundation.

Maximum Time Length for Trust No specified time during which a trust must remain in effect. Each situation must be evaluated separately Charitable trusts, on the other hand, may continue indefinitely.

Cooperatives A legal entity distinct from its members It is not organized to make a profit Instead it is organized on 2 major premises Cooperatives are owned and controlled by member-patrons The profits of the cooperative are returns to the members based on patronage

Kinds of Cooperatives Classified by functions or activities Marketing Cooperatives Purchasing Cooperatives Service Cooperatives Processing Cooperatives Credit Cooperatives

Marketing and Purchasing Cooperatives Farmers pooling their saleable products and purchase needs in an effort to obtain increased market power.

Service Cooperatives Group efforts to improve the level of services received by farmers and ranchers

Credit Cooperatives Acquire funds and provide them to members on a cost basis

Processing Cooperatives Organized to provide processing and packaging alternatives for the members

Purpose of Cooperatives Primary purpose is collective action by farmers to improve their economic well-being Cooperatives accomplish this by Securing higher market prices Securing more favorable inputs Providing improved or new services Providing farmers with credit structured to farm and ranch needs Allowing farmers and ranchers to become involved in assembly and processing

Characteristics of Cooperatives Member Owned Member Control Non Profit For Member Needs Shaved Risk Elected Board

Ways Cooperatives are Financed Stock sales Members can use cooperative funds to finance operations and invest in long-term assets Retention of a portion of the profits in the cooperative. This is paid to members as patronage dividends. These are called retained earnings. Successful cooperatives will be able to repay members the retained earnings over a period of years.

Wrapping Up Cooperatives Important competitive force in agribusiness Provide good and services to farmers and ranchers at lower cost than other sources Helped make agribusiness profitable by reducing operating costs Sometimes able to get higher prices for agricultural products Helps make agriculture more profitable by increasing income

Compare Organizations See text page 10-15

Assignment Complete Assignment Sheets 1 & 2 (p )