Business Organizations & Structure Understanding Sole Proprietorships, Partnerships, Corporations and Cooperatives

Finding Balance: Needs vs. Abilities Five principles for determining what organizational structure works: –The organization should: be as simple as possible. provide access to sufficient resources such as land, labor, capital and management. encourage planning for as many years as possible. The helps reduce uncertainty. increase the efficiency of land, labor, capital and machinery resources. distribute benefits fairly on the basis of contributions to the business.

Factors in Choosing a Business Structure Ownership - Who owns the business organization? Resources - What is the ability to acquire resources such as land, labor and capital? Life - How long is the expected life of the organization? Liability - What is the liability of the owners? Participation – Who participates in management decisions? Compensation - What is the compensation for management? Transfer - How easy is it to transfer business ownership? Taxes - What problems are there for tax planning (income and estate taxes)? Estate - What problems are there for estate planning?

Sole Proprietorship A business that is controlled by one manager. A sole proprietor owns, makes all the decisions, and does all of the planning for a business. This is the simplest form of business organization.

Partnership A business organization that is controlled by more than one person. Two or more people are associated for the purpose of conducting a business for profit.

Corporation A business organization that is run by a board of trustees at the discretion of the controlling stockholders. It has a separate legal identity and is taxed apart from its shareholders.

Sole Proprietorship Advantages –Owner makes all managerial decisions that affect the business. –Can expand or contract the size of the business, change enterprises, etc. Disadvantages –Raising capital may be difficult –Responsible for all management decisions –Responsible for all debts –Injury or illness could stop business

Partnership Advantages –Pooling capital and know-how –Labor and management can be divided Disadvantages –Inequity of resources –Might acquire new debt to expand operation Disadvantages, cont… –Objectives and opinions may vary –An injury or death to one partner has a tragic effect on the partnership –Each partner is liable for the others actions –Unlimited liability may restrict credit use

Corporation Advantages – Economic reasons –Separation of ownership and management –Ease of continuing business –Easily transferred ownership –Opportunity for tax savings –Limited liability Disadvantages –Complicated and costly to organize –Continuing costs to maintain corporation –May be difficulty in obtaining credit –May be no freedom of action –Corporation can be sued –Minority stockholder problems –Income tax laws are unique –Termination is expensive.

Cooperatives Like a corporation, a cooperative is a legal entity distinct from its members Unlike a corporation, it is not organized for making a profit Two major premises: –Cooperatives are owned and controlled by the member- patrons –The profits of the cooperatives are returned to the members based on patronage.

Kinds of Cooperatives Marketing Purchasing Service Processing Credit

Marketing & Purchasing Cooperatives Members pooling their saleable products and purchase needs in an effort to obtain increased market power. –Marketing Examples: Storage of commodity, such as grain in elevators –Purchasing Examples: Operating inputs such as feed, fuel, fertilizer, etc.

Service Cooperatives Group efforts to improve the level of services received by members. –Examples: Electricity through rural electric cooperatives

Processing Cooperatives Organized to provide processing and packaging alternatives for members. –Examples: Assembly, processing, and packaging of Ag products

Credit Cooperatives Acquire funds and provide them to members on a cost basis. –Examples: Farm Credit, Production Credit Association, Federal Land Bank and Bank of Cooperatives