1. Business Organization Structures
October 6, 2005
There are several types of Business Organization structure. This part of the program will go through each of them and discuss the characteristics.
Also, you have some additional materials in your books.

2. Objectives
Identify strengths & weaknesses of the operation that will affect succession of the farm
Identify what you hope to accomplish through Succession Planning
Outline a Succession Plan
Understand differences in business entities

3. Business Structure
What form of business structure do you use for your farming business?
Why is business structure important?
Do you have the best business structure to meet your needs?

4. Farm Business Structure
Missouri
U.S.
Sole Proprietorship
98,435
2,128,982
Partnership
5563
Corporation
Other
2174
625
73, ,039
Data in slide from 2002
Data from the 1997 Census of Agriculture.
MO US
Sole Prop ,919 1,901,175
Partnership 7, ,654
Corp 2, ,574
Other ,729
It will be interesting to see the change in Partnership/Corporation and “Other” in the 2002, since LLC’s were relatively new when the 1997 Census was taken. LLC’s became a legal entity in Missouri in either 1993 or 1994.
Other includes cooperatives, estate or trust, institution

5. Missouri Farmers Full-time Farmers --- 61.035
Other (part-time)
Total ,797
Other could include part-time, as well as people who hire their farming out.
The trend has been a decrease in full-time farmers, but yet the number of farms has been steady to slightly growing.
1997
Full-time 44,751
Other (part-time) 54,109
Total 98,860
Missouri is # 2 to Texas with 228,926 in total farms.
Missouri … is # 2 in Number of Farms has 5% of all U.S. Farms

6. Factors to Consider in Choosing a Business Structure
Legal restrictions
Liabilities
Type of Business
Earnings distribution
Capital Needs
Number of employees
Tax advantages/ disadvantages.
Length of business operation
Bring up the title of this slide and ask the participants “What are some of the factors that should be considered?” Once they are finished click and bring up the list.

7. Types Common to Agriculture
Sole Proprietorship
Partnership

8. Types Common to Agriculture
….. continued
Limited Liability Partnership
Limited Liability Limited Partnership
Limited Liability Company (LLC)

9. Types Common to Agriculture
….. continued
C Corporation
S Corporation
Cooperative Chapter 274 (stock)
Cooperative Chapter 357 (non-stock)

10. Sole Proprietorship Pros Inexpensive and easy to start
Simple to run, transfer or terminate
Single tax
A sole proprietorship can be started by simply beginning to conduct business and it is recommended to open a separate bank account to track business finances.
If operating under a fictitious name such as Smith Farms, be sure that name is filed in Jefferson City.
Tax – Has no double taxation on profits. All income and expenses are reported on the proprietor’s individual tax return. (also must pay self employment tax on income)

11. Sole Proprietorship Cons Unlimited Liability
Ownership is limited to one person
With a sole proprietorship there is no separate legal entity. Therefore, the proprietor has unlimited personal responsibility for the business liabilities.
Ex. If the business cannot pay MFA for fertilizer and chemicals, MFA can sue you individually.
Also Business creditors can go against both the business assets and personal assets, including your bank account, car and house.

12. Partnership Pros Flexible form of business
Permits ownership by more than one person
Avoids double taxation
Few legal formalities
There are both general and limited partnerships. Limited partners have limited liability to the amount of their investment.
Taxes – no income is reported at the partnership level. All profits and losses are reported through the owners individual

13. Partnership Unlimited Liability
Cons
Unlimited Liability
Partnership is legally responsible for business acts of each partner
More complex transfer
Terminates at death
Unlimited liability for a general partnership (limited for a limited partner that has no management decisions)

14. Limited Liability Company
New type of entity to Missouri
Characteristics of Corp., Partnership & sole proprietorship
Members - not stockholders or partners
Many times relatives

15. Limited Liability Company
Pros
Pros
Limited personal liability
Pass through tax advantage of a partnership

16. Limited Liability Company
Cons
Cons
Differences in peoples opinions can cause problems
Potential to be taxed as a Corporation

17. C Corporation Pros Can offer fringe benefits to owners
Limited Liability

18. C Corporation Difficult to get assets out
Cons
Difficult to get assets out
Difficult to sell business without double taxation
If shareholders cannot agree could be problems

19. S Corporation Pros Limited Liability Profits taxed once
Direct pass through of income and expenses to shareholders

20. S Corporation Limitations Cons Include: Less than 100 shareholders
Domestic corporation
Not more than one class of stock
Not be a member of an affiliated group
Not have non-resident alien shareholders
Not be an “ineligible corp”; cannot deduct fringe benefits for owners or their families

21. Cooperatives Most of the time cooperatives are corporations
Why different than regular corporation?
Why different?
Owned by those who conduct business with it.
Purpose is to benefit its owners as investors.
Flip side – an investor-owned corporation’s owners do not usually conduct business with the corporation.

22. Cooperatives Types Chapter 274 Chapter 357
1983 – Missouri had 103 locally owned cooperatives
Chapter 274 – Financed by the members who use their services. New members are usually required to purchase a share of stock, remainder of a member’s investment will be earned over time. Non-stock cooperative. Minimum of 11 people.
Chapter 357 – Member ship cost and then business operators. Stock cooperative. Minimum of 12 people.

24. Trends
Historically – the trend has been as sales increase and the business becomes more complex the number of sole proprietorships decrease

25. Multiple structures
Yes, farms may use more than one business structure.
Ex. One entity owns the land, another for production assets. Why?
Why would a farm want to do that?
May be easier to meet retirements needs of parents if land is retained in individual ownership. Rental income from the land is assured, and it doesn’t affect social security benefits in retirement. Courts have been wrestling whether or not the parents would have to pay self employment taxes since 1995, so far it seems they would have to pay it.
Keeping the land separate from the rest of the farm business assets creates additional options for meeting an objective of fairness to the off-farm heirs without their involvement in the farm business.
Using two entities reduces the investment needed by the on-farm heirs to gain control of the operating side of the business. ** This is usually a big concern to on-farm heirs. **
For people who find the corporation attractive for a production entity, holding the land in a non-corporate entity may sidestep often severe income tax problems of corporate liquidation.
May also want to invest in new cooperatives with neighbors for delivery of products or just to hold the stock.

26. All sorts of farming operations in Missouri

27. Questions
This would be a good break and have them fill out the vision matrix and goals worksheet.
Mary Sobba University of Missouri Extension Agriculture Business Specialist (573)