Chapter 14: Farm Business Organization and Transfer

Sole Proprietorship

A business owned and operated by a single individual, who is personally liable for all business debts and obligations.

How are sole proprietorships taxed?

Pay on profit from farm as income tax returns 

Advantages for sole proprietorships include

1. easy to form and operate

2. full control and flexibility (operating freedom)

3. keep all profit

Disadvantages of sole proprietorship are that

1. Personal liability

2. Limited Capital

3. Heavy workload

4. Lack of business continuation 

Operating Agreement

two or more people coming together to carryout farming activities.

• limited arrangement

• informal

• individual ownership of resources

• bank accounts are separate

How are expenses and revenues divided

1. Ownerships costs: owners pay them

2. Operating costs: shared in a fixed proportion

3. Revenue: same proporti9on as total resources contributed 

What is the difference between a general and limited partnership?

1. General: liability extends to personal assets 

2. Limited: at least one general, the others do not participate in management and do not have personal liability 

Characteristics of Partnerships

1. Sharing of business profits and losses

2. Shared control of property

3. Shared management 

Sharing arrangements should include

1. Management: who is responsible for what

2. Property: how are things being owned and contributed

3. Share of profits and losses

4. Records: who is going to keep them

5. taxation

6. termination

7. dissolution: how are assets getting distributed

What causes termination of a partnership

1. time 

2. death

3. mutual agreements

4. bankruptcy

Indicates a partnership with legally exists

1. joint ownership of assets in capital account

2. operation under a firm name

3. joint bank account

4. single set of business records

5. management participation

6. sharing of profits and losses

How to form a corporation

1. Incorporators file a preliminary application with the appropriate state official

2. Draft a pre-incorporation agreement outlining the major rights and duties of parties

3. Articles of incorporation are prepared and filed with the proper state office

4. Incorporations turn property/cash over to the corporation in exchange for shares of stock representing their ownership share of the corporation

5. Shareholders meet to organize the business and elect directors

6. directors meet to elect officers, adopt bylaws and begin business in the name of the corporation

What groups are individuals are involved in in farming corporation

• shareholders

• directors

• officers

Difference between a S and C corporation and what is double taxation

An S corporation is a corporation that does not have to pay income taxes themselves and are taxed like a partnership

C corporations pay taxes on the taxable income any after tax income is distributed to the shareholders as dividends is considered as taxable income to shareholders

Advantages of a corporation

• Limited liability

• more resources and capital

• More convenient to divide and share ownership

• Business continuity

• Some income tax advantages  

Disadvantages of Corporations

• more costly to maintain

• more costly to create

• Shareholder and director meeting

What is cooperative

• they require articles, bylaws and minutes

• Net income passed to members before income tax (no double taxation)

• Maximum of 8% to shareholders based on your involvement in the co-op

• no matter how much you own you only get one vote

Testamentary Trust v Living Trust

Testamentary: setup by the will after someone passes away

Living: happens while someone is alive

What questions are important to ask when transferring the farm business

1. Is the business big enough to employ another person?

2. Is the business profitable enough to support another person?

3. Can management responsibilities be shared?

Ownership can be transferred in 4 ways

1. By contract: beneficiary on life insurance or retirement account

2. by operation of law: asset is owned under joint tendency with right of survivorship

3. by a trust

4. by probate: according to a will or state law

What are the 3 keys areas of a farm business that must be transferred

1. Income 

2. Ownership

3. Management proces