fbm10

Overview of Business Organizations

Essential Features of a Business Organization

  • Simple structure.

  • Access to capital, land, labor.

  • Encourage long-term planning.

  • Increase efficiency in resources such as land, labor, capital, and machinery.

  • Fair distribution of benefits based on contributions.

Key Considerations for Business Organizations

  • Ownership structure.

  • Resource acquisition capabilities.

  • Duration of the organization.

  • Owner liability.

  • Management decision-making process.

  • Ownership transfer methods.

  • Tax and estate planning issues.

Types of Farm Business Organizations

  • Sole Proprietorship

  • Partnership

  • Corporation

Sole Proprietorship

  • Most common type (85.7% of US farms).

  • Easiest to establish with minimal government restrictions.

  • Sole control over management decisions.

  • Quick to adjust business scale.

  • Full profit responsibility promotes work incentive.

  • No partner conflicts.

Downsides of Sole Proprietorship

  • Challenges in capital raising.

  • May lead to hasty decision-making.

  • Total debt responsibility.

  • Potential for incapacity affecting business.

Raising Capital in Sole Proprietorship

  • Prefer leasing to ownership.

  • Owner/Manager handles all work.

  • Parental support in loans or equipment rental.

  • Explore off-farm income.

Partnership

  • Formation of two or more co-owners.

  • Dissolves upon death unless otherwise stated.

  • Shared liability for debts.

  • Property ownership can be individual or collective.

  • Profits/losses divided by agreement.

Effective Partnership Management

  • Common goals among partners.

  • Respect between partners is crucial.

  • Sufficient business size to support all partners.

  • Necessity for good record-keeping and management.

  • Written partnership agreements are vital.

Partnership Agreements

  • Define ownership transfer upon termination.

  • Address machinery leases and life insurance for partner buyouts.

  • Specify management and accounting roles.

  • Ensure payment structures based on contributions.

Limited Partnership

  • One or more partners have liability for debts.

  • Limited partners cannot manage the business.

  • Must not appear in the partnership name.

  • Partnerships require legal documentation for profit sharing.

Farm Corporations

Advantages

  • Access to capital through pooled resources.

  • Distinction between ownership and management.

  • Easier continuation after shareholder death.

  • Simple transferability of ownership via stock.

  • Tax benefits on certain expenses.

  • Limited liability for shareholders based on contributions.

Disadvantages

  • Costly and complex organization process.

  • Ongoing costs for maintaining a corporation.

  • Possible credit challenges due to unfamiliarity with corporate structure.

  • Reduced personal financial freedoms.

  • Lawsuits may threaten corporate assets.

  • Issues for minority stockholders.

  • Unique income tax complications.

  • Difficulties in terminating a corporation.

S-Corporation

  • Similar to regular corporation but taxed differently.

  • Passes tax items to stockholders like a partnership.

Cooperatives

  • Member-owned and controlled entities.

  • Not profit-centric; profits returned based on patronage.

Types of Cooperatives

  • Marketing: grain, dairy, juice.

  • Purchasing: feed, fuel, supplies.

  • Service: food buying, electricity.

  • Processing.

  • Credit: PCA, banks, etc.

Purposes of Cooperatives

  • Enhance farmers' economic conditions.

  • Achieve better market and input pricing.

  • Deliver improved services and credit options.

Key Characteristics of Cooperatives

  • Owned by users.

  • Member control through democratic processes.

  • Operate on a non-profit basis.

  • Members share risks and select management.

Financing a Cooperative

  • Stock sales with no appreciation in value.

  • Use funds for long-term asset investments.