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Farm Management


farm management chapter 14. 7. Sole Proprietorship ... Bankruptcy. Mutual agreement. farm management chapter 14. 18. Advantages of Partnership ... – PowerPoint PPT presentation

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Title: Farm Management

Farm Management
  • Chapter 14
  • Forms of Business Organization

Chapter Outline
  • Life Cycle
  • Sole Proprietorship
  • Joint Ventures
  • Operating Agreements
  • Partnerships
  • Corporations
  • Limited Liability Companies
  • Cooperatives
  • Transferring the farm business

Chapter Objectives
  • To describe the primary forms of business
  • To discuss the organization and characteristics
    of each form
  • To compare their advantages and disadvantages
  • To show the effect on income taxes
  • To summarize the factors to consider when
    selecting a form of organization
  • To compare the different forms for estate

Forms of Business Organization
  • Most common forms of business organization
  • Sole proprietorship 86
  • Partnership 9
  • Corporation 5
  • Proper choice of organization depends on
  • several factors such as
  • Size of business
  • Number of people involved
  • Career stage and age of owner
  • Owners desires for passing assets to heirs

Life Cycle
  • Each farm business has a life cycle
  • with four stages
  • entry
  • growth
  • consolidation
  • exit

Figure 14-1Illustration of the life cycle of a
farm business
Sole Proprietorship
  • The owner owns and manages the business, assumes
    all risks, receives all profit
  • No special legal permission required
  • Advantages simplicity and freedom
  • Disadvantages personal liability, size may be
    limited, lack of continuity
  • Taxes on profit paid at tax rate of owner
    (individual or joint for couple)

Joint Venture
  • Operating agreements
  • Partnerships
  • Corporations
  • Limited liability companies
  • Cooperatives

Distribution of income from a joint venture
Operating agreements Partnerships Corporations
Cooperatives Limited liability companies
Operating Agreements
  • Two or more sole proprietors carry on some
    activities jointly while maintaining individual
    ownership of resources
  • Operating expenses usually shared among the
    parties in some fixed proportion
  • Income is shared in same proportion as fixed
    assets and expenses are contributed

Example Budget for a Cow/Calf Joint Enterprise
(One Head)
Example Budget for a Cow/Calf Joint Enterprise
(One Head)
  • Cautions in valuing resource contributions
  • Include opportunity costs for all unpaid inputs
  • All costs must be calculated for the same time

  • An association of two or more persons who share
    ownership of a business
  • General partners contribute to the management of
    the business and are exposed to unlimited
  • Limited partners do not participate in the
    management and are liable only for what they have
    contributed to the business

General PartnershipsOrganization and
  • Sharing of business profits and losses
  • Shared control of property, with possible shared
    ownership of some property
  • Shared management of the business

Written Partnership Agreements
  • Management who is responsible for which
    decisions and how they shall be made
  • Property list the property each partner will
    contribute and how it will be owned
  • Share of profits and losses carefully describe
    how these will be divided
  • Records designate who will keep the records

Written Partnership Agreements (continued)
  • Taxation include a detailed account of tax
    basis of property and copies of the partnership
    information tax return
  • Termination state the date of termination if
    one is known
  • Dissolution method of division of property in
    case of dissolution of partnership

  • At a particular time, as indicated in written
  • Upon the incapacitation or death of a partner,
    although the partnership may continue if the
    written agreement contains provisions for passing
    on the estate and continuing the partnership
  • Bankruptcy
  • Mutual agreement

Advantages of Partnership
  • Easier and cheaper to form than a corporation
  • A carefully written agreement can allow the
    partners to maintain much of their freedom
  • Flexible form of business that can accommodate
    many different situations

Disadvantages of Partnership
  • Unlimited liability of each general partner
  • Any partner individually can act for the
    partnership in legal and financial dealings and
    the other partners will also be held responsible
  • Poor business continuity

Partnership Taxation
A partnership does not directly pay taxes. It
files an information income tax return reporting
income and expenses. Each partners share of
income from the partnership is reported on his
or her own tax return.
  • A corporation is a separate legal entity
  • It is formed and operated in accordance with laws
    of the state in which it is organized
  • Shareholders in a corporation are liable only to
    the extent of their investment

Forming a Farm Corporation
  • File a preliminary application, reserving a name
    for the corporation
  • Draft a pre-incorporation agreement outlining
    major rights and duties of the parties
  • Prepare and file the articles of incorporation
  • Turn property or cash over to corporation in
    exchange for shares of stock
  • Shareholders meet to organize and elect directors
  • The directors elect officers, adopt bylaws, and
    begin business

Two Types of Corporations
  • C corporation a regular corporation
  • S corporation a tax-option corporation
  • No more than 75 shareholders
  • Shareholders must be U.S. citizens,
  • estates, or certain types of trusts
  • One class of stock
  • All shareholders must agree to form
  • an S corporation

Advantages of Corporations
  • Limited liability for shareholders
  • This advantage may be negated if a shareholder is
    required to personally sign a note to borrow
  • The corporation, like a partnership, allows for
    several individuals to pool resources
  • Business continuity

Disadvantages of Corporations
  • Costly to form and maintain
  • Legal advice needed
  • Shareholder and director meetings must be held

Taxes and C Corporations
A C corporation pays taxes on its earnings before
dividends are distributed. The shareholders
then pay taxes on the dividends, at their
individual rates. (Double taxation) If
shareholders are employees, their salary
and benefits (e.g. health insurance) can be
charged as expenses to the corporation,
but these expenses must be reasonable.
Taxes and S Corporations
An S corporation is taxed like a
partnership. The corporation files an information
tax return, but shareholders report their
share of income on their own tax returns and are
taxed at their own rates.
Table 14-2 Personal and Corporate Income Tax
Rates (2003)
Check current tax rates for changes
Table 14-3Comparison of Forms of Farm Business
Limited Liability Companies
  • A limited liability company (LLC) resembles a
    partnership but offers members the advantages of
    a corporation
  • Liability is limited to the assets of the LLC,
    not the individually owned assets of members
  • An LLC can have any number of members, all of
    whom can participate in management

Limited Liability Companies(continued)
  • Ownership distributed according to fair market
    value of contributed assets
  • Net farm income from an LLC passed to members,
    who pay taxes at their individual rates (no
    double taxation)
  • An LLC does not automatically continue in the
    event of a death of a member

  • Cooperatives are a special type of corporation
  • They require articles, bylaws, and detailed
  • Members who contribute capital enjoy limited
  • Net income is passed to members and taxed at
    their individual rates
  • Return to members cannot exceed 8, with
    remaining profits distributed as patronage

Transferring the Farm Business
Transferring the Farm Business
Transferring the Farm Business
Transferring the Farm Business
Transferring the Farm Business
  • Is the business large enough to productively
    employ another person or family?
  • Is the business profitable enough to support
    another operator?
  • Can management responsibilities be share?

Key Areas to Transfer
  • Income
  • As a wage or as return on investment (if assets
    are owned)
  • Ownership
  • Investing in breeding stock or equipment
  • Gifting of assets
  • Gift or sale of stock in corporation
  • Management
  • Responsibility of specific enterprises
  • Segregating management duties and assigning

Stages of Transfer
  • Testing stage 1 to 5 years Incoming operator
    receives salary and begins to acquire assets.
  • Post-testing stage alternatives
  • Spin-off separation of operators into
    individual operations
  • Takeover older generation retires and rents or
    sells farm to younger generation
  • Joint operation both generations wish to
    continue farming together and either use an
    operating agreement or form a partnership or a

Figure 14-3Alternatives for farm business
A farm or ranch business can be organized as a
sole proprietorship, a partnership, a
corporation, a limited liability company, or a
cooperative. Each form of business organization
has advantages and disadvantages.