Farm Business Organization and Transfer

1
Farm Business Organization and Transfer

• Chapter 14

2
Common Business Forms for Farms

• Sole Proprietorship (90)
• Partnership (6)
• Corporation (3)

3
Sole Proprietorship

• Characteristics
• Owners owns and manages the business
• A single owner of the business
• Is established by starting to operate the
  business
• Income taxes paid at individual or joint returns
  rates
• Advantages
• Simplicity
• Freedom
• Flexibility

4
Sole Proprietorship

• Disadvantages
• Personal Liability for legal troubles of the
  business
• Size is limited by the capital available
• Lack of business continuity

5
Joint Ventures

• Operating Agreements
• Partnerships
• Corporations
• Limited Liability Corporations
• Cooperatives

6
Operating Agreements

• When two or more sole proprietors carry on some
  farming activities jointly while maintaining
  individual ownership of their resources.
• Tend to be informal
• Tend to be limited arrangements
• Enterprise budgets can be useful
• The general principal of the operating agreement
  is to share income in the same proportion as
  total resources are contributed, including both
  fixed assets and operating costs.

7
Partnerships

• An association of two or more persons who share
  the ownership of a business to be conducted for
  profit
• Two Types
• General Partnership
• Limited Partnership
• Characteristics
• Sharing of business profits and losses
• Shared control of property, with possible shared
  ownership of some
• Shared management of the business

8
Partnerships

• Partnerships do not pay taxes directly.
• Advantages
• Easier and cheaper than a corporation
• Allows for flexibility as children are brought
  into the business.
• Disadvantages
• Unlimited Liability of each general partner

9
Corporations

• Are separate legal entities that must be formed
  and operated in accordance with the laws of the
  state in which they were organized.
• It is separate from its owners, managers, and
  employees.
• It can own property, borrow money, enter into
  contracts and sue or be sued.

10
Corporations

• Characteristics
• Laws vary from state to state
• Three groups of individuals are involved in a
  farming corporation shareholders, directors, and
  officers.
• Two types are C and S
• S corps can have no more than 75 shareholders
• Other corps can not own stock in an S corp

11
Corporations

• Taxes
• C corps can be double taxed
• S corps are taxes like a partnership
• Advantages
• Corporations provide limited liability for all
  shareholders/owners
• Allows for pooling of resources
• Credit easier because of business continuity
• Provides easy way to transfer business ownership.
• Tax benefits for fringe benefits
• Tax rates for C might be beneficial

12
Corporations

• Disadvantages
• More costly to form
• Most likely will continue to need legal advice
  and accounting services
• Requires directors meetings, board meetings and
  for the minutes of these meetings to be kept.

13
LLCs and Cooperatives

• LLCs
• Operated like a partnership however gives the
  benefit of limited liability (creditors cannot
  pursue personal or business assets owned
  individually)
• Cannot deduct the cost of fringe benefits
• Cooperatives
• Made up of independent farmers who wish to carry
  out one particular operation jointly.