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.