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Farm Business Organization and Transfer
Chapter 14
Common Business Forms for Farms
Sole Proprietorship (90%) Partnership (6%) Corporation (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
Sole Proprietorship
Disadvantages Personal Liability for legal troubles of the
business Size is limited by the capital available Lack of business continuity
Joint Ventures
Operating Agreements Partnerships Corporations Limited Liability Corporations Cooperatives
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.
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
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
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.
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
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
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.
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.