TYPES OF AGRIBUSINESSES

Chapter 6

Objectives:

• Compare proprietorships, partnerships, and

corporations.

• Explain the characteristics of the single (sole)

proprietorship

• Explain the characteristics of partnerships.

• Discuss the different types of corporations.

• Explain the characteristics of limited liability

companies.

• Explain the characteristics and value of

cooperatives.

• Describe the characteristics of franchises

Agribusinesses

3 major types of business organizations: Single (sole) proprietorship Partnership Corporation

3 types of corporations: Subchapter C

regular corporations Subchapter S

family farms and small businesses Subchapter T

cooperatives

Business Organizations~

Sole proprietorship organization that is owned by one person most common form of business ownership 19.7 million in US

Partnership two or more people make a legal agreement to

become co-owners of business 2.5 million in US

Corporation a legal entity with authority to act that has

liability separate from that of its owners 2.8 million in US 87% of all sales volume

Sole Proprietorship~

Major type of legal structure in the agricultural industry

Simplest type of business

Easiest to organize

Closest to the American dream

Owner is in complete control

Figure 6-2

Advantages of Sole Proprietorship~

Simple to start

Few government regulations or restrictions

Only requirement is a license

Management and control are solely in the

owner’s hands

No voting is necessary

Disadvantages of Sole Proprietorship~

Unlimited liability

Claim that creditors can make on the

owner’s personal assets for payment of

business debts

Can be difficult to accumulate the large

amounts of capital required to begin

and operate a successful business

Types of Partnerships~

General partnership: Formalized agreement between 2 people specifying:

Resources contributed by each partner Who has decision-making authority How profits will be divided

Limited partnership: Partners not completely liable for each others’ debt Person invests in partnership Does not participate in daily business management

Limited liability partnership: Partners can protect their existing personal assets Partners not responsible for the business’s debts beyond

the amount of their investment

Written Partnership Agreements~

Wise for each partner to get the advice of a lawyer

Prepare yourself before calling the lawyer because of the expense

Be sure that your partnership agreement is put in writing

Model Business Corporation Act

Page 128

Corporations~

General Motors, Ford, IBM, FedEx, Exxon, and John Deere

Small businesses may incorporate as well

Characteristics: legal entity separate from the people who own it can own property, pay taxes, make contracts, sue, etc. issue stock new owners called stockholders pay a set price for their shares gets one vote for each share purchased

Types of Corporations~

Subchapter C sells stock to investors profit-making Board of directors may pay dividends to stockholders

Subchapter S primarily for small businesses profit-making taxed like sole proprietorship certain qualification requirements

Subchapter T very popular in ag industry non-profit figure 6-5

Establishing a Corporation~ Articles of incorporation filed with the

secretary of state’s office and include: The name of the corporation The names of the people who incorporated it The purposes of the corporation The duration of the corporation The number of shares that can be issued The voting rights attached to each type of

stock Other rights of the shareholders The minimum capital of the corporation The address of the corporate office The name and address of the person

responsible for legal service The names and addresses of the first

directors

Bylaws~

Corporations have bylaws in addition to articles of incorporation

Describe how the firm is to be operated, from both legal and managerial points of view, and include: How, when, and where shareholders’ and directors’

meetings are held how long directors are to serve Specifics as to each director’s authority The duties and responsibilities of officers and the

length of their service How stock is issued Other matters, including employment contracts

Figure 6-6

Limited Liability Companies (LLC)~

Legal entity that exists separate from it owners Combines the corporate advantage of limited

liability with the partnership advantage of single taxation

Advantages of LLC: liability of member is limited members are not liable for debts of the LLC unless they have

given personal guarantees for those debts Disadvantages of LLC:

work and expense involved in initial formation post formation record-keeping requirements

Laws regarding LLCs are still developing

Cooperatives~

Corporation formed to provide goods and services

to members either at cost or as near to cost as

possible

Not formed to make profits

Serve the people who own shares in the

organization

Agribusiness cooperatives are very popular

3 cooperative types: Supply

Marketing

Service

Difference between Cooperatives: Supply Cooperatives:

Buy supplies in quantity for resale to members Members save money because items are bought in bulk Can manufacture items rather than buying them to sell

Marketing Cooperatives: find buyers who will pay the highest price for ag.

products

Service Cooperatives: provide members with specific service rather than a

product members probably could not afford services individually

Statistics on Cooperatives~ More than 21,000 cooperatives nationwide

Both business and individual members

Agricultural cooperatives are a multi-billion-

dollar industry

Prime Example: Farmland Industries, Inc

largest agricultural cooperative in 1999

annual revenues of $4.5 billion

1,800 member cooperatives

250,000 farmers in 19 states

Cooperatives and Membership~

Some co-ops serve the general public

Others serve members only

Major emphasis always on members

Voting stock and investment stock are separate

Only common (voting) stock gives a person the

right to vote on business matters

Preferred (investment) stock only gives a person

the opportunity to invest in the business and

receive a reasonable return on investment

Cooperatives and Control~

Most cooperatives use a democratic system of control each member has one vote only no additional votes for owning extra stock

Critics often contend that co-ops are run by a few “elite” members only because many members fail to exercise

their right to vote during the annual stock-holders’ meetings

More About Co-ops~

3 distinguishing characteristics:

Service at cost any excess earnings are returned to patrons in the form of

patronage dividends Democratic control

one member, one vote Limited returns on investment

Figure 6-7, Advantages and Disadvantages

Franchises~

Contract in which a franchisor sells to another business the right to use its name and sell its products

Franchisee (person purchasing the franchise) buys a system of operation that has proven successful McDonald’s, Wendy’s, and Domino’s

600,000 franchised outlets in the United States McDonald’s has more than 30,000 restaurants in 100

different countries

Franchising sales accounted for nearly 33% of all retail sales in the US in 2004

Figure 6-8, Advantages and Disadvantages

What Do YOU think?

Consider the pros and cons of each type of agribusiness.

Which style is best suited for you as an entrepreneur?