business ownership

Agriculture Business Management

LESSON 2: BUSINESS OWNERSHIP

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What are the characteristics of a sole proprietorship?

A sole proprietorship is a business entity with a single owner/operator.

A business entity is a professional organization offering something that has real existence.

The following factors characterize a sole proprietorship.



A. It is the oldest, most common, and simplest form of business organization.

B. One person can serve as the business decision-maker.

C. No registration with the state is required, as is necessary with a corporation or a limited liability company (LLC).



D. It is easily set up and maintained.

E. The owner is personally responsible for assets, income taxes, and business debts.

F. It is relatively simple to manage and control.


advantages: a. ease of exit & entry b. owner control c. low startup costs d. no special taxes e. secrecy f. pride disadvantages: a. unlimited liability b. lack of capital c. lack of management skills d. lack of continuity e. time commitment

What are the advantages and Disadvantages of a sole

proprietorship?

How does a partnership work?

A partnership is a form of business where two or more people go into business together.

A. Partners pool their money to start the business.

B. A written agreement that specifies partnership terms is needed. It explains the responsibilities of each partner and what

percent of the business each owns.



C. Profits and losses are divided as agreed.

D. The partnership may own property.

E. Partners share unlimited liability, so they share responsibility for debts and for wrongful acts. 1. Each partner is responsible for the partnership’s liabilities. 2. Each partner is liable for the other partners’ wrongful acts

as a partner.



F. Records are necessary. In a partnership, it is necessary to file a

partnership tax return and to pay taxes individually.

G. A partnership is normally dissolved upon the death of a partner.

Characteristics of a partnership 10% of all businesses in U.S. 4% of all sales in U.S.


What are the special types of partnerships?

Limited A limited partnership is a work

relationship with an individual (silent partner) who provides capital but has no decision-making powers; the person is only liable for the amount invested.

Nominal The business is allowed to use the partner’s

name (for example: in advertising). General

The business partner is active in the decision making process and whose identity is known by the public.


Advantages: a. low startup costs b. few regulations c. more capital available d. management specialization e. no “special” taxesDisadvantages: a. unlimited liability b. lack of continuity c. frozen investment d. personal conflict e. share profits

What are the advantages and disadvantages of a partnership?

How does a corporation work?

• A corporation is a form of business where the business organization is chartered by a state and acts as a separate entity from its owners.

• 1. It provides limited liability to owners. • Limited liability means the investor cannot lose more

than the amount invested.

• 2. A corporation has different tax structures than other business structures.



• B. Corporation characteristics• 1. Owners own shares (stock),

which signifies ownership in a corporation. • Ownership in the company is

determined by the amount of stock a person owns.

• For example, if a company has 10,000 shares of stock and a person owns 500 shares, the person owns 5 percent of the company.



• a. If a stockholder owns a significant amount of shares, he or she may have a vote on company positions, such as the board of directors who represent the stockholders.

• b. If a stockholder does not own a significant amount of shares, he or she will not have a vote in company decisions.

• c. Corporations have a chief executive officer (CEO) or a chief financial officer (CFO) who runs the company on behalf of the stockholders.



• 2. A corporation raises capital by selling shares of stock. • People invest money in the

corporation, and as the business gains in success, the stock value will increase.

• As the stock value increases, the investors see an increase in the value of their stock.

• 3. The corporation is transferable upon death because stockholders can independently determine the beneficiaries of their shares.



• 4. Corporations do exist that do not have shareholders because the corporation has members. • When this occurs, each member

has a vote in the decisions of the corporation.

• a. This usually occurs when a corporation is not publically traded on the stock market.

• b. Not-for-profit corporations also operate in this manner. • A not-for-profit corporation is a business that does not have

making money as a goal.



• C. There are four types of corporations.

• 1. A C corporation is the most common form of a corporation. • A C corporation creates a

separate legal entity with assets and liabilities separate from the owners.

• A C corporation has publicly traded stock.



• 3. A closed corporation resembles the traditional C corporation, but it is designed for a company with a sole owner or a small group of owners, usually not to exceed 30 shareholders. • A closed corporation has one or a limited number of

shareholders. • When a shareholder wishes to leave the business, he or

she must offer the shares to existing stockholders before selling to new shareholders.



• 4. A limited liability company (LLC) is like an S corporation. • The LLC offers the advantage of

being taxed like a partnership. • Multiowner LLCs also offer the

protection of limited liability. • LLCs do not have stock.


How do you form a C corporation?

• Steps in forming a C corporation• A. It is necessary to choose a

business name that complies with state laws.

• B. It is necessary to appoint directors of the corporation.

• C. It is necessary to file formal paperwork (articles of incorporation) with state and federal governments.

• D. It is necessary to create bylaws that explain the operating rules.


How do you form a C corporation?

• E. It is necessary to hold a meeting with the board of directors to approve all paperwork.

• F. It is necessary to issue stock certificates to shareholders.

• G. It is necessary to obtain licenses and permits required for the business from local, state, and federal governments.


What are the requirements to be an S corporation?

• To be treated as an S corporation, the following must be met.

• A. It must be a domestic corporation or LLC.• B. It must have only one form of stock.• C. It must have no more than 100 stockholders.• D. Stockholders must be U.S. citizens.• E. Profits and losses must be allocated to

stockholders proportionately according to the amount of stock they own.


4. Advantages:a. limited liabilityb. member financingc. lower taxes

5. Disadvantages:a. limited returnsb. difficult to sell stockc. inefficiency (slow to change)

What are the advantages and disadvantages of a corporation?

What are the characteristics of a corporation and a cooperative?

B. A cooperative is a business organization where the owners are the customers. 1. Cooperatives emphasize member

control. 2. Members with a mutual interest

organize cooperatives. 3. Cooperatives are operated on a

non-profit basis. 4. Patronage payments are the

profits paid to members based on their use of the cooperative.


What are the characteristics of a corporation and a cooperative?

5. Membership is voluntary. 6. Most cooperatives operate

on a one-member, one-vote basis.

7. Its members elect the board of directors, which is composed of cooperative members.

8. Cooperative stock does not increase or decrease in value.


What are the advantages of a corporation and a cooperative?

What are the disadvantages of a corporation and a cooperative?

B. A cooperative offers numerous advantages to its members. 1. Lower taxes. 2. Liability is limited to the amount of the investment. 3. Numerous people pool their resources to start the

cooperative. 4. All members share control of the business; no one or

two people can control the company. 5. A long life of the cooperative is likely.


What are the advantages of a corporation and a cooperative?

What are the disadvantages of a corporation and a cooperative?

C. A cooperative may pose several disadvantages. 1. Organizing a corporation can be complicated and

costly. 2. Sometimes hard to liquidate assets. 3. Freedom of actions and

changes to the business are limited. Change comes slow.

4. Limited returns on investment.


What is a cooperative? Why and when were cooperatives

developed? C. Cooperatives have existed for many years.

For example, people used to work together to harvest large animals for survival.

1. One person could not accomplish this task alone. 2. People received help to achieve their objectives.

D. Babylonians are noted in their development of agriculture cooperatives by pooling their resources during farming.

E. The Chinese developed savings and loans similar to cooperatives we have today.



developed? F. In North America, clearing

land in preparation for the planting of crops and barn raisings all required cooperative efforts. 1. The first formal cooperative business is assumed to

have been developed in 1752. a. This cooperative was a mutual insurance company called

the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire.

b. It was organized by Benjamin Franklin and others, and it is still in operation today.



developed? 2. Other farm organizations, including the Farmers

Alliance and the Farmers Educational and Cooperative Union of America (known as the National Farmers Union) began to promote cooperative development. Farmers not affiliated with any farm organization began to

establish cooperatives. By 1900, at least 1,223 cooperatives were active in the

United States. 3. The Grange, a farmer organization established to

improve the economic and social position of the nation’s farm population (National Grange), began to engage in cooperative marketing and purchasing.


To help members improve profits To lower input costs, improve quality, raise

prices, improve service management is "affected" by "structure“ "must" do 1/2 of business with members

What is the basic purpose of establishing a cooperative?

b. financial goals:1) operate at cost?2) prices are "at the market"3) "profits"...can result in patronage refunds4) refunds are based on "patronage"5) revolving fund financing a) stock: "preferred" b) cash: minimum of 20% of patronage refunds..

average is 40%

c. member controlled/member owned:1) board of directors2) one vote per patron or based on patronage3) major decisions (mergers, etc.) are voted on by members4) ability/skills of farmers to serve?

d. limited returns on capital:8% on preferred...ensures that members holding stock know that purpose is not just an "investment" ...so less competition for the"non-coops" ...no floating value for stock

4. Advantages:a. limited liabilityb. member financingc. lower taxes

5. Disadvantages:a. limited returnsb. difficult to sell stockc. inefficiency (slow to change)

6. Organization:a. local: 1) popularity voting 2) conflict of interest

b. regional:1) federated:

a) members are other coops: FS/Growmark, COOP/Farmland Ind.b) control: from the bottom up

2) centralized:a) farmers are the members: AGWAY,

Welch'sb) locals are controlled by "central"c) local outlets have "advisory" councils

3) combined:

What are the types of cooperatives? What are the seven cooperative principles, and

how were they developed? Types of cooperatives and principles A. Purchasing cooperatives

1. These cooperatives sell farm supplies to their members.

2. Products include production supplies: seed, fertilizer, petroleum, chemicals, and farm equipment.

3. American farmers purchase approximately 28 percent of their supply needs through cooperatives.

B. Marketing cooperatives 1. These cooperatives sell their members’ farm products

and maximize the return. 2. Operations can be diversified and complex.



how were they developed? 3. Some marketing cooperatives perform a limited

number of functions, while others vertically integrate. a. Vertical integration owns portions of the business or

production process, which often adds value to the products for a higher return.

b. For example, Hershey’s candy owns cocoa farms in South America, and they own their own transportation system. This allows the company to control

its inputs as value is added to a finished product and sold to consumers.



how were they developed? 4. Some cooperatives even sell products in grocery stores

under their own brand names: Land O’ Lakes, Ocean Spray, and Florida’s Natural.

5. Some cooperatives serve members in many ways. a. They may bargain for better prices. b. They may store and sell members’ commodities. c. They may process farm products into more consumer-

ready goods. 6. In the United States, agricultural cooperatives handle

approximately 30 percent of farmers’ total farm marketing volume.



how were they developed? C. Service cooperatives

1. These cooperatives provide various services to their members. a. Pesticide applications, seed cleaning,

and artificial insemination are some services offered through cooperatives.

b. Service cooperatives also include organizations such as the Farm Credit System—a network of borrower-owned lending institutions.

c. Another example is a rural electric cooperative, which provides electricity to rural areas.

2. The first U.S. cooperative was a service co-op.


8. Usage:a. 20% of inputs/ 30% of salesb. Farmland Industries: __ largest U.S. frimc. non-ag coops: grocery stores, bookstores,

coop housing

9. Joint ventures: