BUSINESS ORGANIZATION IN AGRICULTURE

1. BUSINESS ORGANIZATION IN AGRICULTURE • SOLE PROPRIETORSHIP • PARTNERSHIP GENERAL LIMITED • CORPORATION REGULAR SUB-CHAPTER S

2. SOLE PROPRIETORSHIP • MOST FARMS ARE ORGANIZED AS SOLE PROPRIETORSHIPS. • OFFERS A MAXIMUM OF MANAGEMENT CONTROL WITH A MINIMUM OF ADMINISTRATIVE COSTS. • THE PROPRIETOR IS SELF-EMPLOYED AND PAYS SOCIAL SECURITY TAXES ON “BEFORE TAX” NET INCOME.

3. THE COSTS OF MOST EMPLOYEE BENEFITS TO THE PROPRIETOR AND FAMILY ARE NOT TAX DEDUCTIBLE. • THE PROPRIETOR IS TAXED ON ALL PROFITS WHETHER OR NOT THE INCOME IS WITHDRAWN FOR THE BUSINESS. • SERIOUS LIMITATIONS IN ESTATE PLANNING AND INTER-GENERATION TRANSFER OF THE BUSINESS.

4. PARTNERSHIPS • GENERAL PARTNERSHIP -- EACH PARTNER IS AN INTEGRAL PART OF BOTH OWNERSHIP AND MANAGEMENT, AND EACH HAS UNLIMITED LIABILITY. MAY BE ESTABLISHED AND OPERATED UNDER VERY INFORMAL AGREEMENT BY THE PARTNERS.

5. LIMITED PARTNERSHIP -- COMPRISED OF ONE OR MORE LIMITED PARTNERS AND ONE OR MORE GENERAL PARTNERS. THE GENERAL PARTNERS ARE RESPONSIBLE FOR MANAGEMENT. THE LIABILITY OF THE LIMITED PARTNERS IS LIMITED TO THEIR INVESTMENT IN THE BUSINESS.

6. CORPORATION • A CORPORATION IS A LEGALLY CREATED “PERSON” OR ENTITY. • THE LIABILITIES OF OWNERS IS LIMITED TO THEIR INVESTMENT IN THE CORPORATION. • OWNERSHIP IS HELD IN THE FORM OF SHARES OF STOCK WHICH ARE A CLAIM THE THE NET WORTH OF THE CORPORATION.

7. TYPES OF CORPORATIONS • REGULAR OR “SUB-CHAPTER C.” • SUB-CHAPTER S

8. SUB-CHAPTER C CORPORATION • A SEPARATE TAX-PAYING ENTITY, WITH NET INCOME TAXES AT GRADUATED CORPORATE TAX RATES. • A TAX LOSS IS HELD AT THE CORPORATE LEVEL. • SALARIES TO EMPLOYEES ARE TAX-DEDUCTIBLE TO THE CORPORATION AND TAXABLE TO THE EMPLOYEES.

9. DIVIDENDS TO STOCKHOLDERS ARE NOT TAX DEDUCTIBLE TO THE CORPORATION (PAID WITH AFTER-TAX INCOME), AND ARE TAXABLE TO THE STOCKHOLDERS. • PROFITS IN THE CORPORATION ARE DOUBLE TAXED IF DISTRIBUTED TO THE STOCKHOLDERS. • C CORPORATIONS CAN HAVE A TAX YEAR OTHER THAN A CALENDAR YEAR.

10. SUB-CHAPTER S CORPORATION • THE SUB-CHAPTER S CORPORATION DOES NOT PAY TAX, BUT PASSES ITS NET INCOME THROUGH TO THE SHAREHOLDERS. • LOSSES PASS THROUGH TO THE SHAREHOLDERS AND ARE GENERALLY DEDUCTIBLE BY THE INDIVIDUALS.

11. IF PROFITS IN THE CORPORATION ARE RETAINED, SHAREHOLDERS COULD HAVE A TAX LIABILITY WITHOUT THE DIVIDENDS TO PAY THE TAXES.

12. Must be an eligible entity • Must have only one class of stock. • Must not have more than 100 shareholders • Shareholders must be U.S. citizens or residents, and must be physical entities (a person), so corporate shareholders and partnerships are to be excluded. • Profits and losses must be allocated to shareholders proportionately to each one's interest in the business.

13. C corporation vs. S corporation: The similarities • Limited liability protection. Both offer limited liability protection, so shareholders (owners) are typically not personally responsible for business debts and liabilities. • Separate entities. Both the S corp and C corp are separate legal entities created by a state filing.  • Filing documents. Formation documents filed with the state, which are typically called the Articles of Incorporation or Certificate of Incorporation, are the same for both C and S corporations.

14. Structure. Both have shareholders, directors and officers. Shareholders are the owners of the company and elect the board of directors, who in turn oversee and direct corporation affairs and decision-making, but are not responsible for day-to-day operations. The directors elect the officers to manage daily business affairs. • Corporate formalities. Both are required to follow the same internal and external corporate formalities and obligations, such as adopting bylaws, issuing stock, holding shareholder and director meetings, filing annual reports and paying annual fees.

15. C corporation vs. S corporation: The differences • Taxation • C corporations. C corps are separately taxable entities. They file a corporate tax return and pay taxes at the corporate level. They also face the possibility of double taxation if corporate income is distributed to business owners as dividends, which are considered personal income. Tax on corporate income is paid first at the corporate level and again at the individual level on dividends. • S corporations. S corps are pass-through tax entities. They file an informational federal return, but no income tax is paid at the corporate level. The profits/losses of the business are instead “passed-through” the business and reported on the owners’ personal tax returns. Any tax due is paid at the individual level by the owners.

16. Corporate ownership. C corporations have no restrictions on ownership, but S corporations do. S corps are restricted to no more than 100 shareholders, and shareholders must be US citizens/residents. S corporations cannot be owned by C corporations, other S corporations, LLCs, partnerships, or many trusts. Also, S corporations can have only one class of stock (disregarding voting rights), while C corporations can have multiple classes. C corporations therefore provide a little more flexibility when starting a business if you plan to grow, expand the ownership or sell your corporation.

17. Limited Liability Companies (LLC) • An LLC is a legal structure for organizing a business that provides its owners with the limited liability of a traditional corporation and the single tax treatment of a partnership.

18. An LLC is created by filing articles of organization, comparable to a corporation’s articles of incorporation. • Member rights and obligations are set out in an operating agreement, similar to a partnership agreement or corporate bylaws.

19. An LLC gives its member-owners substantial flexibility in designing financial and governance structures compared to other business forms.

20. Advantages of LLC • Limited Liability: Owners of a LLC have the liability protection of a corporation. A LLC exists as a separate entity much like a corporation. Members cannot be held personally liable for debts unless they have signed a personal guarantee. • Flexible Profit Distribution: Limited liability companies can select varying forms of distribution of profits.

21. No Minutes: Corporations are required to keep formal minutes, have meetings, and record resolutions. The LLC business structure requires no corporate minutes or resolutions and is easier to operate. • Flow Through Taxation: All your business losses, profits, and expenses flow through the company to the individual members. You avoid the double taxation of paying corporate tax and individual tax.

22. Disadvantages of LLC • Limited Life: Corporations can live forever, whereas a LLC is dissolved when a member dies or undergoes bankruptcy. • Going Public: Business owners with plans to take their company public, or issuing employee shares in the future, may be best served by choosing a corporate business structure. • Added Complexity: Running a sole-proprietorship or partnership will have less paperwork and complexity. A LLC may federally be classified as a sole-proprietorship, partnership, or corporation for tax purposes.

23. Cooperatives • Cooperatives exist in nearly every kind of agricultural business activity • Processing • Marketing • Supply • Bargaining

24. Centralized Vs Federated Cooperatives

25. Cooperative Principles • User-owned • User-controlled • User-benefit

26. Primary purpose is economic benefit for members • Members are usually patrons • Members own and control the cooperative • Patrons receive distribution of benefits • Cooperatives are private organizations • Public policy establishes the institutional framework

27. Patronage Refunds • Patronage Refunds are distributions of net income returned to patrons in proportion to the value or quantity of their patronage. • Retained Refunds are allocations of net income made to patrons but retained by the cooperative to increase equity in the organization.