1. Explain the concept of unlimited liability as it relates to sole proprietorships.

The legal requirements necessary to organize as a sole proprietorship are minimal. About all that is required is an
individual’s desire to start a business and the purchase of a license, if one is required for that particular kind of
business. If the owner wishes to do business under an assumed name, that is, if the business is to be conducted
under a name other than that of the owner, most states require that the assumed name be registered (this is where
you will see something like “Mike Jones dba Jones Feed and Supply” on legal documents, where dba means “doing
business as”).

The proprietorship gives the individual owner complete control over the business, subject only to government
regulations that are applicable to all businesses of that particular type. The owner exerts complete control over
plans, programs, policies, and other management decisions. No one else shares in this control unless the owner
specifically delegates a portion of the control to someone else. All profits and losses, all liability to creditors and
liability from other business activities are vested in the proprietor. The costs of organizing and dissolution are
typically low. The business affairs are completely secret from all outsiders, except for select governmental units
such as the IRS (Internal Revenue Service) and lending institutions that supply borrowed funds.

Whenever capital is needed it is supplied by the owner from personal funds or is borrowed against either the
owner’s business or personal assets. Personal and business assets are not strictly separated as they are in some other
business forms; therefore, if the owner as an individual is financially sound, lenders will be more likely to extend
funds. A proprietor can sell their business to whomever they wish, whenever they wish, and for whatever price they
are willing to accept. They can take on as much risk or liability as they wish, but it is important to note that they are
personally liable for whatever risk they assume.

A sole proprietor pays no income tax as a separate business entity. All income that the business earns is taxed as
personal income even though the IRS requires the fi ling of a separate form to show business income and expenses.
Since a proprietor cannot pay him/herself a salary, the amount left over at the end of the year is treated as personal
income or salary. The proprietor may choose to keep this money in the business or use part or all of it for personal
expenditures.

The proprietorship can conduct business in any of the 50 states without special permission other than whatever
licenses are required for that particular kind of business. This is a right guaranteed by the United States
Constitution, which provides that “citizens of each state shall be entitled to the privileges and immunities of citizens
of several states.” The person who desires the lowest cost (to organize), simplest, most self-directed, most private,
and most flexible form of agribusiness will choose the sole proprietorship.

2. Discuss the differences between a general and limited partnership.

General partnerships
By far the most common form of partnership is what is called a general partnership. Continuing with our Fragrant
Floral example — after a couple of years in operation, Jessica Alverson has been very impressed with one of her
employees, Erika Lewandowski. Erika has expressed an interest in becoming involved in the business, and has
some money from an inheritance she is willing to invest in the business. Jessica and Erika decide to enter a
partnership, and rename the business Fragrant Floral and Perfect Gifts. The new name reflects the partner’s desire to
expand the business into a broader line of gift items. So, with Erika’s commitment of capital and her desire to be
further involved in the business, a new partnership is formed.
 In a general partnership, each individual partner — regardless of the percentage of capital contributed — has equal
rights and liabilities, unless stated otherwise in a partnership agreement. A general partner has the authority to act as
an agent for the partnership, and normally participates in the management and operation of the business. Each
general partner is liable for all partnership debts, and may share in profits, in equal proportion with all other
partners. If the partnership struggles and has financial problems, all liabilities are shared equally among the partners
for as long as sufficient personal resources exist.

However, when one partner’s resources are exhausted, remaining parties continue to be liable for the remaining
debt. General partners may contract among themselves to delegate certain responsibilities to each other, or to divide
business revenues or costs in some special manner (e.g., according to funds invested or job responsibility). Each
general partner can bind the partnership to fulfill any business deal made. While the partnership is usually treated as
a separate business for the purposes of accounting, it is not legally regarded as an entity in itself, but as a group of
individuals or entities. Thus, there is no separate business tax paid by the partnership. Like the proprietorship,
partners may not pay themselves a salary. Money left at year’s end is divided among the partners and this is their
profit or “salary” from the partnership. The income is taxed at the individual rate.

Limited partnership

All partnerships are required by law to have at least one general partner who is responsible for the operation and
activities of the business, but it is possible for other partners to be involved in the business on a limited basis. A
limited partnership permits individuals to contribute money or other ownership capital without incurring the full
legal liability of a general partner. A limited partner’s liability is generally limited to the amount that the individual
has personally invested in the business. The state laws regulating limited partnerships must be strictly adhered to
and these acts spell out the limited status of partners: first, the limited partner can contribute capital but not services
to the partnership, and second, the limited partner’s surname cannot appear in the business’s name (unless the
partnership had previously been carried on under that name, or unless a general partner has the same surname).
Limited partnerships are relatively few in number; therefore, the balance of the discussion of partnerships will apply
to general partnerships. However, it is important to note that if a limited partner takes an active role in managing the
business, their limited liability may cease.

3. Outline the reasons why a corporation may be referred to as an “artificial person,” and discuss why
corporations suffer from “double taxation” on their profits.

The corporation as we know it today is a rather recent innovation compared to proprietorships and partnerships. The
early American colonists were very suspicious of this form of organization, and it was not until the 1860s that most
states provided laws allowing for the formation of corporations. A corporation can own property, incur debts, and
be sued for damages, among other things. The important distinction to remember is that the owners (stockholders)
and managers do not own anything directly. The corporation itself owns the assets of the corporation.

Forming a corporation requires strict adherence to the laws of the state in which the business is being formed.
Usually, one or more persons join together to create a corporation. A series of legal documents must be created and
examined by the state’s designated department for establishing corporations. If the legal formalities are in proper
order, and if the proper fee for incorporation has been paid, a charter authorizing the applicants to do business as a
corporation is issued. Additionally, a corporation maintains the following legal documents: articles of incorporation,
 which are fi led with the state and which set forth the basic purpose of the corporation and the means of financing it;
the bylaws , which specify such rules of operation as election of directors, duties of officers and directors, voting
procedures, and dissolution procedures; and stock certificates or shares detailing amounts of the owners’
investments.

The laws relating to the formation of proprietorships and partnerships are fairly well established and uniform
throughout the nation, but considerable differences in the requirements for forming a corporation exist among the
various states. Individual state laws and statutes must be carefully considered by those who wish to form a
corporation. Selection of an attorney who is well versed in the corporate law of the specific state of interest is
essential to avoid potentially serious organizational problems in the agribusiness corporation.

4. How does a Limited Liability Company (LLC) differ from a partnership and a corporation, and what
advantages do these characteristics provide?
A limited liability company (LLC) is a type of business organization form that closely resembles a partnership, but
provides its members with limited liability. Thus, creditors or others who have a claim against an LLC can pursue
the assets of the LLC to satisfy debt and other obligations, but they cannot pursue personal or business assets owned
by the individual members of the LLC.

Advantages of LLCs Limited liability companies can include any number of members and ownership is distributed
in accordance to the fair market value of the assets contributed. Also, net income generated by an LLC is passed on
to its members in proportion to their shares of ownership. The net income is then reported on the members’
individual tax returns and taxes are paid by the members and not by the LLC. An LLC is not required to fi le
articles of incorporation as would be true of a corporation. However, it is still a good idea to record contributions
and distributions of assets, revenue, and expenses, as well as agreements as to how the LLC will operate. These can
be included in an article of organization or an operating agreement.

Disadvantages of LLCs Although the LLC has the limited liability advantage of a corporation, it does not have
some of the other advantages associated with the corporate form of organization. The LLC cannot deduct the cost of
employee benefits, such as insurance costs and the use of vehicles by members. Also, it does not automatically
continue in the event of the death of a member. Instead, it may be perpetual, end on a set date.

5. Why would a firm consider entering into a strategic alliance?

Strategic alliances Many agribusinesses have formed strategic alliances and related cooperative relationships with
other fi rms. Strategic alliances are cooperative agreements between fi rms that go beyond normal fi rm-to-fi rm
dealings, but fall short of being a merger or full partnership and ownership. Such alliances can include joint
research efforts, technology-sharing agreements, joint use of production facilities, agreements to market each
other’s products and the like.

Advantages of strategic alliances There are several advantages to fi rms that form strategic alliances. First, fi rms
can collaborate on technology or the development of new products. The areas of computer hardware and software
and biotechnology are examples. Second, fi rms can improve supply chain efficiency by working together. An
alliance between a feed fi rm and a large integrated swine business would provide an example. Third, fi rms can
gain economies of scale in production and/or marketing. A food fi rm might enter into a strategic alliance with a
broker to distribute its products into a new region of the country. Here, the focus is market expansion and the scale
economies this can bring. Fourth, fi rms, particularly small fi rms, can fill voids in their technical and
manufacturing expertise. A fi rm in the precision agriculture arena may have an alliance with a major farm
equipment manufacturer to collaborate on the development of a new sensor-based system for harvesting melons.
Fifth, fi rms can acquire or improve market access. A fi rm selling animal health products and an e-business fi rm
might enter into a strategic alliance. The e-business fi rm provides the information technology infrastructure, and
access to customers. The animal health fi rm provides products and an existing customer list.

Finally, allies can direct their combined competitive energies into building competitive advantage and defeating a
mutual rival.

Disadvantages of strategic alliances There can also be disadvantages to forming strategic alliances. First,
establishing effective coordination between independent companies is both challenging and time consuming. How
are responsibilities divided? How will returns be divided? These questions, and a hundred more like them, must be
answered in a successful alliance.

Second, there may be language and cultural barriers to overcome, as well as attitudes of suspicion and mistrust. This
issue includes the need for mutually shared goals. If two alliance partners have different objectives from the
alliance, the seeds for long-run problems have been planted.

Third, the relationship may cool at some point in the future and the desired benefits may never be realized, but
information may have already been shared. This commonly occurs when there is management turnover among the
alliance partners. The situation and personalities that were part of the original deal change over time, and the new
management team may look at the world — and the deal — differently.

Finally, a fi rm may become too dependent on another fi rm’s expertise and capabilities and fail to develop its own
internal capabilities. Firms must be careful with respect to what they do themselves, and what they depend on from
a partner. In the animal health example above, the alliance may be a wonderful move for the animal health fi rm.
Or, it could leave them vulnerable in three years if a competitor purchases their alliance partner and they have no
internal e-business capabilities.

A strategic alliance is an attractive organizational form for those fi rms that want to preserve their independence
rather than merge with another fi rm when trying to either remain competitive or enhance their competitive position.
This form of organization enables those fi rms to collaborate with other fi rms to enhance their own capabilities,
develop new products, and compete more effectively. However, as mentioned above, there are also disadvantages
that should be seriously considered before forming a strategic alliance.