Chapter 3

Organization of Agribusiness
Firms

Mubashir Mehdi, Adnan Adeel and Burhan Ahmad*

Abstract
A variety of different organizational forms are observed in agribusinesses. Many of
these are owned and controlled by one person as a proprietorship whereas some are
owned by two or more people as a partnership. These forms of business are the
simplest forms and allow their owners complete flexibility and autonomy. Owners
of such businesses are personally liable for any debts or lawsuits against their
business. Also, the longevity of the business is limited to the life of their owners. The
company is relatively a new type of business organization which closely resembles
a partnership but provides its members with limited liability and the opportunity to
influence the longevity of the business. It is an organization created for the purpose
of carrying on business because it is a legal entity, it can own property, sue or be
sued and carry on business in its own name. Its owners are separate legal entities;
thus their liability is limited to the amount of their investment in the firm.
Cooperatives is another form of business organization which promote democratic
style of management and promote the concepts of sharing resources and delegation
to increase their viability and competitiveness. The life of corporation does not
depend on how long its owners live. However, corporations generally must pay a
special corporate profit tax and must regularly report their activities to federal and
provincial governmental units. Joint venture is a legal organization governed by
domestic and foreign companies to bring new technologies and business practices.
Franchising is a strategic alliance between groups of people who have specific
relationships and responsibilities with a common goal to dominate markets, i.e., to

*
Mubashir Mehdi#, Adnan Adeel and Burhan Ahmad
Institute of Business Management Sciences, University of Agriculture, Faisalabad, Pakistan.
#
Corresponding author’s e-mail: mubashir_mehdi@hotmail.com

Managing editors: Iqrar Ahmad Khan and Muhammad Farooq

Editor: Abdul Ghafoor
University of Agricutlure, Faisalabdad, Pakistan.

57
58 M. Mehdi, A. Adeel and B. Ahmad

get and keep more customers than their competitors. The best form of business
organization for a particular agribusiness depends on many factor like availability of
funds, objectives of firms, government regulations and competition in the market.
Keywords: Organization, Sole Trader, Partnership, Company, Cooperative,
Corporation, Joint Ventures and Franchising

3.1. Importance of Organization

Organization of an agribusiness firm is one of the basic and imperative requirement
for success of businesses. It can be defined as the relationship between human and
material resources of the firm to achieve predetermined goals. It delineates the
division of labor, authority and responsibility of the workers to perform various
activities, hence providing a complete structure of the management (Douma and
Schreuder, 2013). A variety of organizations exist such as sole proprietorship,
partnership, limited companies, cooperatives, profit and non-profit organizations etc.
Organization can be owned by the public as well as private sectors or both. An
organization having both public and private ownership is called hybrid organization.
Organizations usually operate under law however there are some organizations that
operate illegally. Organizations are run by the top management which provides
leadership and vision to the organization.

3.2. Leadership in Organizations

A leader is authorized to lead the organization and ensures the execution of work by
the members of the organization to achieve the objectives of the firm. He must have
the adequate and required qualities to execute his authority. If the leader is not able
and lacking personal competence to lead, then someone else may try to take up
challenges and replace him but during the same period momentum of pursuing
objectives of the firm should not be affected. However, sanctioned authority of the
leader should be backed with personal competence, influence and power and ability
to lead but this should be legitimated only after getting a formal authority in the
organization (Knowles and Borje, 1971).

3.2.1. Leadership in Formal Organizations

A formal organization is one which is formed to attain clear and predefined
objectives. It disaggregates objectives into goal and sub-goals for various divisions,
departments and job positions and assigns tasks to these sub-units hence forming a
working structure. It is expected to develop relationships with clients and its
members impersonally for the execution of the assigned work. In formal organization
top management and higher positions assume a higher level of expertise and ability
to find and solve the problems at lower levels during the execution of the work.
Accordingly, head of the sub-units and departments are appointed and these higher
ups are equipped with relevant authority to execute the work of the organization to
achieve the goals of the organization (Gibb, 1970). In nutshell, leaders in formal
organizations are appointed to provide vision and way forward where their
3 Organization of Agribusiness Firms 59

subordinates, following the vision of firm, should put their efforts combined to
execute work and achieve objectives.

3.2.2. Leadership in Informal Organizations

The informal organizations define objectives and goals for individual members.
These objectives may or may not correspond with the objectives and goals of the
formal organization. The informal organization exhibit an extension of the social
structures that generally describe human life – the spontaneous emergence of groups
and organizations (Gibb, 1970). The informal organization and leaders provide a
source of security and protection and reduce the fear of survival which were major
issues in the ancient times. This helps people to spend more time on doing work for
the organization rather than consuming their energies for the sake of their protection
and security as was in the ancient times (Knowles and Borje, 1971).
A leader in the informal organization comes out from the structure of the organization
itself which is in contrast of formal organization which appoints head of the
administrative units. These reasons for the emergence of the leader in the informal
organization can include the specific features or personal qualities of the leader, need
of the prevailing situation etc., which motivate people to admit his leadership. The
emergent leader exerts influence which is his ability to get cooperation from others.
Emergent leader is also expected to exert power which is a higher degree or stronger
form of influence as it reveals his ability to enforce actions (Knowles and Borje,
1971).

3.3. Factors Influencing Choice of Agribusiness Form

Various forms of agribusinesses exist and each of them has some unique
characteristics. Each owner and manager of agribusiness firm should make an
appropriate choice by taking into account the characteristics of the forms of
agribusiness firms. However, selected legal form of agribusiness can be changed as
it grows and economies of scale attained (Coase, 1937). Following factors should be
taken into account by the owners of the agribusiness firms to select an appropriate
form of agribusiness organization.
Nature and objectives of the agribusiness firm and market coverage
Availability of initial amount of capital to start the business
Management of additional capital if needed
Nature of the taxation applicable to the agribusiness
Degree of self-participation of the owner in the management affairs of the
business
Nature of stability and growth of the business and transfer of ownership
rights
Secrecy of business affairs
Owners’ willingness to take risk and meeting liabilities
Cost of operations and ease of organizing the business affairs
60 M. Mehdi, A. Adeel and B. Ahmad

3.4. Major Forms of Agribusiness Organization

A thoughtful appraisal of these factors can help for making choice of an appropriate
form of agribusiness organization. Main forms of agribusiness organization include
the following:
The Single Proprietorship/ Sole Traders
Partnership
Private Limited Company
Public Limited Companies
Cooperatives
Close Corporations
Joint Ventures
Franchising

3.5. The Single Proprietorship/Sole Traders

Single proprietorship is the form of business organization in which one individual
owns, runs the business and bears all the risks (March and Simon, 1958). The owner
obtains all the profits and pays all the taxes. His liability is unlimited. He is
responsible for paying all the debts and bears all the losses. In this type of business
organization, owner can use a business or trade name of his organization which can
be different from his own name. He can employ other persons and open a bank
account for the financial affairs of his business. There are few legal requirements that
needs to be fulfilled by the single proprietor to start the business and this is one of
the reason that this type of business is very common.

3.5.1. Requirements for Single Proprietorship

Some of the legal requirements and regulations to start and run single proprietorship
include the following;
The owner of the business is required to register his organization and
provide information about annual accounts to the tax officials.
One of the important elements in the sole proprietorship is its name. Some
countries require the registration of the name of the business while in some
countries such as Pakistan writing business name on all of the documents is
sufficient and owner of the business is specified in the concerned public
office.
In some business industries, the sole proprietors should abide by certain
laws which are applicable to all firms in the industry such as health and
safety laws and getting a license e.g. food business.
Single Proprietorship is most simple and straight forward form of a business
in which the owner takes all the business decisions.
Advantages of sole proprietorship.
3 Organization of Agribusiness Firms 61

According to March and Simon (1958), main advantages of a sole proprietorship

(sole ownership) are listed as under:
Sole Proprietorship form of the business is easy to start, execute and wind
up.
Less paper work and few regulations are required to start sole proprietorship
as compared with other forms of business organizations.
The owner enjoys freedom of making business decisions and profits are
entitled to the single owner.
There is quick decision making process as single proprietor has complete
control and does not have to face any opposition or conflict of opinion.
Relatively less capital is required to start such business as compared with
other forms of business operations.

3.5.2. Disadvantages of Sole Proprietorship

Single proprietorship has some disadvantages which are described below;
Sole proprietor has unlimited liability as he is responsible for paying all of
the debts and bears all the losses.
Personal property may be used to pay debts and losses and to fulfill any
other liability
Relatively less amount of capital is required which generally comes from
personal savings. Similarly, it is also difficult to raise that capital further.
As the business starts operating successfully and grows, the risk associated
also increases and to mitigate such risk and for the further growth of the
business single proprietor may have to transfer the business to other forms
of business organizations such as partnership and corporations.
Single person has limited or specialized skills and this may impede the
diversification of the business.
Some of the single proprietors may have huge investment but they do not
have sufficient time and human resource to effectively control their business
affairs.
The death or illness of the person can lead to closure of the business.

3.5.3. How is Sole Owner/Trader Taxed in Pakistan?

A sole proprietor pays tax on his personal income. As it is not a corporation, hence
no corporate taxes are applicable. He considers himself as self-employee to manage
the business affairs of the organization and pays taxes from the profits on the basis
of his self-employment and file tax return under the Income Tax Ordinance, 2001.
Hence, Tax Planning prior to the start of the business can help in managing the tax
burden in a better way.
62 M. Mehdi, A. Adeel and B. Ahmad

3.6. Partnership
Partnership is a form of business organization in which two or more persons jointly
agree to own and run the business looking for their mutual interests. Partners share
the capital, participate in the management of the business affairs and share the profit
and losses. Agreement between the partners possesses a keen importance in this type
of business organization. Agreement should be in written form and once it is finalized
it should be enforced by civil law. Each and every aspect of the business and nature
of sharing should be clearly mentioned in the agreement to avoid future conflicts.
For example, objectives and goals of the organization should clearly be defined in
the agreement. Nature of authority in the management of affairs, nature of the sharing
in the capital and hence shares in profit and losses and responsibilities of each partner
must be clearly defined and written in the agreement.
In partnership, double taxation or corporate taxation like a corporation or limited
company is not applicable. Taxes on profits of the partners are also not levied which
is called dividend tax however after the distribution of profits, tax on individual
incomes are levied. Liability in partnership is greater compared with a corporation
and depends on the agreement. In determining whether a group of persons is or is not
a partner in a firm, situation should be clear by all relevant facts taken together. The
sharing of profits or gross returns arising from property by persons holding a joint or
common interest in that property does not make such person partners and the receipt
by a person of a share of the profit of a business does not make him a partner with
the persons carrying on the business. Such persons include lender, servant, widow or
child of deceased parents etc.

3.6.1. Classification of Partnerships

General Partnership (GP): This is a type of partnership where two or
more persons carry out a business with mutual interests. Such type of
partnership demands equal level of rights and responsibilities in operations
and management of business. Any partner in such type of partnership may
bind other members or partners for a legal obligation. Every partner takes
the full responsibility of all business obligations and debts. This seems to
be very risky if such type of obligation is imposed on a partner but generally
it also offers a tax advantage because profits in partnership are not taxed
rather these are channeled through partners via income tax returns.
Limited Partnership (LP): A partnership consisting of one or more
partners, jointly and severally responsible and who are not liable for the
debts of the partnership beyond the fund so contributed. The partners with
limited liability are known as limited partners. But in this situation not all
the members can take advantage of this offer rather at least one member
(general partner) has to take the responsibility and he will be considered as
general partner. Then he has to be responsible for all business debts and
obligations. As such if general partner takes more responsibility then he also
enjoys more powers and he retains the decision making power with him and
controls the business whereas other limited partners do not generally
3 Organization of Agribusiness Firms 63

participate in business decision making. Both general and limited partners

get benefit from profit of the business.
Limited Liability Partnership (LLP): Limited liability partnership takes
the tax advantages of general partnership but it also generates some sort of
protection of personal liability to partners. Every partner is not declared
responsible for the acts of other partners. They are also not fully responsible
for the debts and obligations of the business. In this case regarding tax
exemptions, some tax authorities take such type of partnership as non-
partnership type of business whereas some still take them as partnership
case. If any partnership type of business wants to take advantage of such
partnership, they do not need to change or modify their existing agreement
although they can do that. If they intend to change, they simply need to
submit an application for registration as limited liability partnership to their
respective state agency. These agencies will collect relevant information
like number of partners, place and type of business and more importantly
partnership name and declare them limited liability partnership.

3.6.2. Types of Partners

A member of partnership type of business organization or firm; one who has united
with others to form a partnership in business.
Dormant Partner: Those whose names are not known to the general public
or do not appear as partners, but who nevertheless are silent partners, and
shares the profits. He is also called as “secret partner” and “silent partner”.
General Partner: A Partner participates fully in the profits, losses and
management of the partnership and personally liable for its debts.
Limited Partner: A partner whose participation in the firm is limited as to
both profits and management. He will not be liable for all business debts
and obligations.
Liquidating Partner: A partner who, upon the dissolution or insolvency of
the firm, is appointed to settle its accounts, collect assets, adjust claims, and
pay debts.
Nominal Partner: One whose name appears in connection with the
business as a member of the firm, but who has no real interest in it.
Sensible Partner: One whose name appears to the world as such, or who is
held out to all persons having dealings with the firm in the character of a
partner, whether or not he has any real interest in the firm.
Quasi Partner: One who has joined with others in a business which appears
to be a partnership but who in reality is not a partner.
Surviving Partner: The partner who, on the dissolution of the firm by the
death of his copartner, occupies the position of a trustee to settle up its
affairs.
64 M. Mehdi, A. Adeel and B. Ahmad

3.6.3. Partnership Law in Pakistan

The Partnership Act, 1932 describes the partnership as an association of two or more
persons to run a business by sharing the ownership and aims at earning profit. Hence,
it is an voluntary contract or agreement between two or more persons who invest
their money, put efforts to run the business, provide labor and skills or some or all of
these features and with a clear understanding of proportionate sharing of profits as
well as losses. Persons who make partnership with each other are termed individually
as partners and collectively as firm. Partnership is a non-entity which does not have
any right or liability as a firm rather its members (partners) are individually
responsible and possess all the rights and liabilities. Two types of partnership are
recognized by the Partnership Act namely “partnership at will” and “particular
partnership”. In the first type of partnership, contract or agreement does not define
the time period or duration of the partnership while in second type it is characterized
as limited partnership for a specified duration depending upon the particular event,
adventure or undertaking etc.

3.6.4. Partnership Registration Process for Agribusiness Firms

in Pakistan
An application is required by the partners to register a partnership in Pakistan which
is submitted in the office of registrar of firms along with necessary documents which
are briefly described as follows;
i. At least two persons are required to register a partnership who provide the
information on their full names and their father or husband names along
with their occupation and residential addresses.
ii. Photocopies of both the partners’ National Identity cards.
iii. Partnership deed written on stamp paper
iv. Utility bill such as electricity bill as a proof of their addresses
v. In case the mentioned address is attained on rent then the rent agreement is
required
vi. Photocopy of the original receipt of partnership fee deposited in the
designated banks.
vii. Signatures of all the partners in partnership/firm business in the presence of
registrar or an authorized officer.

3.6.5. Additional Requirements for Partnership Business

i. National Tax Number (NTN).
ii. Bank Account which is opened in the name of firm/business.
iii. Accounting record of profit, loss, income statement and balance sheet etc.
iv. Advance Payment of Income tax as required under the provisions of the
Income Tax Ordinance, 2001
v. Proof of registration under law by the relevant public body
3 Organization of Agribusiness Firms 65

3.6.6. Advantages of Partnership

i. Partnership business is easy to initiate and organize as compared to other
forms of business organization.
ii. More funds can be generated as compared to sole proprietorship as two are
more partners of the business pool their funds and they may have more
borrowing capacity than a sole proprietor.
iii. A partnership possesses a larger pool of knowledge and skill gathered from
the partners of the business.
iv. Partnerships can be cost-effective as each partner has expertise and
specialization in different aspects of their business.
v. No double taxation as tax is levied on income of the partners.

3.6.7. Disadvantages of Partnership

i. Liability for individual partners is unlimited. Proportion of responsibilities
and liability of each partner is written in the agreement of the partnership.
However, if a partner even having highest liability say 99% but could not
pay then the other partners have to pay although they agreed for less
liability. In the payment of liabilities partners may have to lose their
personal assets or property.
ii. Since management decisions are jointly made hence disagreements on
decision can occur which can impede the objective of long term existence
and a partnership may break.
iii. Partnership may lead to an end due to the death of any of a partner.
iv. A partnership usually has limitations that keeps it away from becoming a
large business.
v. Decisions some times are delayed as all of the members particularly the
general partners should reach to a consensus.

3.7. Company
A company or corporation is a type of business organization that makes, buys and
sells goods and services in exchange of money. Company type of business
organization can be divided into private limited company and public limited
company.

3.7.1. Private Limited Company

Private limited company is jointly owned by the investors. These people who buy the
shares of company are referred as shareholders. Board of directors in company is
appointed by these shareholders. It is evident that mostly directors are the main
shareholders in the company who run the business activities. Such type of companies
is mostly hold by family members, friends or relatives (Scott, 2008).
66 M. Mehdi, A. Adeel and B. Ahmad

3.7.1.1. Characteristics of Private Limited Company

Company has its own separate legal identity which is characterized by the following
features;
i. Company works independently which means there is no intervention in
company business matters from owner side. Its existence continues if one
of the owners even die.
ii. Legal agreements and contracts are always made by company for business
purpose.
iii. Bank accounts of company are always kept separate from owner’s personal
accounts.
In private limited company, limited legal protection or liability is always enjoyed by
the shareholders; however, there are certain restrictions on the ownership of shares
which are discussed below:
i. Share cannot be sold or transferred to anyone else without permission of
other shareholders. Shareholders possess first right to purchase the shares
from the person who wants to sell it.
ii. Shares cannot be sold to general public on stock exchange
iii. The number of shareholders is limited and fixed.
iv. Agreement between shareholders is mandatory to be signed before any sale
or purchase of share.
3.7.1.2. Advantages
i. Shareholders have limited liability. If the company goes defaulter, personal
assets of shareholders will not be seized by the creditors.
ii. Company does not stop its business activities if one of the shareholder or
owner dies.
iii. Minimum two shareholders are required to establish the company
iv. More investment is raised as the number of shareholders can increase up to
fifty.
v. Skills, managerial ability and resources are pooled and are available in a
great deal compared with sole proprietorship and partnership.
vi. Company can expand its operations easily because of limited liability and
availability of more investments from financial institutions.
3.7.1.3. Disadvantages
i. Although public company is costlier to be established as compared to
private limited company.
ii. Expansion of company is limited because maximum number of
shareholders is fifty.
iii. General people can have easy access to quarterly and annual reports.
iv. Dispute is raised due to filthy agreement between shareholders.
3 Organization of Agribusiness Firms 67

3.7.2. Public Limited Company

Public limited companies are the companies that can sell its shares on the stock
exchange.
3.7.2.1. Advantages
i. Public limited company works as private does. It has its own legal entity.
Business operations continue if any of the shareholders dies.
ii. Stock exchange is the mainstream through which shares can be sold
iii. Big public limited companies can borrow from banks on low interest rates
iv. Like private limited company, shareholders have limited liability
v. Public limited companies can purchase products in bulk quantity
vi. Unlimited capital can be raised in public limited company as number of
shareholders is not fixed
vii. Shares can be easily transferred
3.7.2.2. Disadvantages of Public Limited Company
i. More legal formalities compared with partnership are required to establish
the public limited company
ii. Sometimes it becomes difficult to manage company operations effectively
as it grows so large
iii. Strict compliance of rules and regulations to protect the interests of the
investor. Therefore, company publish its accounts
iv. Managers and the owners are different persons having different authorities
and responsibilities
v. Risk of takeover is high if competitors purchase maximum shares

3.7.3. Difference between Private and Public Limited Company

The following are the main differences between private and public limited company;
3.7.3.1. Private Limited Company
i. Range of shareholders is from two to fifty
ii. Once registered, then it makes the use of its name as private limited
company
iii. Certificate of incorporation is issued, then, business operations can be
commenced
iv. In registration process, the articles of association and the memorandum of
association are mandatory to be submitted
v. The memorandum and articles of association is signed by two shareholders
vi. Submission of prospectus and statement in lieu of prospectus is not
obligatory
vii. Shares can’t be sold to general public in open market
viii. In articles of association, transfer of share is restricted
ix. Minimum two directors don’t get retirement, but they use to rotate
x. No legal restrictions on director’s compensation packages
68 M. Mehdi, A. Adeel and B. Ahmad

3.7.3.2. Public Limited Company

i. Range of shareholders is from seven to unlimited
ii. It makes the use of word limited only after registration of its name
iii. To commence the business operations, certificate of incorporation and
commencement are necessary to be submitted
iv. At least seven shareholders sign the memorandum and articles of
association
v. Public limited company may or may not have its own articles of association
vi. Before allotting the shares, prospectus or statement in lieu of prospectus is
obligatory to be submitted

3.7.4. Company Registration Process in Pakistan

Medium and large business enterprises in Pakistan prefer to establish their business
organization as a company. In Pakistan, under Companies Ordinance 1984,
companies can be established and regulated as legal entity. Functional bodies of these
companies are entrusted with Security and Exchange Commission of Pakistan
(SECP). This commission appoints registrar of the companies in each province of
Pakistan where they are get registered.
Company as a corporate body having legal identity is formed by the shareholders
who subscribe their names and details in the Memorandum of Association in
compliance with other legal requirements under the provisions of the Companies
Ordinance (1984).
The following three types of companies are regulated under this ordinance;
• A company with limited shares
• A company with limited guarantee
• A company with unlimited liability
In addition, two types of companies named private limited company and public
limited company are administered under the Companies Ordinance (1984). Single
owner or more shareholders may incorporate private limited company by subscribing
their names to the Memorandum of Association. It is clear that company having one
subscriber is referred as single member company or private limited company.
However, three or more shareholders may form public limited company. These
companies are the most feasible vehicle to start up business enterprise in Pakistan.
The following steps are essential to register a private limited company in Pakistan:
Availability of Company Name
Before incorporation of a company in registrar office, it is necessary to check the
availability of company name. In this context, an application is submitted to seek
certificate of name availability after paying a fee of Rs. 200.
List of Documents
The following documents are submitted along with application in the office of
registrar:
3 Organization of Agribusiness Firms 69

a. Copy of National Identity Card (NIC) or Passport

b. NIC copy of each subscriber and witness to the Memorandum and
Article of Association is submitted and in case of foreigner, his/her
passport copy needs to be submitted.
c. Memorandum of Association
d. All necessary information regarding company and its directors is
written in the memorandum. The structure of company, official name
and address details of directors, objectives of company including
mission and vision statements, number and value of shares are given in
this document. All these documents exhibit that company affairs are
run smoothly and fairly.
e. Articles of Association
f. This document delineates the rule under which the concerned company
operates. Rights and duties of all directors, rules regarding election of
directors, schedules of annual meetings and procedure of share
disbursement are provided in it.
g. In addition, Form 1 for compliance declaration along with all requisite
information for registration of company and Form 21 and Form 29 are
required.
h. Certificate of Name Availability
i. Registration/Filing Fee
j. An original paid bank challan in authorized branches of Habib Bank
Limited or draft of prescribed amount in favor of the Securities and
Exchange Commission of Pakistan is attached herewith application
k. Authorization by Sponsors
l. When registrar points out any deficiency in the Memorandum and
Articles of Association, then, there is need to submit the authorization
letter by sponsor who can fulfill the deficiency.
The Securities and Exchange Commission of Pakistan reviews all the documents in
true spirit and issues the confirmation letter that they don’t have any objection.

3.8. Cooperatives
A business organization in which at least five member have equal voting rights is
known as cooperative. These members run the cooperative practices with their
equitable level of investment and involvement. Like company, members in
cooperative have limited liability. Therefore, they are not liable to pay whole debts.
Being separate legal entity, cooperative promotes sharing of resources and delegating
culture. Democratic style of management is formed basically to enhance
competitiveness. Limited profit is distributed among members. Primarily, this type
70 M. Mehdi, A. Adeel and B. Ahmad

of business organization is established to provide services to members rather than

profit earning (Akridge and Hertel, 1992).
Advantages
i. Cheapest business organization to get registered
ii. All shareholders participate actively in business operations of cooperative
iii. Shareholders have equal voting rights
iv. Members, other than shareholders/directors do not have right to vote
v. All members, managers, directors and shareholders of cooperatives are not
responsible for debts until and unless negligence and fraud is observed
vi. Members own and control cooperatives business practices.
Disadvantages
i. Return on investment is not provided to the members. Therefore, it is
difficult to find out the person who has interest in services instead of
financial return
ii. Minimum five members are required to form a cooperative.
iii. Limited profit is distributed among members.
iv. Regardless of their level of involvement and investment, each
member/shareholder has only right to one vote.
v. Continuous cooperative trainings are required to teach members about
principles and philosophy of cooperative as business organization.

3.8.1. Cooperative Societies in Pakistan

In agriculture sector of Pakistan, various types of cooperatives are working their
practices. Keeping in view the principle of economies of scale, these cooperatives
purchase agricultural inputs in bulk at the cheapest prices and sale their product at
attractive prices to gain fair return. Small-scale farmers are unable to receive such
type of benefits if they do their business on their own (Noor, 2008). Some major
types of such cooperatives are presented below;

3.8.2. Consumer’s Cooperatives

This cooperative is formally established in order to provide consumable goods at
reasonable prices. Role of intermediaries is eliminated because of their direct
purchase from producer or manufacturer.
i. Producer’s Cooperatives
Such type of cooperatives is established in order to save the small producers who are
unable to purchase inputs such as material, equipment, raw materials, tools, etc.
Marketing Cooperatives
Small producers agree to form marketing cooperative who feel difficulty to sale their
products on their own. This cooperative accumulates the products and sells in the
market.
3 Organization of Agribusiness Firms 71

ii. Credit Cooperatives

In order to provide financial support to the members, credit cooperative is formed.
Members deposit their resources and borrow the loans at minimum interest rate in
emergency situation.
iii. Farming Cooperatives
Small scale farmers join together to form this cooperative. The main aim of this is to
perform farming practices such as plowing, sowing, use of tube wells, harvesting,
processing and transporting jointly.
iv. Services Cooperatives
It is a type of cooperative which aims to provide public utility services such as
telecommunication services, electricity and water. Members have their shares in the
form of patronage. Profit gained through services is reinvested for infrastructural
development or paid to the members.

3.9. Close Corporation

This type of business organization can be easily established just like private limited
company. There are fewer rules and regulations about its formation and management.
Under the Companies Ordinance, 1984, close corporation (CC) is known as
“Pakistan Inc.” as an elite business in the economic period of Pakistan.

3.9.1. Characteristics of Close Corporations

The key features of close corporations are as follows;
i. Range of members is up to 10.
ii. A simple founding statement is submitted in the registrar office for its set
up.
iii. There is no separation between ownership and control. It means that
members can be the managers.
iv. Members can have limited and unlimited liability.
They are two critical points referred to the close corporations.
i. Membership is limited, so it is not suitable for large business operations.
ii. Members may disagree that lead to the dispute.

3.9.2. Advantages
i. Registration process of close corporations is relatively simple as well as
affordable.
ii. It does not follow any legal complications. For example, there is no annual
general meetings, no disclosure of financial statements.
iii. It has separate legal entity and has advantage of continuity irrespective of
death of its members.
72 M. Mehdi, A. Adeel and B. Ahmad

iv. There is no provision of income tax on the income disbursement to the

members.
v. It can provide financial assistance to its members.
vi. Capital formation is more as compared to sole proprietorship or small
business.
vii. Members have limited liability except under certain circumstances.
viii. It is easy to change its founding statement.
ix. No separate board works here. Management is also responsibility of the
members.

3.9.3. Disadvantages
i. Limited number of members hampers the expansion of the close
corporation.
ii. Any member may be responsible for the loss of the close corporation if acts
carelessly.
iii. Financial institutions such as bank may audit its finance department prior to
loaning.
iv. It is difficult for members to leave the organization.
v. Every member acts as close corporation agent.
vi. Any company cannot take over the close corporation. First, it will be
converted into the company then it is possible.
vii. Moreover, a close corporation cannot become the subsidiary of company.
viii. Major decisions are taken up by the members having 75 percent shares.
ix. Close corporation has tax provisions that are much higher as compared to
sole proprietor and partnership.

3.10. Joint Ventures

Joint venture (JV) is the set up when two businesses mutually agree to pool their
resources such as human and capital assets and share the risks and profit. In Pakistan,
many European companies have set up joint ventures with national companies
because local managers have good knowledge of culture, domestic market and
consumer preferences.
It has separate legal identity in which partners jointly undertake strategic alliance for
mutual transactions of profit. Basically it is a community of interest with agreement
to share both profit and loss. Joint venture does not enjoy continuing relationship like
partnership.
Joint venture is usual a gateway for entrance of foreign inventors. These investors
bring latest technologies and modern business practices, while domestic companies
fulfill the requisite legal documentations. State Partnership, Contracts or Commercial
Transaction Law govern the joint ventures. It is also subject to the international trade
laws and the domestic laws.
3 Organization of Agribusiness Firms 73

3.10.1. Reasons for Forming a Joint Venture

Company has complementary capabilities of distribution and resources such as
technology have good business alliance to create a joint venture. Joint venture is
created on the basis of following reasons;
a. Company’s strengths is the foundation block
b. Sharing risks and costs including overheads
c. Access to national and international financial institutions
d. Good economies of scale
e. Consumer’s choice and availability of technology
f. Presence of leading and innovative managerial practices

3.10.2. Competitive Goals

a. Every joint venture has certain competitive and strategic goals.
b. Evolve the structural development of the industry
c. Influencing structural evolution of the industry
d. Anticipate competitive forces
e. Defend distorting industry situations
f. Create strong alliance with competitive units
g. High market share

3.10.3. Advantages
a. Secure the opportunity to gain new expertise
b. Provide companies with knowledge of new technologies
c. Easy access to valuable resources of technology and well trained staff
d. Sharing of loss
e. Limited life span with limited commitment
f. Separate from non-core businesses
g. Knowledge of local culture

3.10.4. Disadvantages
a. It is challenging to create relationship with new company
b. Objectives of joint ventures are not clear sometimes
c. Imbalance in form of investment, assets and expertise
74 M. Mehdi, A. Adeel and B. Ahmad

d. Poor integration and cooperation due to different cultures

e. Lack of leadership and support in the early stages
f. Lack of research and development in new projects
g. Disagreement over important decisions

3.11. Franchising
Franchising is a business organization in which a single brand name is used by
different entrepreneurs. Franchisee is allowed to utilize business strategies and
trademarks. In return, franchisee pays fee and royalties to the parent company. Due
to franchising agreement, services such as advertising and training are provided by
the franchisor. It is the fastest form of business organization, because parent company
bears less cost when third party is directly involved in management and operations
of business.
Franchise always get and keep more customers than competitors. They update
customers about valuable products and services. They adopt new marketing
strategies to develop an image in the minds of potential customers. It is the best
method of distribution of products that can satisfy current consumer needs.
In this extremely widespread form of business relationships, various stakeholders
share the followings brand name, modern business model and marketing and
distribution system. During last decade, franchising has seen tremendous growth in
Pakistan. Well-reputed international franchises like Domino’s, Burger King,
Hardees, Pizza Hut, Kentucky Fried Chicken, Dunkin Donuts, Subway, McDonalds,
Papa Johns, Nandos have captured good market share.

3.11.1. Advantages to the Franchisor

i. Franchisee pays license fee to use the brand name
ii. Franchising is the fastest business venture. Therefore, franchisor does not
need to finance all the outlets

3.11.2. Advantages to the Franchisee

i. Risk of business failure is much low
ii. Cost of advertising is born by franchisor
iii. There is no need to get supply from different sources. Central distribution
system of franchisor provides all supplies
iv. All the important decisions like business process, layout of store and
products are decided by the franchisor
v. Franchisor provides trainings to the staff and management
vi. Easy availability of loans from the banks due to low risk of failure

3.11.3. Disadvantages to the Franchisor

i. Bad reputation due to poor management of franchisee
3 Organization of Agribusiness Firms 75

ii. Percentage of profit is kept by the franchisee

3.11.4. Disadvantages to the Franchisee

i. Less independence
ii. Sometimes, decision making is not suitable according to local conditions
iii. In addition to license fee, percentage of annual turnover is also paid to
franchisor.

Conclusion
Consumers want to enjoy a valuable standard of living which is possible only due to
effective and efficient business activities. Decisions regarding production and
logistics are changing with the passage of time and for that there is need to promote
skillful activities of the businessmen. It is imperative for businessman to consider the
legal formalities such as tax issues, financial and personal concerns for various forms
of business organizations and decide which organizational form is the most
appropriate. This decision can be taken in light of various factors which are outlined
in this chapter.
Agro-based firms are diverse regarding their scope, investment requirement and type
of customers. If a business person does not choose the right form for his investment,
he will have to bear extra cost and may be the failure of business. The form of
business also changes with the progress of business and change of its scope. This is
in this background that this chapter was designed to make aware agribusiness
students about different forms of organization and their implications.

Discussion Questions
List and discuss five critical factors in choosing a form of business
organization for:
a. A family farm
b. A feed firm seeking to expand in the near future
c. A college fraternity/sorority
d. A physician who owns farmland
e. A breakfast cereal manufacturer who wants to collaborate a juice company
on a special promotion emphasizing the importance of good breakfast
Compare and contrast the advantages and disadvantages of proprietorship
and partnership.
You and your friends want to start a business; you choose a partnership.
Carefully outline some of the considerations of setting up this new business.
What are some of the specific issues that need to be addressed in your
written partnership agreement?
Discuss the characteristics of each of the different types of partners.
What makes a corporation unique from other business firms? Be specific.
76 M. Mehdi, A. Adeel and B. Ahmad

When and why would an agribusiness firm choose to change its form of
business organization?

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