You are on page 1of 22


Chapter 6


Compare proprietorships, partnerships, and


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


3 major types of business organizations:

Single (sole) proprietorship Partnership Corporation

3 types of corporations:

Subchapter C

regular corporations family farms and small businesses cooperatives

Subchapter S Subchapter T

Business Organizations~

Sole proprietorship

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


two or more people make a legal agreement to become co-owners of business 2.5 million in US


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 owners hands

No voting is necessary

Disadvantages of Sole Proprietorship~

Unlimited liability

that creditors can make on the owners

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 businesss 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


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


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 states 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


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 directors 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


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:

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

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 one member, one vote

Democratic control

Limited returns on investment

Figure 6-7, Advantages and Disadvantages


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

McDonalds, Wendys, and Dominos

600,000 franchised outlets in the United States

McDonalds 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?