Business Organizations PDF

Business Organizations DXP02709 —UN—23FEB11 INTRODUCTION DXP01707 —UN—02SEP10 When you start or reorganize a farm or...

Business Organizations DXP02709 —UN—23FEB11 INTRODUCTION DXP01707 —UN—02SEP10 When you start or reorganize a farm or ranch, one of the first questions to answer is how to structure the business part of the operation. Continued on next page OUO1023,0002CDE -19-24FEB11-1/2 9-1 090117 PN=142  Business Organizations Each family and agriculture situation is unique. Each has a different set of goals. You must analyze the situation and make a careful decision about how you are going to put your organization together (Fig. 1). You should weigh the needs of your operation against the advantages and disadvantages of each agricultural business organization in order to strike a workable balance. This chapter gives the advantages and DXP01702 —UN—02SEP10 disadvantages of the most common types of organizations used to structure farm, ranch, or agribusinesses. As you consider the various business organizations, there are a few principles that will assist you in matching your needs with an organizational structure. The organization should be as simple as possible. The organization should provide access to sufficient Fig. 1—Am I using the best business organization? resources such as capital, land, labor, and management. The organization should encourage planning ahead How easy is it to transfer business ownership? for as many years as possible. This helps you reduce What are issues related to tax planning (income and uncertainty. estate taxes)? The organization should increase the efficiency of land, What are the issues related to estate planning labor, capital, and machinery resources. (intergeneration transfer of resources)? The organization should distribute benefits fairly on the basis of contributions to the business. All of these factors, and possibly others unique to your farm business, are important in selecting a business Choosing an appropriate business organization for any organization. It is always a good strategy to consult farm business should involve considerations of several with a financial advisor who is knowledgeable about the factors related to the goals of the owners. Some of the advantages and disadvantages of the various organization more important factors are these: structures. Who owns the business organization? There are three primary farm business organizations What is the ability to acquire resources such as land, to choose from: labor, and capital? How long is the expected life of the organization? Sole proprietorship What is the liability of the owners? Partnership Who participates in management decisions? Corporation What is the compensation for management? OUO1023,0002CDE -19-24FEB11-2/2 9-2 090117 PN=143  Business Organizations SOLE PROPRIETORSHIP A farm or ranch business is considered a sole proprietorship when the owner and the farm business are considered a single entity. The owner manages the business and bears all of the risk associated with the business. The owner pays an individual income tax based on the earnings of the business and other income. The owner is liable for debts of the business and receives all DXP01705 —UN—02SEP10 profits or losses of the business. The advantages of the sole proprietorship form of business organization: It is the simplest and least expensive business organization to create. The owner has complete control over all business decisions and can freely make decisions within the Fig. 2 — The sole proprietor makes all of the decisions legal framework. All profits from the business accrue to the owner to use for family expenses or reinvest into the farm business. There are typically two types of partnerships: the general Profits from the farm business are taxed on the owner’s partnership and the limited partnership. The two will be personal tax return. discussed separately below. As a sole proprietor, the owner may quickly and easily GENERAL PARTNERSHIPS expand or contract the size of his business, add or eliminate enterprises, and increase or decrease inventory. There are several important characteristics about a Because the owner is solely responsible for managerial partnership. decisions, he can change the direction of business Death of any partner dissolves the partnership unless enterprises faster than if he had to consult a partner or a special arrangements are made. group of stockholders. Partnerships as business organizations pay no income Since the sole proprietor directly receives the rewards taxes (each partner must report a share of partnership of good management and labor, the owner has a income on his or her own personal income tax return). strong incentive to work hard. He strives to make the Each member is subject to liability for all debts of the best management decisions without the problems of business, and this liability can extend to personal assets disagreement among owners (Fig. 2). that are not part of the partnership. Real and personal property may be owned in the name The disadvantages of the sole proprietorship form of of the partnership, or it may be owned in the name of business organization: one or more of the partners. Raising the capital for operating expenses and capital Profits and losses should be divided in accordance with a specific agreement. purchases may be difficult. A sole proprietor must be responsible for purchasing, A partnership is a sharing of profits or losses, control of production, and marketing decisions. business assets, and managerial decisions. The sharing The sole proprietor may not have time to make careful does not have to be equal for each partner, but should management decisions in some situations. be clearly designated in the partnership agreement. The sole proprietor is responsible for all debts. Creditors The goals of all participants should be the same, and can require personal assets, as well as business assets, the business should be of sufficient size to provide an to secure any debt obligations. adequate income for all parties. There should be complete Death of the owner may result in termination of the and accurate business records that track ownership of business and reorganization under new ownership. assets and the distribution of income and expenses. The sole proprietor might be unable to manage the While not required by law in some states, a partnership business due to uncontrollable circumstances (e.g., illness or injury). agreement should be a written agreement. Without a written agreement, there could be disagreement over PARTNERSHIP asset ownership, divisions of profits, and termination of the partnership. This agreement could have special A partnership as a business organization is a relationship importance in a partnership with unequal participation between two or more persons who agree to combine of the partners, since profits are taxed on individual tax some of their property, labor, and skills to jointly own returns. a business. The partnership is an association of two or more people who carry on a business together as co-owners with the goal of making a profit. Continued on next page OUO1023,0002CD8 -19-25FEB11-1/6 9-3 090117 PN=144  Business Organizations The advantages of a partnership form of business A contract signed by any of the partners is as if all partners signed the agreement; thus all partners are organization: responsible for completion of the contract even if Multiple owners can take advantage of different personal assets not in the partnership are required. management expertise. Each partner has unlimited liability, even to personal Multiple owners can pool financial resource often assets, of any liability of the business created by any of resulting in a greater access to capital than a sole the partners in the partnership. proprietorship. In the event of death or withdrawal of any of the The partnership is a simple arrangement with usually no partners, the partnership is dissolved. forms to complete or file; however, a written agreement AN EXAMPLE OF A PARTNERSHIP AGREEMENT is recommended. The Uniform Partnership Act provides for a set of Greg Landon is a recent graduate of the agricultural uniform laws that allow a partnership to be run without college at the State University. He has always worked the complex legal requirements of a corporation. for his parents during school vacations. Now Greg wants A partnership is readily adaptable to changes or to return to the family farm and continue farming. He modifications that can be added to the written has discussed this with his parents several times, but no agreement. decisions have been made. The disadvantages of a partnership form of business Greg also is thinking about getting married. He needs to organization: determine whether he wants to return to the farm or plan another career. Control of the business is shared among the partners, thus giving rise to the possibility of disagreement. Continued on next page OUO1023,0002CD8 -19-25FEB11-2/6 9-4 090117 PN=145  Business Organizations Greg and his parents meet with a farm management consultant to discuss a partnership agreement. Greg knows he will be unable to compete in farming unless he can form a partnership arrangement or get financial backing from his parents (Fig. 3). During the first meeting with Greg and his parents, the farm management consultant states that a partnership is an association of two or more people who carry on a business together as co-owners with the goal of making a profit. The DXP01707 —UN—02SEP10 consultant points out several facts about a partnership. Greg's father points out that he would be making a considerable sacrifice by entering into a partnership. He states that he and his wife have accumulated sufficient resources to take life a little easier. If he enters a partnership with his son, they will be expanding the business, borrowing more money, reducing personal Fig. 3 — The Landons meet with a consultant to discuss a partnership expenditures, and continuing to work as hard as ever. The consultant points out that the objectives and opinions Each partner shares equally in general management between partners may differ. Greg may want to expand responsibilities. Greg is primarily responsible for the more rapidly, maintain a higher standard of living, and dairy enterprise, and his father is primarily responsible take more risks than his father. for the swine and crop enterprises. Greg and his father will keep their own enterprise If either partner becomes ill or dies, it may have a tragic records and pool them for the overall record system. effect on the partnership arrangement by causing an Each partner is paid on the basis of the value of the untimely legal dissolution of the organization. contributions to the partnership. The unlimited liability of each partner may restrict credit Once they are married, Greg and Debbie will move into a small home on the property. use. Unless partners have complete faith in each other, The proper legal agreements are only a part of the there is a tendency to adopt restrictive measures in the requirement for a successful partnership. No matter partnership agreement, which restrict management or how fair and proper the agreement, the partnership delay management decisions. will not be successful unless earnings are adequate to Each partner is liable for wrongdoing in connection with support all the partners. Greg and his parents know that the farm business. A partner may impose liability upon many family partnerships fail because of disagreements other partners for wrongdoing. and misunderstandings. They also recognize that they may have covered only a few of the possible Greg, his fiancée Debbie, and Greg's parents continue problems that must be considered before a partnership to meet and discuss issues important to developing a arrangement can be successful. successful partnership agreement. After considerable Greg and his parents plan to meet regularly to discuss thought and deliberation, they decide to enter into a and update their partnership agreement. Properly four-party partnership agreement. planned, the partnership can meet the need for a business arrangement that will encourage good farming With the help of an attorney familiar with farm partnerships, practices and be fair to all parties. they develop a written partnership agreement. Some provisions in the agreement include: LIMITED PARTNERSHIP A transfer of ownership through a buy-out arrangement A variation of the general partnership is the limited at the termination of the partnership agreement. partnership. A limited partnership requires at least Greg's parents will lease machinery, equipment, and one general partner who will be liable for the debts land to the partnership in the initial stages. The and obligations of the business. The limited partners partnership will eventually buy these capital assets. cannot participate in the management or operations of A life insurance plan is obtained that enables a partner the partnership and are only liable for the amount of to buy the other partner's share if one becomes investment in the partnership. Strict compliance with the incapacitated or dies. requirements of a limited partnership is necessary for They purchase an insurance program with personal limited partners to avoid liability. liability and employee liability insurance to overcome the disadvantage of unlimited liability. Continued on next page OUO1023,0002CD8 -19-25FEB11-3/6 9-5 PN=146 090117  Business Organizations The limited partnership partners cannot participate in the Transfer of ownership in a corporate business structure management of the business nor can their names appear involves the transfer of stock, while title to the asset in the partnership name. The partnership agreement remains with the business. The transfer may be by must be in writing and specifically indicate the share of sale, gift, or inheritance. profit to be paid to the limited partner. The agreement A corporate structure allows multiple individuals to pool must be recorded, which provides constructive notice their financial resources thus, in some cases, making to customers who may be doing business with the the acquisition of capital easier. partnership. There are other technical requirements that In a farm corporation, the owners are also employees of should be understood before a limited partnership is used. the corporation and receive a salary and benefits. The If you consider a limited partnership, consult an attorney benefits, such as insurance premiums, are deductible to draft the agreement. expenses for the corporation. The disadvantages of a corporation form of business FARM CORPORATIONS organization: A corporation is a business organization in which the business is a legal entity separate from the owners and There are fees associated with chartering a corporation in any state. In addition to filing fees, legal fees for an employees. As a legal entity, the business can borrow attorney to assist with the filing can be substantial. money, enter contracts, buy and sell assets, be involved in litigation, and must pay taxes. A corporation is required to have annual meetings, keep specific records, and file documents with the state. Corporations are chartered by the states, and each The major disadvantage of the corporate structure is has different rules and requirements for incorporation. that the income earned can be taxed twice. As a legal However, in most cases a Board of Directors and the entity, the corporation must pay a corporate income tax. Articles of Incorporation are required. The Articles of When the profits are distributed to the stockholders, Incorporation are the rules governing the operation they must pay individual income tax on the distribution. and management of the corporate business. Once A C Corporation is the most common corporate structure incorporated, state laws require certain record keeping in the United States. As such, the C Corporation may and filing of documents. have an unlimited number of stockholders and can have When you incorporate your farm business, the assets large public offerings of stock to be purchased. When of the business are transferred to the corporation in a C Corporation earns a profit, it must pay a federal exchange for stock certificates. The owners of the stock corporate tax and if dividends are paid to stockholders, certificates are entitled to participate in the management the stockholders must pay personal income tax on the and operation of the business. Each share of stock gives dividends, thus creating a potential for double taxation. the shareholder one vote; thus, anyone owning 51% or An S Corporation is a corporation that has elected a more of the stock has control of the corporation. special tax status with the Internal Revenue Service. There are two types of corporations that are considered These corporations are most appropriate for small when farm businesses have decided to incorporate. The business owners and entrepreneurs who prefer to be C Corporation and S Corporation refer to subchapters in taxed as if they were still sole proprietors. In an S the Internal Revenue Service Code. The following list of Corporation, the earnings are passed equally to the advantages and disadvantages specifically apply to a C stockholders based on amount of stock owned. The Corporation. The S Corporation will be discussed later. stockholders then pay personal income tax on their earnings, which are based on how many shares of stock The advantages of a corporation form of business they own. There is no double tax as in a C Corporation. organization: To qualify for S Corporation treatment, a corporation must A corporation as a legal entity can have a permanent meet certain conditions in the Internal Revenue Service existence and is not dissolved upon death of a stock tax regulations: holder. The stock of the deceased is passed to his or her heirs. Must have 100 or fewer stockholders. Husband and Stockholders of a corporation have liability limited just wife are treated as one stockholder. to the value of their shares. There is no unlimited Can have only one class of stock. liability as exists in sole proprietorship or a general All stockholders must be individuals or estates of partnership. It is important to note that some lenders individuals. No non-resident aliens can be stockholders. will not lend to a small farm corporation without some Stockholders cannot be C corporations, other S of the individual stockholders co-signing the note, thus corporations, limited liability companies, or partnerships. pledging personal assets as collateral. Continued on next page OUO1023,0002CD8 -19-25FEB11-4/6 9-6 090117 PN=147  Business Organizations AN EXAMPLE OF FARM INCORPORATION John Lloyd began farming as a sole proprietor over thirty years ago. Now, John and his wife Emma are thinking about their future years and their family. They have four children: Katie (21), who is in a custom hay baling operation with her two younger brothers, Phil (16) and Joe (14). John Jr. (19) married soon after graduation and is working in the family farming operation. The Lloyds farm 4500 acres of crop land and maintain a commercial beef DXP01703 —UN—02SEP10 herd of 100. The Lloyds are aware that an increasing number of farm families are incorporating their farm operations (Fig. 4) to take advantage of the favorable characteristics of this type of ownership. After visiting their financial advisor and other families who have incorporated, they find the most common factors are these: Fig. 4 — The corporation is a team of individuals The opportunities for estate planning Easily transferred ownership — Gifts of minority stock The continuity of business life can be given to the other children to help persuade The possible reduced tax burden them to continue farming. This stock, unlike real estate The limited personal liability gifts, does not have to be recorded with the county The possible access to more capital clerk, and is therefore more private. The Lloyds realize that the objectives of individuals Opportunities for tax savings — A farming corporation vary. What may be a factor that causes one family to may have certain income tax advantages for the Lloyds. choose incorporation may be the very factor that causes This depends on such factors as the income earned and another family to decide against incorporation. The Lloyds their tax brackets. Also, certain fringe benefits are tax must carefully consider all of the characteristics of the deductible, such as insurance and profit-sharing plans. corporation to determine if it will meet the needs of their These are not deductible for a self-employed farmer. family. Limited liability — a corporate stockholder's liability is limited to the stockholder's contribution of capital stock. One of the first things that the Lloyds did was to talk The Lloyds may state bylaws that say if one shareholder to their neighbors that are in farm corporations. They files bankruptcy and creditors attempt to claim the stock, then met with their attorney to learn the advantages and there would be an automatic buy-back at a fixed price disadvantages of incorporation. by the rest of the corporation. This would be useful in Here are the advantages that they found: the event of a divorce or an attempted sale of corporate stock to someone outside the Lloyd family. Economic reasons — The Lloyds may pool or acquire Here are the disadvantages that the Lloyds encountered additional capital if necessary. They may also combine their special skills, abilities, and ideas. However, since in their research of farm corporations: the Lloyds are considering a family corporation, there Corporations are complicated and costly to organize probably will be no equity capital from outside their — more “red tape” is involved in forming a corporation farming operation. than other forms of business organizations. Expenses Separation of ownership and management — Only include filing fees, Articles of Incorporation, and initial John Jr. has indicated an interest in continuing in legal and accounting expenses. the farming operation. John and Emma, the parents, There are continuing costs to maintain the farm want the other children to share in the inheritance, but corporation — Corporations must operate in compliance not in the management of the farm. In this situation, with a corporate charter. The law requires corporations the parents can give the other children a long-term to keep records of directors' and shareholders’ meetings promissory note that has a value equal to the share of and to pay franchise taxes. There may be additional the estate that John receives. This note (debenture) costs for bookkeeping and accounting services for the will not appreciate. The other children will not have a Lloyds. voice in the management of the farm. Income is derived There may be difficulty in obtaining credit from lending through interest payments, which are deductible for the institutions — Some lending institutions may be corporation. unfamiliar with farm corporations. They may require Ease of continuing in business — Upon the death of a more complicated borrowing procedures for the farm stockholder in a farm corporation, only the stock owned corporation. Sometimes shareholders may be required by the person who died is subject to probate, not the to cosign the corporation's notes. underlying assets. Continued on next page OUO1023,0002CD8 -19-25FEB11-5/6 9-7 090117 PN=148  Business Organizations The Lloyds discovered that some farm families Corporations may cause complicated and expensive have difficulty adjusting to a corporation after a sole termination — The Lloyds should not consider proprietorship. Money in the corporation account incorporation unless they intend to continue with that cannot be legally spent for personal use. Management form of organization indefinitely. decisions must be made in accordance with corporation policies, procedures, and bylaws. Good business Another factor the Lloyds must consider if they incorporate practices dictate that both employee and personal their business is the kind of corporation they want. If liability insurance be carried by the farm corporation. taxation is not the major reason for incorporating, the Lloyds may decide to choose the S Corporation. The S The corporation can be sued on contracts or actions that Corporation retains most of the features of a regular C are made in the corporation’s name or by the corporation officers or agents. As a sole proprietor, the Lloyds may Corporation; however, it is not taxed as a separate entity. be exempt from a creditor's claim against property such All of the tax items pass through the corporation to the as the homestead, implements, and a limited number of stockholders, much like partners in a partnership. livestock and feed. These exemptions are lost if such The Lloyds seek legal counsel and review their farm properties are transferred to the corporation. business, family goals, and objectives. Their decision There may be minority stockholder problems — is made after carefully weighing the advantages and Second generation stockholders such as the Lloyds disadvantages of all the alternatives. grandchildren may receive a few shares of the corporation. They may be dissatisfied with dividends The Lloyds feel the corporation form of business and rights. A corporation must make special organization is best for them. It provides the parents with arrangements to handle these potential problems. a vehicle that they can use to pass the estate on to their Income tax laws are unique for corporations — children on a fair basis. A corporation pays income tax on its income. Shareholders may have to pay income tax on dividends from the corporation. OUO1023,0002CD8 -19-25FEB11-6/6 9-8 090117 PN=149  Business Organizations SUMMARY OF BUSINESS ORGANIZATIONS The following chart is a summary of the characteristics of the various business organizations that have been discussed above. Category Sole Proprietor Partnership Corporation Ownership Single individual Two or more individuals A legal, separate entity, separate from stockholders Continuity of ownership Death terminates and there is Business terminates with death Forever, or for a fixed number liquidation; there may be transfer of partner or at agreed time; of years; in case of death, stock of intent during life sale to surviving partner or passes by will or inheritance partners; liquidation Liability of owners Proprietor liable Partners, except limited partners, Corporation is liable for obligations; are liable for all of partnership’s in some cases stockholders obligations may be asked to sign separate payment notes Record keeping Must have records adequate Must file information tax return; Comprehensive set of accounting to prepare defensible income complete set of records kept so that records required; minutes of tax return each partner knows how business shareholder and board of stands at any given time director meetings Capital Personal investments; loans Partner contributions; loans Shareholders stock; sale of stock; loans Compensation of management Sole recipient of profits and losses Partners share all profits or losses; Employees’ profit-sharing and distribution of profits per agreement fringe benefits program; constant salary for management and employees plus bonus in a profitable year; dividends for stockholders Management decisions and Proprietor fully responsible Ability and agreement of partners; Directors' decisions; Articles of limits on business partners may specialize Incorporation; state law Income taxes Tax on income of individual and Each partner reports share of Regular corporation: Corporations related tax laws profits or loss on individual file a tax return and pay tax on income tax return income; salaries to employees and shareholders deductible S Corporation: Each shareholder reports shared income; IRS information report filed by corporation Estate taxes Based on value of proprietor's Based on each partner's estate Based on value on shares of estate value, considering not only all stock and other assets, including separate property but property other separate property in partnership as well Table 1: A COMPARISON OF THE BUSINESS ORGANIZATION STRUCTURES OUO1023,0002CDB -19-24FEB11-1/1 9-9 PN=150 090117  Business Organizations OTHER TYPES OF BUSINESS Establishing a trust involves transferring assets to an ORGANIZATIONS individual or individuals who will manage those assets Other types of business organizations that may be for the benefit of designated beneficiaries. The person considered include a limited liability company and a trust. creating the trust is called a trustor or grantor. The individual or individuals who manage the assets are called LIMITED LIABILITY COMPANY (LLC) trustees. The owners of a Limited Liability Company (LLC) are Trusts may be established either by a written document or called “members,” with (theoretically) no personal liability oral statement establishing the trust during the grantor's for the obligations of the LLC. If you operate an LLC as an lifetime or by will. If the trust property includes real estate, individual, you report income and loss as a sole proprietor. the trust must be created by a written document. Trusts If you operate an LLC with associates, the LLC reports that take effect during the grantor's lifetime are called as a partnership and you report your share of income intervivos trusts. Trusts that are created by will are called and loss. There are instances when an LLC may elect to testamentary trusts. If the grantor's goal is avoidance of report as an association and be taxed as a corporation. probate or minimization of his estate or income taxes, an intervivos trust may be required. A disadvantage of The affairs and conduct of the LLC are governed by an intervivos trusts arises from the fact that, depending upon operating agreement among its members. Ownership how they are structured, the grantor may lose control over is represented by membership interest. Management the property which is transferred to the trust. of an LLC may be vested in the members in proportion to their membership interest; however, the operating The amount of control that a grantor will retain over the agreement may provide for the selection of managers by assets after a trust is created is determined by how the the members. The managers do not have to be members, trust is structured. A revocable trust is one that may be but like members, they have no personal responsibilities terminated at any time by the grantor. An irrevocable trust for the obligations of the LLC. is one that may not be terminated by the grantor once it is created until the end of the time period specified in the The LLC may be dissolved on the occurrence of certain trust terms. The maximum length of time for which a trust events such as expiration of a period fixed in the operating may be created is 21 years if a fixed time is specified or, agreement, unanimous written consent of the members, alternatively, 21 years plus the life or lives of designated or the withdrawal of a member. beneficiaries who are alive when the trust is created. One TRUSTS disadvantage of an irrevocable trust is that the grantor cannot change his distribution plan during the term of A trust is a form of property ownership in which the the trust. persons who hold legal title to the property manage it for the benefit of someone else. Trusts have many potential The importance of obtaining competent professional uses, including minimization of income taxes, avoidance assistance in establishing and managing a trust cannot be of probate, minimization of estate taxes, providing income overemphasized. Trusts can be highly useful planning for the surviving spouse, and management of assets for tools if properly designed, but particularly in the area of minors and others incapable of managing their business tax management, they require very careful drafting to affairs. The appropriate structure for a particular trust is ensure that all of the grantor's goals are achieved. determined by the objectives of the individual establishing the trust. OUO1023,0002CDC -19-24FEB11-1/1 9-10 090117 PN=151  Business Organizations COOPERATIVES Providing improved or new services to farmers and ranchers. As with a corporation, the cooperative is a legal entity Providing farmers with credit structured to farm and distinct from its members. Unlike the regular corporation, ranch needs. however, the cooperative is not organized for making a Allowing farmers and ranchers to become involved in profit. The cooperative is organized based on two major assembly and processing. premises: CHARACTERISTICS OF COOPERATIVES Cooperatives are owned and controlled by the member-patrons. As Jim continues his research of cooperatives, he finds The profits of the cooperative are returns to the these characteristics: members based on patronage. Cooperative businesses are owned by members who KINDS OF COOPERATIVES use them. Members do business directly with the cooperative. As an assignment for his agriculture education class, Jim Cooperatives emphasize member control. Each Bailey studies cooperatives. Through his research, Jim member has some voice in the cooperative business finds most cooperatives are agribusiness firms. He finds affairs. Each member helps select the board of directors. cooperatives can be classified by functions or activities. Cooperative businesses are operated on a nonprofit Jim realizes that marketing and purchasing cooperatives basis. When profits are made, they are returned to are farmers pooling their saleable products and purchase members as patronage dividends. needs in an effort to obtain increased market power. Cooperatives are organized in response to the mutual interest and needs of the members. Membership in the He learns that service cooperatives are group efforts to cooperative is voluntary. Members are free to patronize improve the level of services received by farmers and the cooperative or go elsewhere with their business. ranchers. Members of a cooperative share risk, returns above cost of operation (patronage dividend), and financial The credit cooperatives acquire funds and provide them support in proportion to the amount of business that to members on a cost basis. they do with the cooperative. Processing cooperatives are organized to provide Members of the cooperative elect a board of directors. processing and packaging alternatives for the members. This board is responsible for hiring management, setting policy, and ensuring that the cooperative is Table 1 — Kinds of Cooperatives operated in a manner consistent with the wishes of a Kinds Services Provided majority of the members. Marketing Storage of commodities, such as grain in elevators. Processing WAYS COOPERATIVES ARE FINANCED and distribution of commodities such as milk, dairy products, Jim's study reveals that cooperatives, the same as any orange juice, and produce. business organization, must have capital to operate. The Purchasing Purchase of operating inputs in members must furnish the capital, or it must be borrowed. quantity and selling to individual The cooperative capital needs include: members. Inputs may include feed, fuel, labor, fertilizer, Operating money for the purchase of inventories and and supplies. operating needs of the cooperative. Services Food buying co-ops, feeder pig Cooperatives construct elevators, processing plants, co-ops, co-op auction sales, and buildings to meet the needs of the members. insurance, and electricity through rural electric cooperatives (RECs). Cooperatives purchase land for cooperative-owned capital assets. Credit Three lending institutions comprise the Farm Credit System: Jim discovers several ways that cooperatives are financed. Production Credit Association (PCA), Federal Land Bank, and Bank for Cooperatives. Stock is sold in the cooperative. The stock that a member buys in a cooperative is unlike the stock Processing Assembly, processing, and of a regular corporation. Cooperative stock cannot packaging of agricultural products. appreciate in value. Table 1 — Kinds of cooperatives Members can use cooperative funds to finance PURPOSES OF COOPERATIVES operations and invest in long-term assets. There is a retention of a portion of the profits in the The primary purpose of cooperatives is collective cooperative. These are called retained earnings. A action by farmers to improve their economic well-being. successful cooperative will be able to repay members Cooperatives can accomplish this in several ways: the retained earnings (sometimes referred to as revolving funds) over a period of years. Securing higher market prices for the farmers products. Securing more favorable input prices. Continued on next page OUO1023,0002CDD -19-24FEB11-1/2 9-11 090117 PN=152  Business Organizations In the concluding remarks for his assignment, Jim states agribusiness profitable by reducing operating costs. that cooperatives have been an important competitive Sometimes cooperative sales organizations can get a force in agribusiness. He further states that cooperatives higher price for agricultural products. That, too, helps often provide goods and services to farmers and ranchers make agriculture profitable by increasing income. at lower costs than other sources. That has helped make OUO1023,0002CDD -19-24FEB11-2/2 9-12 090117 PN=153