Chapter 9 Choosing a Legal Structure corpration The Selection of a Legal Structure and the Agribusiness Manager Can have long-term financial implications for the owners, their heirs, and the existence of the the business Need the help of an experienced tax attorney and tax accountant, and the business owners The Three Primary Types of Legal Structure Sole Proprietorship Partnership Corporation The Sole Proprietorship An individual who owns, manages, and assumes all the risk and derives all the profits from a business Advantages and Disadvantages of a Sole Proprietorship Advantages Easiest to create Oldest and most popular business legal structure All profits go to owner Owner makes all decisions Disadvantages All losses charged against owner Personal and business assets available Business ends with death of owner The Partnership Voluntary association of two or more people to carry on as co-owners of a business for profit The general characteristics of a partnership Each person involved participates in management decisions Assets are jointly owned Profits/losses are shared The parties operate under the firm’s name The parties have a joint bank account for their business The parties keep a single set of business records The Importance of a Written Partnership Agreement How much control does each partner have in business decisions? How much control does each partner have over real and personal property used by the partnership? How are profits and losses to be distributed among the partners? How is the partnership going to keep records? Three Types of Partnerships 1. General partnership 2. Limited partnership 3. Registered limited liability partnerships The Corporation A legal entity that is separate and distinct from the shareholders who own it, from the individuals who manage it, and from its employees Created by state law and organized to carry on a business for profit or non- profit Types of Corporations 1. Business corporation 2. Non-profit corporation 3. Close (or closely held) corporation 4. Professional corporations 5. Cooperatives Advantages and Disadvantages of the Corporate Structure Advantages Liability limited to assets of the firm Same legal rights as an individual Can operate in perpetuity Lower tax rates generally Tax-deductible employee benefits Disadvantages More difficult to create than a partnership or sole proprietorship More difficult to dissolve More reporting of activities required Comparing the Three Structures Resource acquisition Continuity of existence Liability of the owners Participation in management Compensation of management Transferability of ownership Record keeping Tax planning Discussion Questions 1. Explain why the selection of a legal structure is an important decision for an agribusiness and its owners. Identify and describe at least four factors that need to be considered when making this selection. 2. Develop a chart that defines sole proprietorship and lists the advantages and disadvantages of this legal structure. 3. Develop a chart that defines the three types of partnerships and gives the advantages and disadvantages of each one. Discussion Questions 4. Develop a chart that defines the five types of corporate legal structures and gives the advantages and disadvantages of each one. 5. Evaluate the statement that family partnerships are the best way to involve a family in a business. 6. What is a limited liability company and how does it differ from a registered limited liability partnership? 7. Compare and contrast what happens to a business when the owner dies if the business is organized as a sole proprietor, a partnership, or a corporation. Discussion Questions 8. Explain the difference between a general partner and a limited partner. Give an example of why someone would wish to be each one. 9. What is the relationship between the Uniform Partnership Act and the written partnership agreement? Does the partnership agreement have to be in writing? Explain your answer. 10. Some argue that the corporate legal structure that gives most corporate executives protection from personal liability for acts of their corporation gives the them too much immunity from responsibility for their acts. How do you feel about this and why?