Chapter 3:

The Organization of an
Agribusiness
 An agribusiness firm be a firm with billions
of dollars sales that employs thousands of
people
 It may be as small as an individual who is a
part time seed corn sales person
 One person or one family agribusiness is
not uncommon
 Most of the agribusiness enterprises
employ hundreds and thousands of people
Forms of Business Organizations
 Every agribusiness is owned by someone
 The circumstances of ownership give an
organization its specific legal form.
 Five basic business forms:
1. Sole Proprietorship
2. Partnership
3. Corporation
4. Limited Liability Company (LLC)
5. Cooperative
 Every conceivable size and kind of agribusiness
may have any of these five forms
 In addition, strategic alliances of various types
can also be used
 Factors Influencing Choice of Business Form
1. What type of business is it, where will it be conducted, and what
are owners’ objectives and philosophies for the agribusiness?
2. How much capital is available for the firm’s start-up?
3. How much capital is needed to support the agribusiness?
4. How easy is it secure additional capital for the agribusiness?
5. What tax liabilities will be incurred and what tax options are
available?
6. How much personal involvement in the management and control
of the agribusiness do the owners desire?
7. How important are the factors of stability, continuity, and transfer
of ownership to the firm’s owners?
8. How desirable is it to keep the affairs of the agribusiness private
and carefully guard any public disclosure?
9. How much risk and liability are the owners willing to assume?
10. How much will this form for organization cost and how easy is this
form of agribusiness to organize?
 The Sole Proprietorship
 The oldest and simplest form
 An organization owned and controlled by one person or family
 Tend to be small businesses
 Popular and widely available
Advantages
 Minimal legal requirements (Only requirement is individual’s
desire to start business and sometimes the purchase of license)
 Complete control over the business (plans, programs, policies)
unless delegated by the owner
 All profits and losses, all liability to creditors and liability from
other business activities are vested in the proprietor.
 Cost of organizing and dissolution are low
 The business affairs are completely secret (except sharing with
govt. departments)
 Needed capital is supplied by the owner from personal funds or
is borrowed against either the owners’ business or personal
assets.
 Personal and business assets are not strictly separated
 If an individual is financial sound, lender will be more likely to
extent credit.
 Proprietor can sell their business to whomever they wish,
whenever they wish and for whatever price they are willing to
accept
 They can take risk on as much risk or liability as they wish
 They are personally liable for whatever risk they assume
 No income tax as separate entity
 The amount left over is treated as personal income or salary
 Proprietor may keep or use earned income in the business

The person who desires the lowest cost (to organize),

simplest, most self-directed, most private, and most
flexible form of agribusiness will choose the sole
proprietorship
Disadvantages
 Unlimited liability – personal liability (does not stop to business
asset but extends to personal asset)
 Limited availability of capital – lenders are reluctant unless
owner guarantee of personal equity
 Freedom from business tax may also disadvantage – higher
profit may subject to higher tax
 Concentration of control and profit may discourage employees
 Lacks stability and continuity
 Partnership
 Association of two or more people as owners of a business
 Written or oral agreement or formal contract between the
parties involved
 Partnership can be formed by law (Partnership Act, 1932 in
Pakistan
 Simplest form of business organization by which a number of
people can pool their resources and talents for mutual benefit.
Advantages
 Easy to start as proprietorship
 Little expenses
 May operated under assumed or fictitious name – provided
registration in accordance with state laws
 Availability of resources – financial, talent, management
 Additional partners can be brought in – if more money
or talent is needed
 Only personal taxation – no business tax per se
 Control and management of business decisions
concentrated among partners
 Sharing of responsibility
 Partners may sell their interest to others – if other
partners agree
 Business affairs are confined to the partnership
Disadvantages
 Unlimited liability of each general partner
 Limited number of partnership – may suffer from lack
of funds and talent compared to a corporation
 Need for carefully written partnership agreement
 Kinds of Partnership
General Partnership
 Each partner has equal rights
 A general partner has the authority to act as an agent for the
partnership and can participate in the management and
operations of the business
 Each general partner is liable for all partnership debts and may
share in profits in equal proportions with all other partners
 Liabilities are shared equally among the partners for as long as
sufficient financial personal resources exist
 When one partner’s resources are exhausted, remaining parties
continue to be liable for the remaining debt.
 Each partner can bind the partnership to fulfill any business deal
made
 No separate business tax
Limited Partnership
 All partnerships are required by law to have at least one
general partner but it is possible for other partners to be
involved on a limited basis.
 Permits individuals to contribute money or ownership
capital without incurring the full legal liability of a general
partner.
 A limited partner’s liability is generally limited to the
amount that the individual has personally invested in the
business
 Limited partnership are relatively few in number
 Types of Partners
General Partner
 One who is active in the management of the partnership
 Typically has an investment in the business and is subject to
unlimited liability.
 If nothing is written, all partners are assumed to be general
partners
Limited Partner
 Has limited liability
 The agreement is in writing
 May not take an active role in managing the partnership
Senior Partner
 Typically an individual who has helped form the partnership or
who has seniority in the business
 Tend to receive major portion of the business profits
Junior Partner
 Typically younger and has not been in the business as long as
senior partner
 Tend to receive smaller portion in the business profits
 Rarely take an active role in managing the business affairs
Secret Partner
 Desires to take an active role in managing the partnership but is
not known to be a partner by the general public due to
involvement in other businesses
Silent Partner
 Known by the public and not active in managing the partnership
to add some recognition to a firm
 Have limited liability
Dormant Partner
 Not active in managing partnership and is not known by the
general public
 Retain limited liability
 May be source of additional investment capital for the business

Nominal Partner
 In name only
 Not active in the business and have no investment
 The Corporation
A special legal entity endowed by the law with the powers, rights,
liabilities and duties of a person
 Sometimes referred to as an “artificial person”
 Typically facilitates the accumulation of greater amount of capital
 Often are large businesses employing hundreds of thousands of
people and worth billions of Rupees.
 Although formed for profit-making, may be formed as nonprofit
corporations such as religious, government, labor and charitable
organizations.
 A corporation can own property, incur debts and can sue and be
sued for damages.
 The owners (stockholders) and managers do not own anything
directly. Rather corporation itself owns the assets of the
corporation
 Forming a Corporation
 Requires strict adherence to the laws
 One or more persons may join together to create a corporation
 Requires legal documentation
 When all legal formalities are met and proper fee for
incorporation is paid, a charter authorizing the applicants to do
business as corporation is issued
 A corporation need to maintain:
 Articles of incorporation: filed with the state and which set forth the
basic purpose of corporation and the means of financing it
 Bylaws: Specify such rules of operation as election of directors, duties of
officers and directors, voting procedure and dissolution procedures
 Stock certificates or shares: Detailing amounts of the owners’
investment
 Stock of the Corporation
 When corporations are formed shares of stock are sold to those
who are interested in the enterprise
 A share of STOCK: a piece of paper in prescribed legal form which
represents each person’s amount of ownership in the corporation
 Common Stock: carries the privilege of voting for the board of
directors that oversees the activities of the corporation
 Stockholders are willing to take risk and believe the value of their stock
will increase overtime
 Each holder has one vote per share of common stock
 Preferred Stock: usually nonvoting and has a preferred position in
receiving dividends and in redemption in the case of liquidation
 These stockholders tend to take less risk
 The prices of preferred fluctuates relatively less
 Preferred stockholders often invest for the dividends granted by the
corporation
 Cooperatives
Owned, operated and controlled by members, a cooperative is a
distinct form of the corporate form of business.
 Help members improve the prices they receive for the products
they produce
 Reduce the prices paid for the inputs necessary to grow those
products.
 Help members find markets, and/or improve the negotiating
position of members.
 Provide economic and/or operational benefits to member-owners,
and then return the profit to the member-owners based on each
member’s use of the cooperative.
 The user-member is the total emphasis for the cooperative. In
contrast, generating profit for the owners of the firm is the purpose
of the non-cooperative business enterprise.
Characteristics of food & agricultural cooperatives
Resemblances with other businesses
 They must follow sound business practices and may perform
similar functions.
 Have facilities to maintain, employees to hire, advertising to
develop, and so forth.
 There are bylaws, policies, and activities that must be performed to
carry out the business at hand.
 Cooperatives must generate a return (member benefits plus direct
financial returns) on the investment of their members, which
justifies continued membership in the cooperative.
Differences
 Member owned, member controlled
 Operation at cost
 Limited returns on capital
Member owned, member controlled
 They must be owned and control-led by the people who conduct
business with them.
 maintain their orientation toward servicing those who patronize
them.
 active patron-members—who are also owners of the business—
control the cooperative.
 one vote for each active patron-member regardless of how much
business that member transacts with the cooperative or how much
stock the individual member may have accumulated.
 Democratic control has gained almost universal acceptance as a
basic cooperative principle.
 Member control of cooperatives is executed through a board of
directors, which is selected in open elections from the ranks of
active members.
 The board takes on the responsibilities of sensing and representing
the best interests of all members, setting overall policy, hiring and
directing top management, and monitoring the cooperative’s
performance in achieving its objectives.
 However, some highly critical decisions involving such issues as
mergers or large investments may be taken directly to the
membership for a vote.
 This contrasts with a non-cooperative business, where the owners,
whose number of votes is determined individually by the amount
of stock they own, elect the directors. Consequently, most board
members are stockholders with relatively large ownership interests
Operation at cost
 a cooperative’s net income is distributed to individual members in
proportion to the volume of business that they have done with the
cooperative.
 A cooperative may choose to retain profits rather than pay them out
as patronage returns, but when it does, it normally must pay
corporate income tax just as any corporation must pay.
 The obligation to return profits to members is a primary factor that
separates cooperatives from other forms of business.
 Cooperatives may do some business with individuals who are not
members. In the case of such non-patron business, any excess of
income over and above the expenses generated specifically by that
transaction does not have to be returned to the customer.
 Instead, many cooperatives elect to treat this additional income as
regular profit, to pay taxes on it just as any business would, and to
use the profits to fund growth of the cooperative.
Limited returns on capital
 The basic purpose of cooperatives is to operate at cost in order to
benefit member-patrons directly in their own business
 Many state cooperative laws require that returns on invested capital
be limited.
 Limiting returns on member equity to a nominal amount helps to
ensure that members holding stock in the cooperative are not
tempted to view the cooperative as an investment in and of itself,
but rather as a service to their own business.
 In practice, most cooperatives pay no dividends on their stock;
therefore limiting returns is often a moot point.
Advantages of agricultural cooperatives
 Allow agricultural producers to “level the playing field” when they
deal with suppliers of inputs, or with those who purchase their farm
products.
 A cooperative can also provide a needed market where none
existed before —again to provide input supplies or to process and
market products produced by farmers.
Disadvantages of agricultural cooperatives
 Some cooperatives have gotten so large that the farmer member is
far removed from having any significant voice in the business.
 Board of directors is sometimes elected on the basis of popularity
rather than genuine ability to make policy decisions
 One vote one member requirement - Some feel that those with
larger business volume and/or the number of shares of stock should
have more say in the operation of the cooperative.