Choosing a Legal Structure

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Choosing a Legal Structure
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Sole Proprietorship

• Sole proprietorship individual who owns,
  manages, assumes all the risk, and derives all
  the profit from a business.
• 80 of farming and ranching operations are sole
  proprietorships

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Sole Proprietorship

• ADVANTAGES
• Easy to create
• Most popular legal structure
• All profits go to owner
• Owner makes all decisions
• DISADVANTAGES
• Owner personally responsible for contracts and
  torts
• Access to capital limited
• Terminates at death

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Partnership

• Partnership voluntary association of two or more
  persons to carry on, as co-owners, a business for
  profit.
• A written partnership agreement sets out in
  detail the rights and responsibilities of each
  partner.

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Partnership

• ADVANTAGES
• Easy to create
• Partnership not taxed, only partners income is
  taxed
• Easy to dissolve
• DISADVANTAGES
• Succeeds only if each partner has faith and trust
  in the other
• Each partner is, individually, responsible for
  all debts owed by the partnership
• Business ends with death, bankruptcy, or
  incapacity of a partner

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Types of Partnerships

• LIMITED LIABILITY PARTNERSHIP
• Limited partnership created pursuant to a statute
  and includes general and limited partners.
• GENERAL PARTNERS
• Invest capital, manage the business, and are
  personally liable for partnership debts
• LIMITED PARTNERS
• Invest capital but do not participate in
  management of the partnership and are not
  personally liable for partnership debts beyond
  their capital contribution

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Corporation

• Corporation legal entity separate and distinct
  from the shareholders who own it, from the
  individuals who manage it, or from its employees.
• A corporation is a separate legal person apart
  from the shareholders, has most of the legal
  rights and duties of a person.
• It can make contracts, transact business, hold
  property, sue, and be sued.
• The concept of legal separateness sets the
  corporation apart from the partnership and sole
  proprietorship.
• Most dominate form of business in U.S.

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Corporation

• ADVANTAGES
• Limited liability
• Continuity of management
• Specialization of management decision making
• Easy to transfer ownership
• DISADVANTAGES
• More difficult to create
• More difficult to dissolve
• Increased records
• Double taxed

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Types of Corporations

• FOR PROFIT CORPORATION
• Conduct business and distribute profit to
  shareholders in the form of dividends
• NONPROFIT CORPORATION
• Formed for a charitable, educational, religious,
  or scientific purpose. May make a profit but
  cannot distribute to members, directors, or
  officers.

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Corporations

• PUBLICLY HELD CORPORATION
• Corporation that has many shareholders and stock
  is traded on the stock exchange
• CLOSELY HELD CORPORATION
• Shares owned by a few shareholders and are not
  traded on the exchange (family)

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Corporations

• C-CORPORATION
• TAXPAYER
• Double taxed
• S-CORPORATION
• NOT A TAXPAYER
• Taxed like a partnership
• Shareholders pay taxes on income
• Must file Sub-S with IRS

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Cooperatives

• Cooperative business entity that distributes its
  income to its members in accordance with a
  members use of the coop
• Primary function is the allocation of economic
  benefits to member patrons on the basis of their
  use
• Coops are controlled by their members who elect a
  board of directors who hire a manager and
  employees

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Types of Cooperatives

• MARKETING COOPS
• Functions as purchaser of its members products at
  the prevailing rate or as a pooling agency. Any
  net earnings are allocated based on patrons
  input. Patronage refund.
• SUPPLY COOPS
• Purchases products needed by its members such as
  machinery parts, fertilizer, seed, or gas at
  wholesale prices. Theses products are sold to
  members. Any net earnings are distributed to
  members based on usage.

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