Types of Agribiusiness

Types of agribusiness
Lecture 2
Introduction
• An agribusiness may be a firm with billions of dollars of sales that employs
thousands of people, or it may be as small as an individual who is a part-time
seed corn salesperson. Agribusinesses may engage in a variety of activities that
are related to the production, processing, marketing, and distribution of food and
fiber products.
• Though the one-person or one-family agribusiness is not uncommon, most of the

actual business volume in agribusiness is conducted by enterprises that employ
hundreds or even thousands of people.
Introduction
• Every agribusiness is owned by someone, and it is the circumstances
of ownership that give an organization its specific legal form. There
are five basic business forms:
• sole proprietorship,
• partnership,
• corporation,
• limited liability company (LLC), and
• cooperative.
Factors influencing choice of business form
1. What type of business is it, where will it be conducted, and what are
the 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 to secure additional capital for the agribusiness?
5. What tax liabilities will be incurred and what tax options are
available?
The sole proprietorship
• The oldest and simplest form of business organization is the sole or individual
proprietorship, an organization owned and controlled by one person or family. It
is the most popular business organization. All profits and losses, all liability to
creditors and liability from other business activities are vested in the proprietor.
• The legal requirements necessary to organize as a sole proprietorship are
minimal. About all that is required is an individual’s desire to start a business and
the purchase of a license, if one is required for that particular kind of business
• The proprietorship gives the individual owner complete control over the
business, subject only to government regulations that are applicable to all
businesses of that particular type. The owner exerts complete control over plans,
programs, policies, and other management decisions.
The sole proprietorship
• Perhaps the most important disadvantage of the proprietorship is the owner’s
personal liability for all debts and liabilities of the business, which can extend
even to the owner’s personal estate. In a proprietorship, there is no separation
between business assets and personal assets. Consequently, this form of business
organization is characterized by what is called unlimited liability.
• The owner’s liability does not stop with business assets; it also extends to
personal assets. Another important disadvantage relates to the generally limited
amount of capital funds that one person can contribute. Lenders are also
somewhat reluctant to lend to an individual owner unless the owner’s personal
equity can guarantee the loan. Proprietorships often find that they are starved for
capital, and this serious disadvantage may do more than stunt growth.
Partnerships
• A partnership is the association of two or more people as owners of a business.
There is no limit to the number of people who may join a partnership. Apart from
the fact that a partnership involves more than one person, it is similar to the
proprietorship. Partnerships can be based upon written or oral agreements, or on
formal contracts between the parties involved.
• There are basically two kinds of partnership:

• general partnerships
• limited partnerships.
General partnerships
• In a general partnership , each individual partner — regardless of the percentage
of capital contributed — has equal rights and liabilities, unless stated otherwise in
a partnership agreement.
• A general partner has the authority to act as an agent for the partnership, and
normally participates in the management and operation of the business. Each
general partner is liable for all partnership debts, and may share in profits, in
equal proportion with all other partners. If the partnership struggles and has
financial problems, all liabilities are shared equally among the partners for as long
as sufficient personal resources exist.
General partnerships
• when one partner’s resources are exhausted, remaining parties continue to be
liable for the remaining debt. General partners may contract among themselves
to delegate certain responsibilities to each other, or to divide business revenues
or costs in some special manner (e.g., according to funds invested or job
responsibility).
• Each general partner can bind the partnership to fulfill any business deal made.
While the partnership is usually treated as a separate business for the purposes
of accounting, it is not legally regarded as an entity in itself, but as a group of
individuals or entities.
Limited partnership
• All partnerships are required by law to have at least one general partner who is
responsible for the operation and activities of the business, but it is possible for
other partners to be involved in the business on a limited basis.
• A limited partnership permits individuals to contribute money or other

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.
Partnerships
• Partnerships are just about as easy to start as proprietorships. They require very
little expense. A partnership can generally bring together many more resources
than a proprietorship because of the increase in the number of people involved.
These added resources are not only financial in nature; the business also benefits
from the variety of unique talents that many different individuals can bring to it.
• The biggest disadvantage of the partnership is

• The unlimited liability of each general partner.
• Another disadvantage is the lack of continuity and stability of a partnership.
• When a partner leaves the partnership as a result of withdrawal, death, or incapacity, a new
partnership must be formed. The old partner’s share must be liquidated, and this can often
place a severe burden on the partnership’s capital position.
The corporation
• A corporation is a special legal entity endowed by law with the powers, rights,
liabilities, and duties of a person (in fact a corporation is sometimes referred to as
an “artificial” person). The corporate form of business organization typically
facilitates the accumulation of greater amounts of capital when compared to
proprietorships and partnerships.
• Most corporations are formed for profit-making purposes; however, there are
thousands of nonprofit corporations in existence. These nonprofit corporations
embrace many areas of activity, including those of religious, governmental, labor,
and charitable organizations.
Stock of the corporation
• When corporations are formed, shares of stock are sold to those who are
interested in investing and risking their money in the enterprise. A share of stock
is a piece of paper, in prescribed legal form, which represents each person’s
amount of ownership in the corporation.
• Common stock normally carries the privilege of voting for the board of directors
that oversees the activities of the corporation. Preferred stock differs from
common stock in that it is usually nonvoting, and has a preferred position in
receiving dividends and in redemption in the case of liquidation. Thus, voting
rights are exchanged for lower risk on the investment of capital in the
corporation.
Stock of the corporation
• Thus, there are two specific types of stockholders in a for-profit corporation.
Common stockholders are willing to take risk. They invest in the corporation
typically because they believe the value of their stock will increase over time. At
the annual meeting, common stockholders are the ones that vote for the board
of directors of the corporation. Each common stockholder has one vote per share
of common stock.
• In contrast, preferred stockholders tend to take less risk on their investment in

the corporation. The price of preferred stock typically fluctuates less than
common stock in publicly traded corporations. Also, preferred stockholders often
invest for the dividends granted by the corporation.
The corporation
• The primary advantage of the corporate form of business organization is that the
stockholders (owners) are not personally liable for the debts of the organization,
and in most cases are not responsible for the liability that occurs through the
corporation’s business activities. The assets of the corporation are all that are at
risk in settling most claims.
• Transfer of ownership is also easier in a corporation than in other business forms.

Usually, a stockholder can sell shares of stock to anyone for any price that the
buyer is willing to pay. Because corporations’ ownership rights are traded freely, it
is relatively easy for them to raise large amounts of equity capital. Finally, the
corporation is perpetual in nature. Death, withdrawal, or retirement of its
shareholders has little effect on the life of the corporation
Cooperatives
• Owned, operated and controlled by members, a cooperative is a distinct form of
the corporate form of business. Cooperatives are committed to helping members
improve the prices they receive for the products they produce and/or reduce the
prices paid for the inputs necessary to grow those products.
• Cooperatives also exist to help members find markets, and/or improve the
negotiating position of members. Cooperatives 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.
Cooperatives
• Three specific features delineate cooperatives from non-cooperative
businesses:
• Member owned, member controlled (A fundamental principle undergirding
cooperatives is that they must be owned and controlled by the people who
conduct business with them.)
• Operation at cost (In most cases, a cooperative’s net income is distributed to
individual members in proportion to the volume of business that they have
done with the cooperative.)
• Limited returns on capital (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.)
Strategic alliances
• Many agribusinesses have formed strategic alliances and related cooperative
relationships with other firms. Strategic alliances are cooperative agreements
between firms that go beyond normal firm-to-firm dealings, but fall short of
being a merger or full partnership and ownership. Such alliances can include joint
research efforts, technology-sharing agreements, joint use of production
facilities, agreements to market each other’s products and the like.
• There are several advantages to firms that form strategic alliances.

• First, firms can collaborate on technology or the development of new products.
• Second, firms can improve supply chain efficiency by working together.
• Third, firms can gain economies of scale in production and/or marketing.

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Types of agribusiness

• Though the one-person or one-family agribusiness is not uncommon, most of the

• limited liability company (LLC), and

• There are basically two kinds of partnership:

• A limited partnership permits individuals to contribute money or other

• The biggest disadvantage of the partnership is

• In contrast, preferred stockholders tend to take less risk on their investment in

• Transfer of ownership is also easier in a corporation than in other business forms.

• There are several advantages to firms that form strategic alliances.

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