Chapter 4:

The Organization of an Agribusiness

Dr. Hammad Badar (Assistant Professor IBMS)

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
Dr. Hammad Badar (Assistant Professor
IBMS)

Forms of Business
Organizations
Every agribusiness is owned by someone
The circumstances of ownership give
organization its specific legal form.
Five basic business forms:
1.
2.
3.
4.
5.

an

Sole Proprietorship
Partnership
Corporation
Limited Liability Company (LLC)
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
Dr. Hammad Badar (Assistant Professor IBMS)

Factors Influencing Choice of

Business
Form
1. What type of business is it, where will
2.
3.
4.
5.
6.
7.
8.

it be
conducted, and what are owners objectives and
philosophies for the agribusiness?
How much capital is available for the firms start-up?
How much capital is needed to support the
agribusiness?
How easy is it secure additional capital for the
agribusiness?
What tax liabilities will be incurred and what tax
options are available?
How much personal involvement in the management
and control of the agribusiness do the owners desire?
How important are the factors of stability, continuity,
and transfer of ownership to the firms owners?
How desirable is it to keep the affairs of the
agribusiness private and carefully guard any public
Dr. Hammad Badar (Assistant Professor
IBMS)

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

individuals 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

Dr. Hammad Badar (Assistant Professor IBMS)

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
Dr. Hammad Badar (Assistant Professor IBMS)

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

Dr. Hammad Badar (Assistant Professor IBMS)

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,

Dr. Hammad Badar (Assistant Professor IBMS)

 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
Dr. Hammad Badar (Assistant Professor IBMS)

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 partners resources are exhausted,
remaining parties continue to be liable for the
remaining debt.
Each partner can bind the partnership to fulfill any
Dr. Hammad Badar (Assistant Professor IBMS)

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 partners liability is generally limited
to the amount that the individual has personally
invested in the business
Limited partnership are relatively few in number

Dr. Hammad Badar (Assistant Professor IBMS)

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
Dr. Hammad Badar (Assistant Professor IBMS)

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
Dr. Hammad Badar (Assistant Professor IBMS)

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

Dr. Hammad Badar (Assistant Professor IBMS)

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
Dr. Hammad Badar (Assistant Professor IBMS)

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
Dr. Hammad Badar (Assistant Professor IBMS)
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 persons 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

Dr. Hammad Badar (Assistant Professor IBMS)
The prices of preferred
fluctuates relatively less

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
members 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.
Dr. Hammad Badar (Assistant Professor IBMS)

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
Dr. Hammad Badar (Assistant Professor IBMS)

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-memberswho 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.

Dr. Hammad Badar (Assistant Professor IBMS)

 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 cooperatives
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
Dr. Hammad Badar (Assistant Professor IBMS)

Operation at cost
a cooperatives 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.
Dr. Hammad Badar (Assistant Professor IBMS)

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.

Dr. Hammad Badar (Assistant Professor IBMS)

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.
Dr. Hammad Badar (Assistant Professor IBMS)