Business Entities 



Advantages and Disadvantages 



Elizabeth L. Bayne 



Every business owner should periodically review his or 

 her business and evaluate its legal and tax structure to be 

 certain it is appropriate for their unique business. The 

 considerations are many and may require professional 

 advice from an attorney and ac- 

 countant. 



Proprietorship 



The proprietorship is the most 

 common form of business a- 

 mong farm operators. It is not a 

 separate legal entity from the 

 owner/operator. A proprietor- 

 ship has one owner who reports 

 profits and losses on a farm or 

 business schedule on their per- 

 sonal tax return. Income tax is 

 paid on the net profit of the 

 business whether or not the 

 profits are withdrawn. No pay- 

 roll taxes are paid on the own- 

 er's draw. Bookkeeping for a 

 proprietorship is less complex 

 than for a partnership or corpo- 

 ration. The proprietorship is the 

 form of choice for the small-to- 

 mid-size business. 



Partnership 



A partnership is a relationship 

 existing between two or more 

 persons who join together to op- 

 erate a trade or business with 

 the intention of sharing profits 

 and losses. A partnership does 

 not have to be a written agree- 

 ment, but it is highly recom- 

 mended. The partnership is a 

 separate legal entity that files 

 its own tax return, but pays no 

 tax. All profits and losses are 

 allocated to the partners based 

 on the partnership agreement. 

 Each partner pays tax on their 

 share of the partnership profits 

 whether they were drawn out 

 for personal use or left in the 

 partnership for business use. 



The partnership form of business is an excellent means 

 for combining capital and management of individuals 

 into a fairly simple business form. It is also an excellent 

 way {jo bring the next generation into a farm business. 



The partnership form of busi- 

 ness can have both general 

 partners and limited partners. 

 This can be useful if a partner- 

 ship includes partners who, 

 for instance, contribute capital 

 but are not involved in the man- 

 agement or operation of the 

 business. 



Sawtelle's Tips 



Keep your customers coming back! Offer 

 an incentive to keep them coming to you. 

 A small business card can inexpensively 



be printed that is stamped or marked 

 each time a purchase of, for example, ten 

 dollars or more is made. When tlte card is 

 full it is redeemable for ten dollars worth 

 of merchandise. (Remember your cost is 

 less than this!) You can set a time limit 

 that is card is good for. I designed one of 

 these cards for a pick-your-own straw- 

 berry farm titled "Bloomin' 

 Strawberries." The card had twelve 

 strawberry blossoms on the front with the 

 directions on the back. (Of course the 

 farm logo, address, and phone number 

 were there too!) Each time a $10.-or-more 



purchase was made, one blossom was 



stamped with a strawberry. The card had 



to be redeemed within one year of the 



date of issue. Certain items can be 



excluded if you wish. Why not make one 



of your own? Customers love them! 



It's time to think about...yes...CUSTOMER 



SERVICE. You hear a lot about it lately. 



It ileserves attention. Consumers consider 



service, or lack of it to be one of the four 



most important influences in selecting a 



business from which to buy. Consider a 



training session on customer service for 



your employees. 



Remember the tool of multiple pricing 

 this spring! It works! $2.99 each or 3 for 

 $7.99. Volume is the name of the game. 

 Offer discounts on six-packs for those 

 who buy fifteen or twenty. Don't underes- 

 timate quantities people will buy. 



The legal and accounting re- 

 quirements of a partnership are 



greater than than those of a proprietorship's, but less 

 than a corporation's. In general, a partnership is simple to 

 form and liquidate and usually doesn't result in serious 

 tax consequences compared wdth a corporation. 



26 THE Plantsman 



Partnership can be set up in the 

 Partnership Agreement to ter- 

 minate upon death of a partner 

 or to continue after death in 

 the case of a partnership with 

 more than two partners. A two- 

 partnerpartnershipterminates 

 upon death of a partner. 



Corporation 



Some businesses are logical 

 candidates to operate in the 

 corpoi^ate form because of po- 

 tential liability issues. These 

 might include trucking opera- 

 tionsor food service businesses. 



Corporations are good vehicles 

 for ease of transfer of owner- 

 ship interests. This is typically 

 done through sale or gifting of 

 corporate stock. Shares of stock 

 as units of ownership provide a 

 good way to transfer a business 

 to the next generation in an 

 organized manner. The sale of 

 stock in a corporation will al- 

 ways result in capital gain 

 income, which is a significant 

 advantage as it can be sold on 

 the installment method. If the 

 business were a proprietorship 

 or partnership, depreciable as- 

 sets could not be reported as an 

 installment sale. 



The corporate form can also be a 

 tax benefit to a profitable business. The tax rates on 

 income up to $75,000 are the same or lower than the 

 personal tax rates. Also social security tax is due on only 

 wages paid by the corporation and not on all profits of the 



