AGE 4211 UNIT 3

UNIT THREE: THE ORGANISATION OF AN AGRIBUSINESS

Part I: Factors influencing Choice of the Business Form

Part II: Sole proprietorship
Part III: Partnerships
Part IV: Corporations
Part V: Co-operatives
Part VII: Strategic Alliances: Out grower Schemes, Joint ventures, Consortiums and Collective
Action.

3.1 Background of business organization

Originally, producers were engaged in subsistence production. However, after the period of
industrialization, specialization came into existence, such that one had to produce enough for
him/herself and sell the excess. There was a risk in undertaking some economic/business
ventures and those who took the risk were paid a premium or profit. Consequently the concept
of entrepreneurship and business organization evolved to the extent that currently the business
organization has become the most important organization. Government, which was once
important, depends on the business to exist through taxes. Most economies have shifted from
socialist/command to capitalist economies, implying the private sector has taken an upper
hand in driving the economy and development of communities through employment creation,
income generation and poverty alleviation.

A business organization is a group of people(shareholders, managers, workers)forming a structure

with rules and authority; pursuing predetermined objectives and using economic resources( land,
labor, capital, entrepreneurship, time, information)to satisfy economic wants for which
people are prepared to sacrifice their resources. Business organizations exist or are organized
mainly for economic reasons. For any organization to continue in business it must achieve its goals
and the most apparent and important goal is profit. This is because profit is the only measure of the
validity of business decisions and any business that does not make profit in the long run cannot
survive and grow. Notwithstanding the importance of the profit objective, it should be noted that
the primary objective of a business is to create a customer through whom profits are made, for
without a customer there are no sales.

An agribusiness can represent a firm with billions of dollars in sales that employs thousands of
people, or it may be as small as an individual who is a part-time farmer. Agribusinesses may
engage in a variety of activities that are related to the production, processing and marketing of
food and fiber products. Every agribusiness is owned by someone, and it is the circumstances of
ownership that give an organization its legal form. There are five basic business forms:
 Single (Sole) Proprietorship,
 Partnership,

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 Corporation, and
 Cooperative

In addition to the four business forms, strategic alliances are also being used by agribusiness as a
form of business organization. Strategic alliances can take a variety of forms, and represent an
important way that food and agribusiness firms can work together today.

The many advantages and disadvantages of each of the four organizational forms must be
weighed carefully when attempting to choose the proper one for a specific firm; because each
form tends to fit some situations better than others.

3.2 Factors Influencing the Choice of Business Form

Each form of business organization has its own individual characteristics. Owners and managers
must choose the most appropriate form for their unique circumstances. An agribusiness may
want to change its legal form of organization as it grows or as economic and other conditions
change.
When deciding which form of organization is best, an owner or owners must answer several
important questions. A careful evaluation of these factors will allow the selection of the most
appropriate form of business organization in each case.

1. What type of business is it, where will it be conducted, and what are the owners’
objectives and philosophies for the business?
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?
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 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 liabilities are owners willing to assume?
10. How much will this form of organization cost? and
11. How easy is this form of agribusiness to organize?

3.3 Forms of Business Organizations

 Sole proprietorship - organization that is owned by one person. Most common form of
business ownership

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 +.39396
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 Partnership - two or more people make a legal agreement to become co-owners of business.
 Corporation - A legal entity with authority to act that has liability separate from that of its
owners
 Limited Liability Companies - A legal entity that has limited liability.
 Cooperatives - A legal entity that is owned, operated and controlled by members.
 Strategic Alliances - These are cooperative agreements between two firms that go beyond
firm-to-firm dealings but fall short of merger or full partnership and ownership.

3.3.1 Sole Proprietorship

 Major type of legal structure in the agricultural industry

 Simplest and oldest type of business organizational form.
 Are owned and controlled by one person or family. The owner is in complete control.
 Tend to be small, although there might be exceptions. When the business reaches a certain
size, other business organizational forms usually become more attractive for a variety of
reasons.

Advantages
 Ease of formation: least complicated as there are few legal and tax requirements.
 Easy to dissolve: by sale or inheritance of assets of the business organization;
 Activities and flexibility are unlimited except by personal wishes of proprietor;
 Taxation: income is taxed as proprietor’s personal income thus it is free from business
tax;
 Confidentiality: Information on operations and profits are known by proprietor and
generally not known by the public. Legally they are not required to audit their accounts
nor publicly disclose their records;
 Control of the business rests with one individual; therefore it is relatively easy to make
decisions and there is no scope for disagreements between owners;
 Retention of profit: all profits belong to the owner, which is a strong incentive for the sole
proprietor to succeed; and
 Personal relationships: the smallness of the business facilitates a sole proprietor’s
maintenance of a closer and more personal contact with both his/her employees and
customers. He/she is known personally to the customers and is aware of their private
problems. So there often exists intimacy between management, workers and customers,
which is not easy to foster in a large concern. This personal knowledge of the customers
and their financial standing makes it easy for the proprietor to meet their wishes and be
prudent in granting of credit.

Disadvantages

 Ease of raising funds is limited to owner’s personal resources or ability to borrow.

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 Unlimited liability for personal assets: the owner’s personal liability for all debts and
liabilities of the business extends even to the owner’s personal estate;
 Taxation: While freedom from business taxes is generally an advantage, it may be a
disadvantage. This is because business profit in a proprietorship is considered as personal
income to the owner, whereby a high business profit may throw the owner into a higher
tax bracket. This may not be the case for example in a corporation that pays corporate
tax. This is especially disadvantageous if extensive funds are needed for the growth and
expansion of the business.
 Limited management skills: potential benefits of specialization in business management
are usually inaccessible to the typical small scale proprietorship. Proprietorships may
experience difficulty in employing highly skilled employees because the majority of
highly trained and motivated employees would want to participate financially in the
business for which they work and they may feel uneasy about the fact that their future
depends on the health and viability of a single person. Hence, as the business grows the
owner may find herself wearing too many hats with the end result that the business
suffers;
 Status: there could be possible status problems perceived by third parties; and
 Lacks stability and continuity because it depends so heavily on one person. Death or
disability of the owner in effect ends the business.

3.3.2 Partnerships

A Partnership is a business formed for profits by two or more co-owners, where the rights and
duties of the partnership are regulated by laws of the state and bounded by a legal agreement
entered into by the co-owners. Each partner customarily contributes economic assets to the
enterprise in form of money, skill and labor. The legalities required to set it up a partnership are
minimal, however it is advisable to have a formal partnership agreement drawn up by a solicitor
(if possible one who is familiar with problems of partnerships). Such an agreement should
specify the following:
 Details of the partners, and the name and nature of the business they carry on;
 Duration of the partnership, date of commencement and any anticipated termination date;
 Capital contributed by partners and agreement on interest payable to partners for money
introduced;
 Calculation and division of profits: this needs to be specified particularly where partners
contribute unequally;
 Rights and obligations of individual partners such as management and control of the
business. This is most needed where partners put in unequal amounts of time in the
partnership. Where there is a sleeping partner, management partners may need to guard
against future interference and provide for their own salaries before profits are divided;
 Changes brought about by death, retirement and joining of new partners;
 How the ending can be dealt with if the partnership is dissolved; and
 Participation of family members as employees of the business

Types of Partnerships

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There are basically two types of partnerships. These include general partnerships and limited
liability partnerships.

General Partnerships

This is the most common type of partnership. Each individual partner, regardless of the
percentage of capital contributed, has rights and liabilities. 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 partner is liable for all partnership debts, and may share profits in equal
proportion with all partners. If misfortune befalls the partnership, all liabilities are shared equally
among partners for as long as sufficient personal resources exist. However, in the case where 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 according to a chosen criterion, for instance the
funds invested or job responsibility. Each general partner may bind the partnership to fulfill any
business deal he/she makes.

Limited Partnerships

A limited partnership is a partnership consisting of some partners whose liability is limited to the
amount of capital contributed by each. The personal property of a limited partner is not liable for
the firm's debts.

He cannot take part in the management of the firm. His retirement, insolvency, lunacy or death
does not cause dissolution of the firm. There is at least one partner having unlimited liability. A
limited partnership must be registered.

The chief characteristics of a limited partnership are as follows:

 There must be at least one partner with unlimited liability. The liability of the remaining
partners is limited to their capitals in the firm. Thus, a limited partnership consists of two
types of partners, general partner and limited partner.
 The limited partner cannot take part in the management of the firm. He has no implied
authority to represent and bind the firm. However, he is allowed to inspect the books of
accounts of the firm.
 The limited or special partner cannot assign his share to an outsider without the consent
of the general partner.
 The limited partner cannot withdraw any part of his capital.

Limited partnership offers the following benefits:

 It enables people to invest in a business without assuming unlimited risk and without
devoting much time and attention in management of business.

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 It permits the mobilisation of larger financial resources from cautious and conservative
investors.
 It provides an opportunity to able and experienced persons to manage the business
without any interference from other partners. Complete control and personal supervision
help to ensure prompt decisions and uniform actions.
 It is more stable than general partnership because it is not dissolved by the insolvency,
retirement, incapacity or death of limited partner.

Limited partnership suffers from the following drawbacks:

 The limited partners are deprived of the right to manage. They remain at the mercy of the
general partner.
 The general partner may misuse his power to exploit the limited partners.
 A limited partnership enjoys little credit standing as the liability of some partners is
limited. It has to be registered.

Advantages of Partnerships

 Easy and inexpensive to form, although it’s advisable that a good solicitor is engaged to
draw up the partnership agreement;
 Confidentiality: The business affairs of a partnership are confined to the partnership and
the partnership accounts are legally not required to be audited. This element of secrecy is
one of the prime reasons why many people choose to do business as partners;
 Partners are a team: where each team member shares in the responsibility and profits. As
a result partners are more likely to be motivated than employees of sole proprietorship or
corporation;
 Taxation: partners as individuals pay taxes only on the income generated from their share
of profits, hence tax expense is minimized through the distribution of profits;
 Control or management of business decisions and policies: is concentrated among the
partners. The partnership combines the wealth, knowledge, skills and talents of different
partners and generally partners split the responsibilities of the business. That is if one
heads the sales section another will head the operations and this can be done either on a
formal or informal basis;
 Transfer of ownership: partners may sell their interest in the business to others if the
remaining partners agree;
 Graduation to a limited company: A partnership can be relatively easily transferred to a
limited company a later stage compared to a sole proprietorship.

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Disadvantages of Partnership

 Liability: partners are personally liable for the debts of the partners even if caused by
actions of other partners;
 Continuity and stability: From strictly a legal point of view whenever a partner
leaves, the partnership is dissolved and a new one must be formed. However, if the
means for establishing the value of the partner’s share and the process for transfer and
acceptance of new partners has been firmly established in the written partnership
agreement, the transition can be reasonably smooth;
 Conflicts: disputes between partners or former partners can be very damaging and
there is high degree of mutual trust required;
 Control and management of partnership are vested equally in the general partners,
therefore a serious mistake by one partner can affect all the partners seriously;
 Activities and flexibility: are limited by the partnership agreement and partner wishes;
 Ease of raising funds is limited to partner’s resources and ability to borrow; and
 Transfer of ownership: is by mutual agreement of partners. Therefore sales of
partnership interest may be difficult making the investment illiquid. This is the case
for example when remaining partners are unwilling to buy the shares of the business
that belongs to a partner who retires or wants to relocate to another city. To avoid
such difficulties, the partnership agreement should include some procedure for buying
out a partner.

3.3.3 Corporations

A corporation is defined as a legal entity or structure created under the authority of a state's laws,
consisting of a person or group of persons who become shareholders. The entity's existence is
considered separate and distinct from that of its members, which means that corporations are
capable of owning property, employing people, making contracts, suing and being sued. The number of
shares issued is unlimited. The shares are issued to each stockholder according to the level of investment.

Corporations are basically in two forms:

1. Private limited company is owned by at least two-individuals/ group of people not more than fifty
(50). The company comprises a stipulated number of shares, which can either be bought or sold.
2. Public limited company –similar to the above, but it can invite the public to buy its shares and can
hence list its shares on the stock exchange. For example Zambeef, Zambia National Breweries
and Zambia Sugar. It has a minimum authorized share capital. In case it winds up and its assets
are not sufficient to cover its liabilities, the liability of the shareholders is limited to the amount
left unpaid of their shares

Advantages

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 Legal Entity: treated as a legal person with all rights, duties and responsibilities of a legal person
Therefore, the shareholders are not personally liable for the debts of the organization. Liability of
owners is limited to the amount invested in corporation stock;
 Continuity: is indefinite, it can operate through the lives of several generations of investors.
Death, withdrawal, or retirement of its shareholders has little effect on the life of the corporation;
 Transferability of ownership and interest: is easier and usually a stockholder can sell shares of
stock to any one for any price that the buyer is willing to pay. An individual owner may also
transfer individual equity to heirs or to others much more easily;
 Specialized management: typically corporations are able to recruit more skilled, knowledgeable
and talented managers than proprietorships and partnerships. This is because they pay bigger
salaries and are large enough to offer considerable opportunity for advancement;
 Ease of raising fund: is relatively easy through widening of ownership thereby issuing of shares
and borrowing is based on corporation’s credit capacity; and
 Status: possibly higher perceived status.

Disadvantages

 Double taxation: the company pays tax on the profit it has earned and thereafter stockholders pay
income tax on the dividends that they receive;
 High establishment and administration costs: it is more time consuming and expensive to set up.
The costs of taxes, documentation (which must be extremely comprehensive), and operation of
the corporate can be significantly higher than the costs for other forms of organization. For
example the auditing and accounting costs are high; for this reason the corporate form should be
evaluated carefully before it is adopted by an agribusiness owner;
 Lack of secrecy: because reports must be made to stockholders and the public; and they may be
required to disclose whenever a stock offering is made to prospective purchasers. Especially
public limited companies are more available for public scrutiny.
 Decision making may be relatively slower than in sole proprietorship or partnership because of
the bureaucracy involved.

3.3.4 Co-operatives

 A cooperative can be defined as an autonomous association of persons united voluntarily to

meet their common economic, social and cultural needs and aspirations through a jointly
owned and democratically controlled enterprise. It is a form of collective action
 There are seven cooperative principles adopted by the International Cooperative Alliance
(ICA) in 1995 that countries world over have agreed to uphold.
 Co-operatives principles are guidelines by which co-operatives put their values into practice
and form the basis for conducting co-operative business. They include:

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i. Voluntary and Open Membership: Co-operatives are voluntary organizations, open to

all persons able to use their services and willing to accept the responsibilities of
membership, without gender, social, racial, political or religious discrimination.

ii. Democratic Member Control: Co-operatives are democratic organizations controlled by

their members, who actively participate in setting their policies and making decisions.
Men and women serving as elected representatives are accountable to the membership.
Members in a cooperative have equal voting rights regardless of the number of paid up
shares. To maintain democracy it is advisable that a uniform number of shares are open
for purchase to all members in a co-operative.

iii. Member Economic Participation: members contribute equitably to and democratically

control the capital of their co-operative. At least part of that capital is usually the
common property of the co-operative. Members usually receive limited compensation, if
any, on capital subscribed as a condition of membership. Members allocate surplus for
any or all of the following purposes: developing their co-operative, setting up reserves,
patronage benefits in proportion to their transactions with the co-operative and supporting
other activities approved by the general meeting.

iv. Autonomy and Independence: Co-operatives are autonomous, self-help, organizations

controlled by their members. If they enter into agreements with other organizations,
including governments, or raise capital from external sources, they do so on terms that
ensure democratic control by their members and maintain their co-operative autonomy.
However, autonomy does not mean the co-operative is above the law, as explained above
they are subject to government laws and regulations as provided in the Co-operatives Act
or any other legislation.

v. Education, Training and Information: Co-operatives provide education and training

for their members, elected representatives, managers and employees so they can
contribute effectively to the development of their co-operatives. They inform the public,
particularly young people and opinion leaders about the importance and benefits of co-
operation.

vi. Cooperation among Cooperatives: Co-operatives serve their members most effectively
and strengthen the co-operative movement by working together through local, national,
regional and international structures.

vii. Concern for the Community: Co-operatives work for the sustainable development of
their communities through policies approved by their members. They should not be
involved in activities that harm the welfare of the community and are prohibited by law.

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Role of Cooperatives

 Cooperatives are an important cornerstone in the socio economic development of the

country. They are viewed as a strategic means for enhancing income generation,
employment creation and community development, which will in leads to alleviating
hunger, poverty, unemployment and income disparities in the country;
 Cooperatives in Zambia act as a vehicle for the implementation of government rural
development policies and strategies. This includes agricultural development,
empowerment of small-scale farmers, agricultural credit delivery systems, input supply
and crop marketing and to some extent post-harvest management. They appear well
suited to economic, social and institutional needs of development in the rural economy;
 Cooperatives can provide the mechanism to organize and mobilize people for self-help
action in providing the services they require as a farming and rural community.

Objectives of Agricultural Cooperatives

The general purpose for which the society is established is to promote agricultural activities of its
members by: -
 Raising funds by issuing shares, receiving deposits, overdrafts, organizing and managing
loans and credit schemes to promote agricultural production amongst its members;
 Engaging in agricultural farming activities of any kind: livestock, fish farming and crop
production;
 Sorting, grading, storing, transporting and selling agricultural produce on behalf of its
members;
 Processing or handling any agricultural products on behalf of its members;
 Dealing in or selling agricultural requisites and consumer goods as long as this is in the
interest of members;
 Provision of agricultural related training, extension and;
 Hiring out services to agricultural related institutions/ individuals for the benefit of its
members.

Advantages of Cooperatives

 Continuity: the cooperative’s lifespan is dependent on a lot of people, thus if one member
dies or pulls away the cooperative will still survive;
 It is easier to raise capital;
 Cooperatives are better positioned to reduce the poverty levels; and meet the economic,
social and institutional needs of development in the rural economy.

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 Co-operatives benefit from larger business volume, operating efficiencies and professional
management of Apex organizations. Economies of scale enjoyed by co-operatives enable
farmers to purchase supplies at volume discounts, and receive profits from value-added
processing; and credit unions pool their resources together and are able to transfer surplus
savings to credit unions in lower income areas.
 Substantial tax advantages
 Co-operatives teach people how to resolve problems democratically and empower
individuals by giving them chance to participate in decisions, which impact them.
 Co-operatives teach new skills, from adult literacy to business operations.

Disadvantages of Cooperatives

 Cooperation among members may be difficult to achieve

 Slow in organizing and getting started
 Members fail to recognize their ownership responsibilities (free rider mentality)
 In some countries cooperatives are dependent on the government, hence are prone to abuse
and;
 Cooperatives may not afford hiring skilled personnel since their capital base is low.

3.3.5 Strategic Alliances

 A strategic alliance is an agreement between two or more parties to pursue a set of agreed
upon objectives while remaining independent organizations.

 Partners may provide the strategic alliance with resources such as products, distribution
channels, manufacturing capability, project funding, capital equipment, knowledge,
expertise, or intellectual property.

 The alliance is a cooperation or collaboration which aims for a synergy where each partner
hopes that the benefits from the alliance will be greater than those from individual efforts

Advantages of Strategic Alliances

 Firms benefit from joint collaboration on technology and product development.

 Learning from partners and developing competencies that may be more widely exploited
elsewhere.
 Firms can improve supply chain efficiency by working together.
 Smaller firms can fill the voids in their technical and manufacturing expertise.
 Firms can acquire or improve market access.
 Allows each partner to concentrate on their competitive advantage.

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 Allies can direct their combined energies into building a competitive advantage and defeating
a mutual rival.
 Reduces political risk while entering into a new market.

Disadvantages of Strategic Alliances

 Establishing effective coordination between independent companies is both challenging and

time consuming.
 There may be language and cultural barriers to overcome, as well as attitudes of suspicion
and mistrust.
 A firm may become too dependent on another firm’s expertise and capabilities and fail to
develop its own internal capabilities.
 Risk of losing control over proprietary information, especially regarding complex
transactions requiring extensive coordination and intensive information sharing.

Some examples of Strategic Alliances are Out -grower Schemes, Joint ventures, Consortiums,
and Collective Action.

a) Contract Agriculture/ Out grower schemes

 Contract farming refers to a system where a retailer/wholesaler, central processing or
exporting unit purchases the harvests of independent farmers; the terms of purchase are
arranged in advance through contracts.
 The terms of the contract differ and usually stipulate how much produce the contractor
will buy and what price they will pay for it.
 Contracting is essentially a way of distributing risk between producer and contractor;
where the former takes the risk of production and the latter the risk of marketing.
 The contractor/processor provides an assured market outlet and access to critical
productive resources (credit, technical and related assistance and bulk commodity
collection facilities) and in return they are assured of a reliable supply of quality inputs.
 Most governments have recognized the importance of out-grower schemes as a means of
attracting investment, opening up new markets, providing adequate support services and
helping to make agriculture competitive.

b) Joint Ventures
 A Joint venture is defined as a contract for conducting a joint business venture by which a
group of two or more firms provide a whole range of contributions, not involving the loss
of their identity and individuality.
 Often joint ventures contract would include an agreement between two or more firms to
contribute resources for a joint business venture.

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These resources might include: raw materials, capital and technology, knowledge of the
market, sales and distribution channels, staffing financing or products.
c) Consortium
 A consortium can be defined as an alliance of business groups comprising legal entities
whose aim is to jointly conduct a business activity.
 Significant characteristics of a consortium include:
- Products which member firms contribute to the consortium are normally mutually
complementary and not competing against each other. For instance in addition to
sharing the same distribution channel, they may enjoy joint promotional
activities;
- Firms adopt a mutual economic and /or commercial undertaking and define rules
governing what each firm must contribute, their respective rights and
responsibilities; and
- The consortium should be seen as a secondary instrument of the firm itself, which
only defends the interests of the members
- Examples of consortia include: an export consortium which is a voluntary
association of firms with the objective of promoting and facilitating the
exportation of members’

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