Enterprise vs Entity

During the Ranching for Profit School, we focus on the economics of the “operating business” and not the “land investment.” The operating business must rent the land at fair market value from the land investment for the agricultural use. In other words, the cows don’t get to graze the ranch for free. This is a value transfer that must be respected. Honoring that value in your decision making will reveal if the cows are profitable or if your increase in net worth is only coming from land value appreciation. 

This separation can lead to some confusion between an enterprise and an entity. There are multiple definitions for both terms, but at the Ranching for Profit School here is our intent:

• Enterprises are different production areas generating value (gross product) and contributing a gross margin to the operation
  • Ranch examples would be cow/calf enterprise, stocker enterprise, sheep enterprise, etc
  • Farm examples would be corn enterprise, wheat enterprise, alfalfa enterprise, etc
• Entities are separate legal businesses with a distinct purpose
  • Tax entities are corporations, partnerships, limited liability companies, trusts, etc

When laying out ranch economics, defining the enterprise mix is the first step. It can generally be answered by asking, what do you produce? Each enterprise will have its own gross product, direct costs, and gross margins. Gross margin per unit will tell us the economic efficiency of that enterprise, and if we should possibly expand that enterprise. The sum of all gross margins is what the ranch has to pay overheads. 

So when we talk about Ranching for Profit economics, we are focusing on enterprise mix and overheads. Entities aren’t discussed much because they serve different purposes. It is possible to run the ranch under one legal name while treating it as a business and calculating the proper economic costs to make wise management decisions. When you are making so much money you have to worry about an enormous income tax bill and estate taxes to your heirs, then yes let’s talk about entities. Until then let’s focus on annual profit and building that after-tax wealth. 

The most common confusion I see when people start working on their numbers is adding the land in as a separate enterprise, and I do not prefer it that way. If you want to think of the land as a separate entity, it will have rental income, then property taxes, maybe some liability insurance and capital improvements, and last but not least, probably a mortgage payment. Owning land is a fantastic way to build wealth, but it can be hard to cash flow so make sure you find a profit→cash flow→income tax balance in your business at all times. 

To recap, the operating business is in charge of annual enterprise selection to produce the most value possible with the necessary overheads and assets available to earn profits. The land investment is a long-term wealth building strategy that has other factors in it like appreciation, location, security, and others based on your personal preferences. The operating business and the land investment could legally and financially be one and the same entity, or different entities for different reasons. I hope this helps make a distinction between enterprises and entities. If you are interested in building a profitable business with enterprises you love to produce, check out our Ranching for Profit School schedule.