Business Entity Architecture - Essay Example

Business Entity Architecture Business refers to the involvement in the production of goods or services or both with an intention of earning profits. A firm’s success is dependent on factors such as: availability of a feasible business idea, availability of capital for start up, availability of a conducive environment for investment and availability of working capital among others1. Another important factor that should be keenly considered before one settles on a particular business is the type of business entity one wishes to operate on. However, more often than not this factor has always been considered light and has led to the down fall of several business enterprises. The various forms of business entity vary from country to country depending on their legal systems. The most common types of business entities are sole proprietorship, limited liability Company, partnerships, private company, cooperatives and corporations2. These types of business entity could be formed only with of the consideration of the law of the land where they intend to be formed. Law refers to a set of rules and principles that are recognized and designed to control the way people conduct themselves within a given community or state. They are usually enforced by sovereign political authority and are aimed at attaining justice across the board. Formation of business entities is based on two branches of law; these are statute law and case law. Statute law refers to rules and regulation enacted by the parliament of a given country in a process of exercising its legislative power conferred upon it by the existing constitution of the land. The parliament is given power to make laws either indirectly or directly. The statute law is recognized in several states as a source of law by the judiciary act. In the process of passing a bill in the national assembly, the parliament is perceived to be practicing its legislative powers3. A bill is can be described as a draft in the form of law of legislation. Bills can be sponsored by a private member of the national assembly or by the government; therefore there can a private or a public bill. A government bill refers to that bill which is brought before the parliament by the government for debate with an intention of being enacted into law. A private member bill on the hand refers to a bill brought before parliament by a member of parliament in his capacity to do so as granted by the law. A bill which intends to amend or introduce law that influences the whole country is referred to as a public bill while a private bill seeks to introduce or amend a law that would only influence some part of the state. A bill whether private or public can seek to create conditions or an environment that is suitable for the formation of a particular business entity; or the bill may adversely affect the formation of a given business entity. Therefore an entrepreneur should be very keen in analyzing the statute laws existing and how they affect the various types of business entity before deciding on which type of business entity to settle for. In most countries a bill is enacted into law through an eight stage process. The initial stage involves publication of a bill into the national gazette of a given country. This should be done at least 14 days before it is officially presented to parliament/congress for debate. The next stage is where the bill is formally presented before the house, the first reading is done but no debate takes place. Thereafter, the second reading is carried out and this is where debate is undertaken and every member willing to contribute is given an opportunity to do so. The third stage is known as the committee stage and in this stage; a group of members of Congress are appointed and endorsed with the task of analyzing the bill into finer details. The fourth stage is the report stage and in this stage the chairman of the committee appointed in the previous stage presents their findings before the house and if accepted the bill progresses to the following stage. This involves the third reading of the bill; here the bill is read before house for third time and if endorsed by larger majority it moves to the next stage. The sixth stage is referred to as the presidential assent stage. In this stage the bill is presented to the president of the state and he is expected to communicate to the committee on the decision. In the event of refusal, the president is expected to present a written memorandum to giving his opinion and possible recommendations. The bill then goes back for further discussion. They can either pass the bill incorporating the president’s recommendations or pass the bill ignoring the president’s recommendation. The next stage of the bill entails its publication into the national gazette. A bill must be published in the gazette before it becomes law. The final stage is the commencement stage. A statute law is considered law only after its publication in the national gazette or any other day prescribed by the minister in charge through a notice. A bill can be one that affects the operations of any of the various types of business entity. For instance a bill can be one that is calling for a reduction in legal requirements and tax levels for small and medium enterprises. This would encourage starting up of business entity such as sole proprietorship and partnership as most of them fall in the bracket of small and medium enterprises. Statute law has its merits and demerits towards the formation of the various business entities. Some of the merits of statute law are: it represents all people and is therefore seen to be democratic; it allows for dissolution of legal problems through amending existing laws and enacting new statutes; it is uniformly affects everyone as it is applied without any discrimination hence ensuring a level playing ground for all business operators; it is dynamic in nature in the sense that it is applicable in different circumstances and times; it is certain since it exists in formal documents that are accessible and it is enacted by parliament. On the other hand, the demerits of statute law include: the dominant class in the society may impose these laws on the people; statute laws are rigid and may not respond to urgent matters since it has to go through law making procedure in parliament; parliament may lack the experts to handle technical and bulky issues hence leading to them being neglected; at times they do not present the wishes of the constituents but those of the members of parliament. Another form of law that has impact on the type of business entity one may wish to select is the case law. Case law refers to a body of rules and principles created by a jury of judges when settling cases before them. These laws are mainly formed in a situation where none existed or the judges are doubtful of the situation. If similar cases arise in future they will be judged as per the laws previously created by the judges. The rules formulated are usually referred to as ratio decidendi which means reason for decision. The law can be changed depending on the cases to be tackled. The principle of oditer dictum which means by the way is important in case law since in the course judgment the judge usually makes by the way statements. The principle of doctrine of judicial precedent which means the decision stands also exists under case law since the previous decisions are used to decide on similar subsequent cases. Case law also has its advantages and disadvantages towards the operators of the various types of business entities. Some of the advantages include: it has substantial degree of predictability and certainty and is therefore credible enough to firm a legal system; there is consistency and uniformity brought about by the doctrine of stare decisions; the law is detailed since similar decisions have previously been made; has a remarkable potential to grow; the law is convenient and practical since they are formulated as per the circumstances at hand and has the ability to change with time4. The disadvantages include: it be can be bulky and hence difficult to handle; the series of principles that come with the law make it rigid and inflexible; since it is based on previous cases it creates artificiality in the legal system; it also interferes with the ability of judges to make decisions without relying on previous cases. The process of starting up a business also requires property either in the form of assets or even capital and therefore the law of property must be put into consideration. The law of property mainly deals with the extent to which one can have ownership and control over his land or any other form of property. One has a right to claim compensation in case he suffers losses. In starting up a business, one also needs to keenly analyze the various types of business entities before selecting a suitable one. The factors that should be considered are such as: the capital required for start up; legal formalities that must be adhered to; the type of liability, whether limited or unlimited and the degree of skilled labor force required for proper management. These entities vary widely with regard to the factors mentioned above. The major types of business entities are as discussed below. First, we are going to handle sole proprietorship. This is a form of business entity that is operated by one person as stated by the law. Sole proprietorship can also be termed as sole trader. It is characterized by few legal formalities required for starting up; it also needs little capital to start. Capital is mainly acquired through personal savings, borrowing from friends and relatives and retained earnings. It uses low levels of skilled of labor force as the form of management is basic. The owner is sole decision maker in the business. He is also responsible for all the losses incurred and profits gained by the business. This business has its advantages and disadvantages. The advantages include: the fact that there is no bureaucracy in decision making since the owner is the sole decision maker in the business; the owner of the business enjoys all the profits; requires little capital, skilled labor and legalities for start up; the trader can easily change the business in case an investment opportunity comes up. The disadvantages of this business entity include: low capacity for expansion and innovation due to low levels of capital and skilled labor; in the event that the business incurs losses, the owner suffers the losses alone; incase the owner of the business dies, goes insane or bankrupt, the business also closes down; the profits earned by this form of business are relatively low. The second form of business entity we are going handle is partnership. This refers to a form of business entity where two or more individuals agree to start up a business with the aim of sharing profits and the business being run by all of them or any one of them on behalf of others. Partnership has some legal requirements that must be observed before its establishment. These include: the partnership must be started with the core intention of doing legal business; partnership must be an association two or more persons; partnership must be as a result of agreement among members to share profits gained or losses incurred; business must be conducted by all members or any one of them on behalf of others. Partnership is considered illegal if: the purpose for which it is formed is considered to be illegal; if the number of people forming the partnership exceeds 20 persons. In the formation of partnership, the registrar business must be provided with the following information: the name of the business conducted, the general nature of the business, the key location of the business, the Christian names and surnames of all members of the partnership, the nationality of each member in the partnership, any other occupation of the members if any and date of commencement of business. The article of partnership contains the following clause: property and capital of the business, contribution of each partner, nature of the business to be conducted, rules concerning drawings and capital, the powers given to each partner, grounds for dissolution, the arbitration clause, power of expulsion, method of determining value of good will on retirement or death of a partner and method of computing an amount payable to an outgoing or deceased partner. Partnership defers from co-ownership in the sense that it is formed by agreement while co-ownership is created by statute or by agreement or by status. In partnership transfer of interest can only take place after consultation with all the partners while under co-ownership one may transfer one may transfer interest without the consent of other partners. Partnership has various advantages and disadvantages. The advantages include: capital is available from the members contributions; there is room for expansion and innovation since partners contribute different ideas for the development of the business; in the event of losses, they are shared and one individual bearing all the loss like in the case of sole trader; it also requires few legal formalities to start up; the business continues even in the event of death or insanity of one of the partners. The disadvantages of this form of business entity include: there is bureaucracy in decision making since all the members have to be in agreement before a decision is made; realizes less profits since the profits made have to be shared between the partners; the capital contributed by the members is never enough to propel the business to higher levels; the existence of non-active members may adversely affect the operations of a business leading to losses5. The other form of business entity is the public limited company. Before it begins its operations it has to be registered which is compulsory under the companies act. A public limited company exists on its own by law and is viewed as a separate person for its owners. It is formed by a minimum of 7 individuals and the maximum is unlimited. A public company is managed by a board of directors which is elected by members and has the authority to conduct business on behalf of the company. A public company cannot be dissolved in the event of death or insolvency of a shareholder hence it is said to have perpetual existence. The shareholders of a company receive dividends on the shares they hold. A company can only come to an end if it is wound up according to the company’s act. The advantages of a public include; ability to raise huge capitals for expansion; it has limited liability and hence shareholders cannot lose personal property in the event of failure to pay debts; has the ability to realize very huge profits and boasts of a lot of innovation. The disadvantages of public companies include: requires huge capital for start up; they also require a lot of legal formalities to set up, for instance it has to undergo registration as stated in the companies act; selection of an incompetent board could drag the company into losses. In conclusion, we can say that the type of business entity must be considered before one starts up a business to ensure you are in the correct field where you can maximize your profits with consideration of one’s capital and skills constraints. The process also helps one to know the different legal requirements of every business entity before starting up a business. One also acquires the mental preparation of the kind business he or she is walking into regarding the profits or may be losses that could occur and prepare on how to keep them under control. Works Cited Carl R. J. Sniffen, The Company Corporation. Incorporating Your Business For Dummies. New Jersey: John Wiley & Sons, 2010. Carl S. Warren, James M. Reeve, Jonathan Duchac. Financial & Managerial Accounting. Boston: Cengage Learning, 2009. College of Law (Sydney, N.S.W.). Continuing Legal Education Dept. Which Business Entity?: Being Papers Presented by the Continuing Legal Education Department of the College of Law on Friday, 11 March 1988. Texas: CLE Department of the College of Law,, 2007. Fishman, Stephen. Tax Deductions for Professionals. California: Nolo, 2011. Mancuso, Anthony. LLC Or Corporation?: How to Choose the Right Form for Your Business. California: Nolo, 2008. Matthew P. Feeney, Richard C. Onsager, Arizona Institute of Continuing Legal Education, Maricopa County Bar Association (Maricopa County, Ariz.). The Business Entity. London: The Institute,, 2008. Mezzullo, Louis A. An estate planners guide to family business entities: family limited partnerships, limited liability companies, and more. Chicago: American Bar Association, , 2008. Pakroo, Peri. The Small Business Start-Up Kit for California. California: Nolo, 2008. Read More