The Law of Enterprise Organization - Assignment Example

? The Law of Enterprise Organization Introduction This paper seeks to provide six partners each coming up with different capital contribution, expertise, skills and vision with an introduction to the basic structures of laws plus regulations that impact the manner of business in the Commonwealth of Massachusetts. The variety of detail is wide-ranging, reflecting the characteristic of the legal fields discussed. The paper begins by discussing in brief why business enterprise of sole proprietorship, general partnership, and limited partnership cannot work well for this group, due to factors such as management, capital contribution, and liability of principals. This is then followed by a discussion of the pros and cons for each investor and for the business as a whole with a focus on Limited Liability Company, Limited Liability Partnership, and “S" and "C” corporations. Discussion Sole proprietorship In Massachusetts there are no statutory requirements governing the creation of a sole proprietorship. Hence, a sole proprietor interest in the business is represented by the assets of the business, and he or she is not considered as a separate legal entity, in particular for federal income tax. Therefore, every income, loss, credit and profits are taxed under the owner marginal tax level. The other major reason why sole proprietorships cannot benefit this group is that they will each be completely liable for the responsibility of the business to the degree of his or her individual and business assets. Every personal assets committed to the enterprise can be seized to make payments. Even though homeowner insurance can help in excluding liabilities arising in the course of the business transaction, they will still need further riders and policies (Griffin 2). Given that the owner of any sole proprietorship is in complete and absolute command of the business such a structure would not work in a group like this due to dissimilar vested interests, ideas, and contributions. General Partnerships General Partnerships would not work very well for this group since the partners would be liable for the debts as well as obligations arising from any wrongful acts by another partner. Specifically when that partner performs during the commonplace itinerary of the business or otherwise acted with the say-so of other partners. This group comprises ambitious people who have their own idea on how to run the business with each seeking to be more active in the management. Hence, any business debt or liabilities due to one of them implies that they will be liable for the risk also as they are legally tied. Therefore, it is going to be difficult to create lasting trust (Miller and Jentz 530). Limited Partnerships Based on the stipulations of Chapter 109, section 2 of the Uniform Limited Partnership Act, a limited partnership would not work very well for this group since it would imply some members possessing minimal level of control and rather limited liability and the one who is active will be liable for any debt or obligation. For instance, to Charlie such a structure would imply him having minimal control of the business since he would not be active, even though he has contributed significant amount of capital and clientele and publicity. Furthermore, the fact that one general partner responsible for running the partnership implies that he or she will be responsible for debts plus liabilities beyond the sum of their contributions, and this would definitely make it hard for any of them to accept to be a general partner, as it will be a great risk on their part. For Leila this would entail placing her parents’ retirement and property at risk and Andrew and Indira would lose a lot in terms of their contribution, in particular Indira who is willing to mortgage her house as part of her capital contribution (O'Neill and Warda 14). Limited Liability Partnerships Based on the Uniform Partnership Act Chapter 108A, Section 48 one of the key benefits of Limited liability partnerships is that, there is a reduced risk to any of the partners being held liable for the business debts and obligations as a result of conducting normal business functions. This is because the personal liability of the partners when it comes to debts, obligations plus liabilities of the partnership is limited, thus a partner will not have personal liability for the negligence arising from actions of another partner. Moreover, during liquidation the money and resources of the partners are protected as they can only be sued for the business income. Secondly, limited liability partnerships possess internal flexibility, whereby the partners will decide on management practices whereby they can come up with their own culture of managing and running the partnership. Thirdly, a limited liability partnership will help in circumventing double taxation as it is taxed once as an entity but not to the individual partners (Mann and Roberts 619). The advantage for running a limited liability partnership for the six partners is that it will offer them more participation in management and operations. This is because it will allow them to come up with an agreement on equal contribution of funds, their labor, and expertise. They will have the right to operate the business directly and it also comes with tax benefits, as they will not be taxed on business profits. Secondly, a limited liability partnership would help them to share profits, losses, as well as management role of the business equally, with each partner being personally plus equally liable for the debts of the business. However, this form of business enterprise rules out Tim S. and Jackson because they do not possess significant capital investment as required. When it comes to Charlie this form of business enterprise does favor him because he is assured that the other partners will administer the daily operations of the business when he is away. A limited liability partnership would be adventurous to Leila, since it will offer her the right to be involved in the daily operations of the business, and this will provide her the occasion to spend time developing new inventions and to come up with new ideas and putting them into effect. However, this form of a business structure can be difficult to administer, since some of the partners would not probably love the ideas or innovations of others, and it can be very difficult to agree on some certain issues leading to friction and disagreements end even collapse of the business. For Leila and Adams, given that they are innovative and passionate about the business, a limited liability partnership will be ideal for them since management will be more flexible than other available structures. Thus, the management of a limited liability company will not entail bureaucratic entanglements like those of corporations, or the autocracy under sole proprietorship are done away with. Limited liability Corporation Chapter 156c Limited Liability Company Act states that Limited liability corporations are unincorporated business structures whereby the members are not held personally liable for the business debts. Secondly, the act permits the business associates to mold the structure of the business organization to their own needs. Thirdly, the statutes give the limited liability corporation a pass-through taxation system as the earnings are taxed once. However, it is crucial to note when the limited liability corporation contains more than one of the corporate feature of limited liability, continuity of life, centralized management and liberated transferability of interests then it will not be handled as a partnership when it comes to income tax principles. Thus, every one of of the limited liability corporation income will be taxable two times, once when the business earns the income, and secondly when it makes distributions to the business associates. Involvement in the management of a limited liability corporation does not categorize a partner to general liability. Moreover, the limited liability corporation is given the freedom in terms of transferability of interests, as it is an "elastic" limited liability corporation regulation, and thus provides variations regarding the corporate characteristics which can then be customized to the requirements and concerns of the business associates. Another benefit of a limited liability corporation is that it provides a number of categories of membership interests with various classes of stock. They are permitted to own subsidiaries with no restriction and even own a majority of another business shares. Still, the partner liability is by and large limited to amount of money which the partner has invested (Mancuso 188). A limited liability corporation will be beneficial to the six members when they decide to be taxed as a corporation rather than as partners, since the corporate income tax levels for the initial corporate taxable earnings are lesser than the personal income tax levels which pertain to the taxable income of those non-corporate taxpayers (Cartano 657). Hence, it is possible for the members to acquire a net earnings tax savings due to this tax election. Secondly, they will all be shielded from personal liability when the corporation goes bankrupt or it harms someone or an entity and finds itself into legal difficulty. The advantage of operating an LLC for Charlie is that the others will be able to make management decisions since he will be an inactive member and most of the time away. Hence, he will be assured of continuity of the venture and any breach of duty by those in management can be held personally liable, especially when they do not perform responsibilities stipulated under the Operating Agreement. Thirdly, if there is any undercapitalization of the LLC, the business can take a loan and any member can personally guarantee the credit (Cartano 657). The disadvantage of forming an LLC for Leila is that if the corporation goes bankrupt, she will have difficulty in paying back her parents retirement money upon liquidation. Tim S. and Jackson would benefit, since the operating agreement would define their share of ownership, voting rights, shares of profits plus losses, in addition to their distribution rights without regard to the fact that they have no significant capital contribution. The main disadvantage is that unlike other corporations, limited liability corporations do not possess specific roles and this can easily make it complicated for the business and the members to know exactly who is in control, or who should sign definite contracts. "C" Corporations and Tax Status The benefit of C-corporations in Massachusetts is that, the principals will benefit from limited liability for the business debts, obligations plus liabilities, in addition to liabilities originating from possible legal action (Commonwealth of Massachusetts General Law ch 156D). Secondly, they will be able to accumulate assets, and be able to easily raise additional capital requirements as it can have any number of shareholders through stocks or financial instruments. The disadvantage is that C-corporations in Massachusetts undergo double taxation, as they pay taxes on their net taxable earnings and they pay a minimum tax even if there is any loss (Angelini, Conte and Sanchez-Penalver 9). They also a pay considerable tax on their tangible property found within Massachusetts save for property that is taxed locally by the city or township or a tax on net worth if they do not possess significant assets. The tangible property tax comprises items like leasehold improvements, inventories, equipments and supplies. Hence, there is small incentive to keep inventory and supplies. Secondly, C-corporations face double taxation and when a segment of the corporation profits are allotted as dividend, then the allotment is taxed to the members. Accordingly, corporate profits are taxed firstly to the corporation then to individual shareholders when distributed as dividends. Thirdly, during the phase of liquidation they pay tax not only on the corporate level but on earnings on appreciated assets, in addition to the members or shareholders paying another tax when they collect liquidating dividend. The advantage is that those members can own the golf real estate discretely or otherwise under a realty trust to avoid double taxation (Angelini, Conte and Sanchez-Penalver 9). "S" Corporations and Tax Status The Massachusetts Business Corporation Act, M.G.L. C. 156d states that an S corporation protects the members from any individual liability arising from business debts plus obligations. S-corporations in Massachusetts are hybrid entities having the advantage of not paying taxes at the corporate phase when their gross receipts is below $6 million. But, this is applicable when the corporation states that it wants to be an S tax status within the initial 75 days of the tax year and even this is not automatic as it can have to wait for around ten years so as to liquidate the assets and avoid corporate phase tax, although it is classified as an S-corporation or “built in gains tax,” (Angelini, Conte and Sanchez-Penalver 12). S corporation tax status involves paying a 3% on their net taxable income if gross receipts are around $6-$9 million, and they pay 4.5% on their net income if gross receipts are higher than $9 million (Angelini, Conte and Sanchez-Penalver 12). However, they can pay income tax even if the corporation net taxable income is far below $6 million. This form of tax arrangement would be favorable to Leila and the others if they have low sales but high profit margins rather than high sales but low profit margins. Secondly, S tax status losses within the first year are allowed to flow through and consequently be likely deductible by the members or shareholders. Thirdly, S tax status entails paying a tax on the tangible property or else the net worth. The disadvantage for this group in running an S corporation is that there are restrictions when it comes to transfer of individual equity interests, such that only individuals who are actively participants can own equity. This would be unfair to Charlie since he will not be an active participant in the daily basis operation of the business, and his contributions in terms on money, contacts and publicity would be immense. Secondly, the fact that an S corporation states that shareholders should elect directors and officers to manage daily operations and decision making which are out of commonplace course of business, implies that it would be difficult for Leila, Adams and Indira to quite easily implement their new inventions and ideas into effect due to this increasing bureaucracy. Recommendation They should form a limited liability company as it merges the corporate benefit of a limited liability with that of a partnership gain of pass-through taxation. This form of business structure will protect the six from any personal liability arising from business debts and obligations, particularly when formalities are observed, and that they try to avoid situation which can enable creditors to participate intensively in funding. Furthermore, the business under an LLC will not be liable for any Massachusetts excise tax, this will be beneficial to them since its earnings will be taxed to the partners through a pass-through origin, such that there will be no tax at the business level, but at the individual level, thus providing additional incentives for growing the business. Most importantly, a limited liability corporation can enable them to issue multiple categories of ownership interests, given that some will contribute more than others and Tim S. and Jackson do not have significant capital contribution as it will not be constrained to the forms of members who will hold interests. The flexibility in management implies that the principals will actively be involved in the management process, and if active involvement by all of them is not feasible, they can delegate to a single manager or else to a group of managers who may well or may not be coming from them. Limited liability corporation flexibility in apportioning income to the principals would offer them numerous categories of membership interests. Therefore, any number of persons or entities can own interests and this will be crucial especially in meeting additional operational requirements especially when credit is expensive to come by. Conclusion The paper has discussed why business enterprise of sole proprietorship, general partnership, and limited partnership cannot work well for this group, due to factors such as management, capital contribution, and liability of principals. This was then followed by a section on pros and cons for each investor and for the business as a whole with a focus on Limited Liability Company, Limited Liability Partnership, and “S" and "C” corporations based on Massachusetts Uniform Partnership Act. Based on the findings the option of entity needs to be carefully considered taking into consideration the explicit concerns of a given business venture. This comprises tax treatment, spotlight on contract plus tort liability, and efficiency and techniques of governance. The different business structures all have their exclusive advantages as well as disadvantages. This paper recommends that the group should form a limited liability corporation since it has comprehensive tax status that will be fair for them all, issue multiple categories of ownership interests in terms of stocks to raise funds and most importantly it will protect the six from any personal liability arising from business debts and obligation. Moreover, the flexibility in management implies that the principals will actively be involved in the management process, and if active involvement by all of them is not feasible, they can delegate to a single manager or else to a group of managers who may well or may not be coming from them. Works Cited Angelini, James P, et al. Business Taxes in Massachusetts:Toward Fundamental Reform. Boston, MA: THE Beacon Hill Institute At Suffolk University, 2008. Cartano, David J. Federal and State Taxation of Limited Liability Companies 2009. CCH, 2008. Commonwealth of Massachusetts. "830 CMR 62.17A.1 Massachusetts Taxation of C Corporations and Their Shareholders." 2012. 28 April 2012 . Griffin, William F. An Introduction To Business Organizations. Boston, MA: Thompson & Thompson, 2004. Mass. Gen. Laws Ch 108a, S 48 Mass. Gen. La’s Ch. 156d, S 8.03 Mass. Gen. Law’s Ch. 108a, S 15 Mass. Gen Laws Ch. 108a, S 15(B) (2). Mass. Gen. Laws Ch. 108a, S 45 Mass Gen. Laws Ch. 109, S.8. Mancuso, Anthony. Form Your Own Limited Liability Company. Nolo, 2009. Mann, Richard A and Barry S Roberts. Smith and Roberson's Business Law. Boston, MA: Cengage Learning, 2008. Miller, Roger LeRoy and Gaylord A Jentz. Fundamentals of Business Law: Excerpted Cases. Boston, MA: Cengage Learning, 2009. O'Neill, Julia K and Mark Warda. How to Start a Business in Massachusetts. Sphinx Pub, 2003. Read More