Fundamentals of Business Structure - Essay Example

? [Business Structure] Business structure of three close friends who have recently qualified as dentists Any business partners need to structure their business in a way that will meet their individual as well as collective needs. Business structure is a typically hierarchical arrangement of authority, rights and duties of any organization. It, therefore, determines how roles, power as well as responsibilities are to be assigned among the partners, how the business will be controlled and coordinated and how information flows within the organizational departments. The structure depends on the business objectives and its strategy. Business structure has many facets including operational, organizational, marketing, financial and legal structures. The choice of structure depends hugely on organizational, marketing, operational and financial strategy and structure. In this case, the paper discusses the appropriate business structure of the three close university friends who have recently qualified as dentists and want to start a dental clinic (Denoncourt, 2012). The three university graduates will have to decide the best business structure for their clinic depending on several factors like risks and liabilities, cost of formalities and administration, control and management, legal limitations, financing, taxation, termination or closure of the business, and business expansion. General partnership is an association of two or more people who have decided to start up a business for the mutual benefit of the owners. The partners contribute property, money or services equally towards the business for their common benefit. The partners share profits equally got from the business. All the partners are allowed to participate in management, but give no liability protection to any of the partners. Therefore, coming up with a business structure is one of the significant steps a business makes in order to be in a position to run effectively. It is required of the partners to evaluate the options available and choose the best form of structure that best meets their needs. Although this process is time consuming and also costly, it is the best investment any partnership can make (Glover & Wasserman, 2003). The three partners will have to form their business without having to fill any legal document and this makes their business structure easy to form. It is, therefore, similar to a sole proprietorship in the sense that it is easy to form and any business partners can form it without any intention to do so. The business can either start as a sole proprietorship or later change into a partnership by adding other partners. The liability at which a partner in a general partnership is exposed to is also similar to the personal liability that a sole proprietor suffers, but there is an included element of risk. All the partners are responsible for all their actions and debts of the partnership and this means that each of the partners may lose interest in the partnership as well as everything they posses. This is referred to as personal liability (Glover & Wasserman, 2003). The three partners will be personally responsible for all actions as well as debts of partnership meaning that each of the three partners may loose not only their interest in partnership, but also everything they own. This means that if the partnership fails, or the business is sued, the creditors can go after the assets of the general partnership as well as the private assets of the three partners. Here, the partners will be responsible for their own actions and their partner’s action since the action of a particular partner can be imputable to the other partner through a joint liability. In general, the actions and mistakes of a particular partner becomes a responsibility of the other two partners. For example, Rose, John and Jane want to start a dental clinic where they have to share the profits equally. One day, John is involved in an accident while on duty and the accident injures Luis his patient. Luis lives up to his name and brings suit against both the general partnership and John himself. The policy holds that Luis can collect not only from John and partnership, but also the other partners individually due to their joint liability. John does not have any money and neither does poor. This means that rich will be forced to pay for John’s accident even though it occurred through no fault (Denoncourt, 2012). In the case of tax structure, their partnership can be viewed as belonging to three proprietors who are equally responsible for the business. The partners are entitled to equal sharing of profits as well as accrued debts. In the case of business dissolution, the termination of their business will depend upon the type of general partnership the business is operating under. It means that if there was no sign of agreement which they signed, the default general rule remains that if one or two partners die, withdraws from the clinic or becomes disabled; another default general partnership can be created in order to replace the old partnership (Denoncourt, 2012). General partnership will be appropriate for the two graduates because of the following advantages; (1) general partnership is appropriate for low risk, and low profile businesses since it can allow the possibility of getting capital, talent as well as strategic assets which are based on mutually agreed terms, (2) partnerships face fewer statutory control than other companies (3) all the profits that are generated by the business will be taxed at personal income tax level (4) this partnership can be simple and cheap to set up. Any partnership agreement is however advisable (5) the general partnership does not require to audit or publish its accounts or even register the partnership agreement. No government returns are required to be filled by the partnerships, except for the income tax (Glover & Wasserman, 2003). 2) Business structure for a group of 35 accountants who recently met during a networking event who wish to establish a boutique accounting practice aimed at professional sports people For a group of 35 accountants who recently met during a networking event and wish to establish a boutique accounting practice aimed at professional sports people, the best business structure for their boutique is a limited partnership. A limited partnership structure can be created by two or more people and there are formalities that are supposed to be followed in order to establish this form of business structure. Limited partnership has a general partner and limited partners and the limited partners are only investors and not involved in the day to day running of the business. It is formed by filing a certificate of limited partnerships with a state agency in charge of registering new business (Denoncourt, 2012). To register for a limited partnership, the partners must register under the Limited Partnership Act 1907. To register, an application form must be delivered for registration, signed by all the members to the registrar. The partnership will only come to existence on registration of an acceptable LP5 form. Below is a sample of the registration form (Robert, 2007). LP5 Form Name of the partnership.…………………………………………………………………………… General nature of the business.……………………………………….............................................. The term if any for which the limited partnership is to be entered into.…………………………... Name and signature of each general partner Name……………………………………………………………………………………...Signature Name……………………………………………………………………………………...Signature Name……………………………………………………………………………………...Signature Name……………………………………………………………………………………...Signature Please give the name and amount contributed and signature of each limited partner Name…………………………………….Amount……………………………………….Signature Name…………………………………….Amount……………………………………….Signature Name…………………………………….Amount……………………………………….Signature Presented by ………………………………………………………………….presenters reference. A liability agreement exists with two types of ownership interests. To form a limited partnership, one general partner has to be included and at least one limited partner. The limited partners are at risk of losing their assets they have invested into their company. It becomes evident that any debts or any civil liabilities which are created by lawsuits and the partners can not pay may be enforced against the general partners personal assets. The limited partners have little or no control over the business operation and remain as passive investors. If the partners incur any debts and potential lawsuits arise during the operation of the business, they remain under control of the general partner and it clearly fits that the general partner bears the associated risk (Denoncourt, 2012). For example, in the case of the group of 35 accountants who recently met during a networking event and wish to establish a boutique accounting practice aimed at professional sports people, as a limited partnership, the 35 accountants will run the boutique and make of the business decision and contribute towards the capital required to start the business. If the business succeeds, the 35 partners share the accrued profits equally (Robert, 2007). A limited business structure is seen to have some improvement over the general partnership structure because the limited partners are not responsible for their debts as well as actions of the general partners or their employees. The limited partnership has some advantages and include the following (1) tax benefits is one of the advantages of a limited partnership as the profits and the losses of the business flow through the business to the partners and all the partners can be taxed on their personal income returns. The advantage is that the limited partners can share in the company’s profits even though they don’t have to participate in the companies responsibilities (2) there are liability limits whereby a limited partner liability for the partnership debt can be restricted to the amount of money of the property that all the individual members contributed towards this partnership. In the case of the general partnership, any money or any property which was contributed by the partners becomes an asset of all the partners (3) the general partners take charge of the business as they are responsible for the business daily responsibilities and operations and they don’t even need to consult the limited partners in most of the business decisions (4) offers a legal framework to the beginning of the business (5) all the profits accrued can be reported on the partners personal tax returns that is it passes through taxation (6) all the limited partners can be protected from liability in a business lawsuit (7) partners assets can be protected such as when a limited partner is sued, all the assets inside the limited partnership can be protected from seizure (8) and all limited partnerships are a separate legal entity that can own property, sue and can also be sued (Denoncourt, 2012). The following are some of the disadvantages of a limited partnership (1) the general partner in this case bears the burden of running the business and is always liable for all debts of the company (2) a more legal documentation is required in a limited partnership (3) the formalities of this business structure must be observed in order to keep the business in good standing as well as safeguarding the companies liabilities (4) there is division of authorities among the partners. The tax structure for the limited partnership qualifies for taxation as a general partnership in all circumstances and the pass through taxation structure is one of the most beneficial structures. The pass through taxation structure can allow for all profits and losses of all the partners to be allocated to the partners based on their ownership interest. This aspect in many cases can be modified in case of substantial economic reasons to do so. The general partners can be treated as sole proprietors while the regular partners can be treated as general partnership. This will, therefore, require the payment for a self employment tax on the accrued income since they spent most of their time in business operation and responsibilities (Miller & Gaylord, 2009) During the termination of the business, any event can potentially lead to the disclosure of a limited partnership. The reason for the uncertainty is that those default rules possessed by the state can be modified by a partnership agreement that is it can add, modify or even remove events that would eventually lead to the termination of the business. Like all the other business structures, the limited partnership can terminate on a written consent by all the business partners or alternatively a court can request for the termination of the business if there are issues like insolvency, deadlocks within the business or when the business is wasting its resources. For example, the loss of one general partner can be taken as an event which can lead to the termination of the business. This event can be modified in case when the partnership is comprised of many partners like in our case. In a situation when the limited partnership loses all the general and limited partners, the business can close unless there is a clause to allow new partners to join the business or some of the partners to switch to the other class (Miller & Gaylord, 2009) In conclusion, General partnership occurs when two or more individuals come together and each person contributes money, labor, skill and property equally and each of the partners is expected to share in both the profits and losses. It is not mandated that a legal requirement must exist which can have several effects in future. Significant factors for the three partners (Rose, John and Jane) have to be considered when coming up with this structure and include; the ease of formation, the potential liability that partners face, business tax structure, and a general partnership dissolution. In the case of the 35 accountants who want to start an accounting boutique, a liability agreement must exist with two types of ownership interests that are a general partner and a limited partner. The general partnership is more appropriate unlike the limited partnership due to the risks involved in a limited partnership. Reference Denoncourt, J. 2012. Business Law. Routledge: London. Glover, S. & Wasserman, C. 2003. Partnerships, Joint Ventures & Strategic Alliances, Volume 1Business law corporate series. Cambridge: Law Journal Press. Miller, R. & Gaylord, A. 2009. Fundamentals of business law. Exerpted Cases. Stamford: Cengage Learning. Robert W. 2007. Limited liability partnerships: formation, operation, and taxation. New Jersey: J. Wiley. Read More