Appropriate Business Structure for ChitChat - Essay Example

?Memo scenario Lauryn, Nicole and Elizabeth 14 December Re: Appropriate business structure for ChitChat Background Lauryn, Nicole and Elizabeth who created a social media application called ChitChat are unsure on the business structure they should adopt for their business. At the close of the last financial year Chitchat had earned its owners $19 million and employs 35 people with prospects of increasing the number of employees. The three are close friends and they amicably share the day to day responsibilities of maintaining the application. Although the venture is doing well, there are some matters that are starting to concern them. One of their good friends who had also created an application similar to ChitChat was sued by an employee for negligence and a footballer for defamation. The court’s decision favored both the employee and the footballer and the application creator ended up losing the application as well as her house and cars. The three friends, Lauryn, Nicole and Elizabeth, are scared that the same might occur to them, and they may lose the application as well as their personal property. The three friends are also unsure on how to sign contracts with suppliers and especially if they will all be liable for a contract entered into by one of them. Additionally, they have heard that other developers are raising money to fund other ventures, and they would also like to be able to raise funds to finance other applications they are working on. The three are unsure of the most appropriate business structure they should adopt. Issue The three friends would like to enter into a formal business organization that would allow them to manage and operate the activities of ChiChat effectively. The three friends are concerned about the legal liability of the undertaking particularly the extent of their individual liability in the venture and as such would like a business structure that will address this issue. There is also the concern of raising additional capital and the contracting process for the venture. Conclusion The most appropriate business structure for the three friends is a partnership. Discussion A partnership is a valid arrangement between two or more people to carry out business with a general view of making a profit. A partnership agreement can be written or oral; however, if the partners wish to make their arrangement positively clear and enforceable it is prudent to draw up Articles of Partnership. Formally partnered entities can easily be made public through press releases, advertisements or public records. There are several types of partnerships, and they include general partnerships, limited liability partnerships and limited partnerships. In a general partnership arrangement, all partners manage the company and are personally accountable for its liabilities (Mayson, French, & Ryan, 1989 p. 19). In a limited partnership, some limited partners relinquish their management role in the partnership, in substitute for limited liability for the partnerships liabilities. The other type of partnership is the limited liability partnership where all the partners have some degree of limited liability for the liabilities of the partnership (Sealy, & Worthington2007 p.115). Liability Every individual in the partnership undertaking are both an agent and a principal of the partnership and may, therefore, bind the other partners and the firm. This implies that each partner is jointly and severally accountable for the debts of the partnership, which include the share of the partner’s risks as well as being liable for the risks of the partnership in its general course of business. The liability of a partner to a business is, therefore, unlimited in respect to a general partnership. In limited partnerships, the liability of a partner is limited to some degree (Morse, 2010 p. 24). It is also noteworthy that, in limited partnerships, the limited partners cannot take part in the operations of the partnership for their liability to remain limited. Lauryn, Nicole and Elizabeth’s venture is managed amicably by the three partners, and they cannot adopt a limited liability partnership since this will mean that they relinquish their management of the venture. A general partnership is a viable option for managing ChitChat. Relationship of partners to third parties. The most general right of a partner in a partnership is the right to contribute in the management of the venture. This management will often result in engaging third parties in the course of the businesses operations. This implies that a partner maybe required to act as a representative of the partnership in entering into contracts especially with suppliers. In a partnership, a partner is regarded as an agent of the business when a partner has an actual or obvious power to act on behalf of the venture (Ribstein2006, p. 68). A partner’s act shall bind all the other partners in the business for the ensuing obligations. Equally, a partner's admission regarding the affairs of the partnership is regarded an admission of the business. However, a partner may only bind the partnership if that partner had authority to conduct transactions on behalf of the partnership and undertakes such transactions while conducting the ordinary partnership business Union Bank of Australia v Fisher. Benefits of a partnership Although their current venture is an implied partnership, a formally incorporated partnership will yield more advantages for the partners. A partnership increases the borrowing capacity for the venture which can be used to finance other applications and expansion. There is also the benefit of incoming splitting, which results from tax saving as a partnership is treated as a co ownership of an enterprise and thus attracts fewer taxes. A partnership will also keep the business affairs of the partners private as well as being governed by limited external regulations. Furthermore, it is easy to modify the structure of a partnership in the future if the circumstances will require a modification in the structure of the venture (Roach 2013, p. 45). Conclusion The best business structure for ChitChat will be a partnership. A partnership will ensure that the running of the venture is conducted by the three friends and that all the partners have the authority to contract on behalf of the business. Additionally, a partnership will give the venture an increased capacity to borrow and expand its activities. Memo scenario 2 To: Mainan Pty Ltd From: Date: 14 December 2013 Re: Legal issues related to contracting Background Upon registration, Mainan Pty Ltd adopted a constitution which included provisions relating to the contractual activities of the company. These provisions provide that all the directors of the company must approve contracts in excess of $ 2 million. The chief executive officer, Jed Lim, may enter into agreements on behalf of the company, but such contracts must not exceed $500,000. The CEO can also with the approval of three directors of the company enter into contracts more than $500,000 but less than $ 1 million. In the follow up to Christmas the company had a lot of orders for their deluxe modernist play house and to meet these orders the executive director for production, Penny Crane advised the CEO, Jed Lim, of the requirement of at least 10,000 Birch Marine Board Plywood panels to meet the orders. Jed asked Penny to look into the matter and introduced her to Jack Kirby who is the CEO of Plywood R Us. Jed is busy and informs Jack that Penny will take care of the purchases on behalf of Mainan Pty Ltd. On these instructions, Penny negotiates a deal with Jack for $450,000. Jed has also been in negotiations with, Martin Ling, the CEO of City Plywood Pty Ltd and signed a contract on behalf of Mainan Pty Ltd for $575,000. The five directors of the company meet to discuss the two contracts that were entered into on behalf of the company. The directors find that according to its constitution the two, Jed and Penny, did not have the authority to contract on behalf of the business. The directors, however, think that the contract negotiated by Penny for $450,000 is an absolute bargain, and they would like to pursue the contract although they acknowledge that the contract was not entered into properly. The directors do not intend to keep the contract negotiated by Jed and asks the secretary to inform the other party that the corporation does not intend to honor that contract. Jack is furious on finding that the company will not honor the contract and insists there is a valid contract, and they seek to enforce it. Issues The issues raised in this scenario are whether the company can pursue the contract for $450,000 entered into on its behalf by Penny and whether there was a binding contract between the company and Jack for the contract for $575,000 entered into by Jed in behalf of the company. Discussion Contract negotiated on behalf of Mainan Pty Ltd by Penny Although Penny did not have the permission to enter into a contract on the company’s behalf, it is possible for the company to ratify such a contract. In contract law, a contract can be ratified under two circumstances; where the agent did not have the approval to enter into the contract and where the agent had authority, but the authorization of the principal was necessary (DeMott, 2009, p. 62). An instance where the agent did not have authority is where an employee who does not have the power to enter into a contract does so, and the contract is later ratified. As a general rule to ratification, the principal reserves the right to ratify a contract (Corbin et al. 1993 pp. 4). A ratified contract has a retrospective effect and is binding to the principal from the date the contract was entered into and not when it is ratified Bolton Partners v. Lambert. The contract that is ratified is equivalent to an original contract. The contract negotiated by Penny on behalf of the company can, therefore, be ratified by the directors. Despite Penny’s lack of power to enter into the contract ratification will make the contract as effective as a contract entered by authorized persons. Contract negotiated on behalf of Mainan Pty Ltd by Jed The company’s constitution authorizes the CEO, Jed, to enter into contracts not exceeding $500,000 or not exceeding $1 million with the authorization of 3 directors. The contract negotiated by Jed, on the other hand, is for $575,000 and exceeds the authorized limit. The doctrine of ultra vires provides that where an organization enters into a contract that is beyond its scope such contract shall be held to be illegal (Gilani, 2011, p. 125). Where a company has a constitution, the constitution may contain implied or express restrictions or prohibitions on the exercise of company powers. An exercise of power not authorized by the company’s constitution is an ultra vires act and, therefore, invalid. A company is not bound with respect to a third party unless that the party was aware that transaction or action was ultra vires. A third party contracting with the company is entitled to presume that the contract is executed in respect to the company’s regulations Royal British Bank v Turquand. When this is the situation the director or representative of the company who exceeded such powers is liable personally in respect to the company and the ultra vires acts are rendered void (Vaidya, & Raghuvanshi 2010, p.69). The contract entered on behalf of the company by Jed is ultra vires and, therefore, void. The contract cannot be enforced unless Jack can demonstrate that he was not aware that Jed was acting beyond his powers. In the event that Jack can demonstrate that he was unaware of the acts as being ultra vires then Jed is personally liable for the contract. Conclusion The company can seek to enforce the contract entered into on its behalf by Penny by ratifying this contract. Although Penny was not approved to enter into the contract, ratification makes it binding as if it Penny had the authority ab initio. The contract entered into on the company's behalf by Jed was ultra vies and cannot be enforced. Even in the event that it can be ascertained that the third party was not aware that Jed’s actions were ultra vires the company will not be liable as Jed will be held personally accountable on behalf of the company. Reference list Corbin, A. L., Perillo, J. M., Kniffin, M. N., Holmes, E. M., Bender, H. H., McCauliffe, C. M., & Giesel, G. M. 1993, Corbin on contracts (pp. 1-4). West. DeMott, D. A, 2009, Ratification: Useful But Uneven. Gilani, S. 2011, The'Doctrine of Ultra Vires' and its Subsequent Development in the Frame Work of Company Law, Available at SSRN 1936728. Mayson, S. W., French, D., & Ryan, C. L. 1989, Mayson, French & Ryan on company law, Blackstone. Morse, G, 2010, Partnership law, Oxford University Press. Ribstein, L. E. 2006, The Evolving Partnership. University of Illinois Legal Working Paper Series, 68. Roach, L. 2013, Company law concentrate: law revision and study guide, Oxford University Press. Sealy, L., & Worthington, S. 2007, Cases and materials in company law, Oxford University Press. Vaidya, N., & Raghuvanshi, R, 2010, Applicability of Doctrine of Ultra Vires on Companies, Available at SSRN 1558971. Cases Bolton Partners v. Lambert (1889) 41 Ch D 295 Royal British Bank v Turquand (1856) 6 E&B 327 Union Bank of Australia v Fisher (1893) 14 LR (NSW) Eq 241 Read More