Business Laws Provided by the State and the Company - Essay Example

BUSINESS LAW REPORT By Business Law Report Business law is an essential aspect in the business world due tothe responsibility of giving guidance on the rights and relations of involved parties. In simpler terms, business law comprises of the various laws surrounding formation, running, and closure of any business (Emerson, 2009; Twomey and Jennings, 2010). Additionally, business laws include state, federal, and administrative laws hence it is important for people engaging in business ventures to have this knowledge. This explains the rising need of involving attorneys especially in the startup procedure of a business. More importantly, business laws do not only act as regulations on carrying out business activities but also are useful for the protection of individual entities and persons involved. For instance, business laws are crucial in partnerships due to the governance of relations between the individual parties in play. To facilitate comprehension, a more specific evaluation of the role of business law in limited liability companies (LLC) is in order. Basically, LLCs are legally formed business entities with provisions of limited liability to its members. The recent years have seen increased venturing into LLC across the globe arguably due to the extensive benefits accrued to their formation that impact directly on the owners. LLCs are allowed to choose their preferred tax regime such as either a sole proprietorship or a partnership. This implies that an LLC may be formed by a single individual or through combination of multiple members thereby creating a partnership. However, tax provisions vary across different regions implying that determination of qualification is carried out based on the laws governing LLCs in respective regions. Nonetheless, this provision is increases flexibility of LLCs making giving them some advantage over other business forms. Such an LLC may opt to be taxed as partnerships rather than a corporation to enjoy the benefits accrued to such entities. For example, members’ distributive share of income, gain, and loss among other sharable prospects may be done through other approaches apart from through determination of ownership percentage of individual members provided they are within the confines of laws in Treasury Regulation. Moreover, members of an LLC have limited liability implying that they are protected from liabilities of the LLC. However, this benefit is dependent on the state shield law with some providing for some of the liability rather than the entire liability. Additionally, LLC are arguably better compared to corporations due to reduced administrative paperwork and record keeping. LLCs also benefits from pass–through taxation meaning that they do not undergo double taxation except in cases where an LLC opts to be taxed as a corporation. This implies that taxation is done at an individual member level instead of taxing the LLC (Sanbar and American College of Legal Medicine 2004, p.77). For example, in many regions taxation is imposed on the members rather than the LLC or both hence evading double taxation. Furthermore, LLCs in most regions are regarded as separate entities from their members and are at a much lesser risk of acquisitions such as from creditors (Warda 2007, p.87). Additionally, there is no limit on formation of LLCs hence a large company may have several LLCs with each having its own property. This is important for such companies as real estates since it gives property protection on an individual basis. In some instances during partnership formations, one or a selected group among the partners may be required to deal with formation of the company, perhaps, due to extensive knowledge and expertise in the area. This brings in the issue of company promoters that basically refers to any person involved in the formation of a company. However, promoters are not necessarily part of the company implying that they could be outsiders such as professional promoters who engage in company promotion activities only as part of their profession. Nonetheless, promoters are held by a fiduciary relation to the company and the shareholders in order to avoid any form of exploitation owing to the promoter position held. This is further cemented by the argument that a promoter is not agent on the proposed company since it is not yet into existence. For instance, a promoter is required to disclose all profits that may be acquired from the promotion activity (Tulsian, 2011, p.25.4). This implies that fiduciary duties are owed to the company and they require the promoter to act in good faith. The disclosure requirement is however seemingly more insistent on scenarios where the promoter is the sole shareholder. Basically, fiduciary duties act to prevent any secret profitability of the promoter from the company. However, this does not imply that a promoter is prohibited from making any profit at all but rather that profit being made should be disclosed to the company and its members. As such, a promoter is held personally liable in case of a loss either due to disclosure failure or existence of a false statement in the prospectus (Sealy and Worthington, 2008). For example, a person may subscribe for shares in the company based on the promoter’s prospectus but due to the false statement undergo a loss. In such a scenario, the person who has suffered the loss can sue the promoter upon which the promoter will be required to compensate the loss. Additionally, payment for promotion services should be contained in a contract with the company failure to which a promoter has no right to lay any payment claims. This implies that the role of promoter is quite sensitive and requires total comprehension of the fiduciary duties to avoid any losses. Formation of an LLC with multiple members does necessarily require equal contribution of capital from each individual member. However, this raises concerns regarding ownership of the LLC and protection of capital investment especially by people with the greatest contribution. Nonetheless, such concerns can be provided for in the LLC operating agreement since it provides for structuring of both financial and working relationships within the company. Basically, an operating agreements outlines the overall structure and ways of conducting the company’s operations. For instance, the operating agreement contains information on the agreed percentage proportions allocated to each member in relation to ownership, profit and loss share, and general responsibilities. Additionally, an operating agreement contains information regarding to contingency plans and guidance in case of structural changes that may emanate. For example, it contains the step forward in case one of the members opt to leave or leaves under uncontrollable circumstances. Although an operating agreement is essential in the operation of a LLC, it is not a requirement in all states. This implies that some businesses may opt to forego the operating agreement especially sole proprietorships in these states. However, an operating agreement is crucial especially in setting individual company laws. As such, in addition to state laws, it is important for a company to have its own set of laws to ensure smooth operations. Additionally, possession of an operating agreement allows for alteration of some of the default state laws. For example, in most states there is a default law giving provision that profits and losses should be divided equally among LLC members regardless of their individual contribution. This implies that an LLC with an unequal contribution requires an operating agreement to govern profit and loss allocations and also reflect individual contribution thereby ensuring protection of each member’s contribution. In addition to providing a financial structure, an operating agreement may also be used to draft the management structure. In this context the main focus on management structure refers to voting powers and the process of taking votes within the company. In an LLC with multiple members, individuals may have different voting powers with some having more power than others. In many cases, more voting power is given to members with the highest capital investment and expertise in the area of business the company is engaged. This is arguably based on the argument that members with the greatest capital investment bare a greater risk hence the need to protect their investment. For example, voting power may be given based on percentages of ownership of each individual. Moreover, it is also important to clearly stipulate the criteria of making a decision such as whether it will be based on the majority vote or a unanimous decision. The unanimous approach is seemingly more favorable for partners with concerns about being outvoted by other members. Conclusively, the smooth operation of any business is heavily dependent on the business laws that are provided by both the state and the company. This is because business laws ensure protection of both member’s rights and companies as individual entities. With the recent increment in number of LLCs being formed, business laws have become even more crucial. LLCs have attracted increased participation due to their relatively many advantages such as flexibility in relation to taxes among others. However, formation of an LLC requires extensive knowledge on various underlying features such as the fiduciary duties of a promoter that emphasize on utmost good faith and liability in case of loss. Moreover, it is important to note the importance of some of the LLC documents such as the operating agreement that ensures members comply with the stipulated agreements. For example, an operating agreement gives provisions on financial and management structures such as allocated percentage of profits and losses and voting powers respectively. This implies that for profitability and protection, individuals need to be aware and in full comprehension of business laws related to LLCs. Works Cited Emerson, W 2009, ‘Business law’, Hauppauge, N.Y., Barrons Educational Series. Sanbar, S and American College of Legal Medicine 2007, ‘Legal Medicine’, Philadelphia, PA: Mosby/Elsevier. Sealy, L and Worthington, S 2008, ‘Cases and materials in company law’, Oxford; New York: Oxford University Press. Tulsian, P 2011, ‘Tulsians business and corporate laws’, New Delhi S Chand. Twomey, P and Jennings, M 2010, ‘Business law: principles for todays commercial environment’, Mason, OH, South-Western Cengage Learning. Warda, M 2007, ‘The LLC and corporation start-up guide’, Naperville, Ill.: Sphinx Pub. Read More