Setting up a Business Issues - Essay Example

Setting up a Business Scenario Task How to structure a business is one of the primary decisions that an entrepreneur has to make. When developing a business or advancing a business from one level to the other, it is essential to consider a legal arrangement that delineates the liabilities and the rights of the parties with regard to ownership, personal liability, control, financial structure and life span (Clarkson, 2009, p. 225). Nonetheless, such a decision has long-term repercussion, which makes it particularly significant to search and consult deeper with a legal advisor. In making such a decision, the business owner should consider his or her vision regarding the nature and size of the business, the level of control, the business’s susceptibility to lawsuits and the tax liabilities of each of the structures (Cross et al., 2009, p. 353). In our case, Clare, Jasmine and Sanjita can either decide to form a general partnership, a limited partnership or a corporation. a. General Partnership A partnership is a business set-up that is established when two or more people bring their skills and resources together with one goal (Bagley & Dauchy, 2012, p. 287). Notably, a partnership is defined by the Partnership Act as “a voluntary association of two or more people, each contributing money, skills, labor, property or goodwill as the capital of the new firm” (UK Gov, 1980). A general partnership is a form of partnership where the partners are all fully active each with control within the business. This also makes each one of them fully liable for business debts (Emerson, 2009, p. 267). In reference to Gibson and Fraser (2013, p. 290-94), entrepreneurs would consider a general partnership because each partner has equal authority within the business. This makes each partner partake in decision making within the business. This also implies that every partner acts as an agent to the business and to the other partners. In this case, a partner can transact on behalf of the business and the other associates, thing that would legally bind them (Miller, 2012, p. 387). However, a partner is not authorized to indulge in a business that would have harmful effects to the other partners such as selling the business property without consent of the other associates, sell his or her interest in the organization or admit new partners into the business without the consent of the other associates (Law Commission UK, 2003, s.28 and 29). Another factor that would make entrepreneurs choose a general partnership is the way profits and losses are shared. Unlike other forms of business such as a corporation, the Revised Partnership Act (section 24) stipulates that partners in a general partnership share profits according to their agreed ratios and do not have to share with any other shareholder (UK Government, 1996, s. 24). A general partnership, just like any other partnership, is not subject to the federal tax. A general partnership requires providing a report on its returns that shows the income of the business, deductions and taxable income (Ricketts et al., 2006, p. 367). However, a partnership is not a separate taxable entity that does not go through federal taxation (Pride et al., 2012, p. 398). This exempts the partnership from any accumulated earnings tax. This is because the profits of the partnership pass down to the partners. The partners can use the partnership losses to offset some of profits that would be subject to federal tax. Additionally, in a general partnership, The Partnership Act (section 36) acknowledges that each of the partners have unlimited liability towards the business’s obligations (UK Gov, 1980). This is one of the distinguishing factors of a general partnership. According to Miller and Jentz (2008), this implies that every partner is individually accountable for the business debts if the business becomes insolvent or a partner dies (p. 458). This also means that the business debts can not only be settled with the assets of the business but also those of the partners. In case a partnership is unable to settle its debts, creditors can come for the personal assets of partners in order to settle the debts (Emerson, 2009, p. 306). This also implies that if a partner also becomes insolvent, his or her assets have to be used to settle the debt before the assets of the business and the other partners can be taken. Needless to say, a general partnership can be dissolved if one of the associates dies, becomes bankrupt or sells his or her interest in the business. b. Limited partnership A limited partnership is defined as a partnership consisting of two or more associates with at least one limited partner and general partners (Cross et al., 2009, p. 378). The limited partners are not personally liable for operations of the partnership and their assets cannot be taken up to settle the partnership debts. However, the limited partners are not involved in the daily operations of the partnership (Bagley & Dauchy, 2012, p. 396). The general partners are the ones involved in the daily operations of the business. The essence in a limited partnership is to get a partner with money to enter into a partnership with other associates without being exposed to the unlimited liabilities of a general partner. The limited liability of the limited partner or partners is one of the advantages of a limited partnership (Law Commission UK & Scottish Law Commission, 2003). Unlike in a general partnership, every partner is personally liable for the actions of the business such as liabilities, debts and wrongful acts of any of the partners (Clarkson, 2009, p. 414). The limited partnership protects the limited partners from any loss that may arise from negligent acts of partners not under their direct supervision. Just like the general partnerships, a limited partnership is exempt from federal tax. The partners in a limited partnership only file their personal income taxes. The profits and losses of the partnership are passed to the partnership (Pride et al, 2012, p. 406). In a limited partnership, the partners have the flexibility to decide how they will each contribute to the progress of the partnership. They can divide the managerial functions among the general partners (Miller & Jentz, 2008, p. 397). However, the limited partners can elect to either take up responsibility according to their capital share or they can opt to retain their ownership rights (Miller, 2012, p. 376-8). When such partners are given responsibilities, they may do it out of their personal interests plunging the business into debts and other liabilities. This risk would be borne by the general partners. c. Corporation The last business set-up that Clare, Jasmine and Sanjita can take up is a corporation. A corporation is a business consisting of people with a common goal but under one name that makes it distinct from its owners (Pride et al., 2012, p. 427). In other words, a corporation is a separate business unit from its owners. One of the primary advantages of a corporation is its limited liability (Clarkson, 2009, p. 416). This implies that the owners of business are all not personally liable for the operations of the business such as debts and other liabilities. If the business becomes insolvent, the owners can only loose what they have invested in the business and not their personal assets (Cross et al., 2009, p. 443). Additionally, unlike a partnership, a corporation does not end if one of the owners dies. This is because the business is a separate entity that operates differently from its owners (Emerson, 2009, p. 462). However, a corporation needs more capital to form than a general or limited partnership. Additionally, corporations are required to submit reports on their business operations as demanded by local, state and federal agencies (Gibson & Fraser, 2013, p. 399-410). Lastly, a corporation encounters double taxation where the revenues of the corporation are taxed while the individual profits of the owners are also taxed. Task 2 Formation of a General partnership In most cases, business associates start a business without considerable planning and setting rules. Partners can conflict in myriad ways in a partnership if some issues are not ironed out before setting up a partnership. On the other hand, it is also essential to follow some of the regulations as required by the law. There are numerous steps that Clare, Jasmine and Sanjita have to take before setting up their business. The first step in setting up a partnership is coming up with a business name (UK Gov, 2015). In our case, the partners have chosen to go with Clare and Co Accessories as the business name. After coming up with such a name, the next step involves checking the availability of the proposed name. Partners should avoid using a name that can be confused with an already existing rival firm (UK Gov, 2015). Choosing a name that is almost similar to another competing business can attract a legal action for infringement of trademark rights. This may attract fines and damages to the new business (Law Commission UK, 2003). Therefore, it is essential for partners to search deeply for the business name availability. However, the search for availability of the name is no easy task. The partners require to not only checking in one place but in numerous places. Therefore, Clare, Jasmine and Sanjita should deeply search for the availability of the name. Clare, Jasmine and Sanjita should search in the fictitious name database, the trademark database and the database with names of firms, partnerships and corporations. To start off with the search, the partners can make use of the search engines by doing a basic screening of the name of the business. This can easily show them whether there is another business that uses the similar name. The fictitious database is a database of business names within a state. Some businesses opt to have their names at the fictitious database and do not put it online. After checking the availability of the name, the next step will be registering the partnership name. After registering the business, the partners should generate a partnership deed. The partnership deed sets an understanding of the relationship between the partners (UK Gov, 2015). It includes how profits and losses will be distributed, the rights and obligations of each partner, the name and location of the business, the contributions of the partners, what happens when a partner leaves and how to admit new partners (Rickets et al., 2006, p. 423; Pride et al., 2012, p. 434). The final step will involve obtaining an operating permit and license from the local, state and federal authorities. Scenario B Task 3 a In some situations, a partner or partners may wish to take action against a partner for breaching the terms of the partnership agreement or for unlawfully using the partnership resources. In most instances, expulsion of a partner is impossible. This is when the partnership does not have a partnership deed and is under the 1890 Partnership Act. In instances where the partnership does not have a partnership deed, the only option available would be dissolution of the partnership. A partnership agreement sets rules on how the partners can admit and remove a partner from the partnership (Pride et al., 2012, p. 448). In most instances, a partnership deed sets how the partners can eliminate a partner either through majority vote and a provision that the partnership would survive without the expelled partner (Clarkson, 2009, p. 392). Notably, a partnership deed offers a useful foundation on how a partnership can let go a partner. In this case, the best thing for the partners to do is to revisit their partnership deed. The partnership deed also sets the factors that would make the partners expel the partner (Emerson, 2009, p. 366). For the partner to be expelled, it would be essential to prove that he or she engaged in an unlawful and wrong deed as indicated in the partnership deed (Bagley & Dauchy, 2012, p. 386). In this case, Pierre and Chloe have grounds of pushing an expulsion of Thomas. This is because Thomas engaged in acts that the partnership deed recognizes as unlawful. One of the requirements of a partnership is that none of the partners should run a competitive business similar to that of the partnership and none also should use the business resources for their personal interest without the consent of the other partners. Under section 40 of the RPA, a partner has fiduciary responsibility to the business and the other associates where he or she ought to desist from competing with the business before its termination (UK Gov, 1996). In this case, Thomas seems to have violated a term in the partnership deed that requires the partners to act with greatest evenhandedness and good faith towards the rest of the partners. Task 3b Thomas can pay both Chloe and Pierre under two accounts. The first account is under section 26 of the Partnership Act (1890) for profits made for carrying out a similar business as that of the partnership and the second is under section 28 of the Partnership Act for use of the partnership resources for personal gain without consent (UK Gov, 1890). By approaching the partnership business’ customers and offering to do extra decorating work for them without the consent of the other partners shows that Thomas knowingly carries out a business similar to that of the partnership. Under the partnership act, a partner who carries a similar business is required to remit the profits made to the partnership business. This is because running a parallel business jeopardizes the partnership and would lead to losses and stealing of clients as witnessed with Thomas who offered to do extra decorations for clients. On the other hand, the property within a partnership belongs to the partnership and not to the individual partners. Property within a partnership includes all the property that was brought by the partners and anything that was bought later by the partnership in its name (Gibson & Fraser, 2013, p. 422-26). However, a partner can only use such property only when acting on behalf of the partnership. Notably, a partner is not a co-owner of the property that belongs to the partnership and he or she has no right to mortgage, sell, transfer ownership or use such property for his or her personal benefit (Miller, 2012, p. 386). In this case, Thomas used the paint for his personal gain and he is entitled to refund the value of the paint used. Task 3 c In reference to Cross and Miller (2008, p. 374), a partner is an agent to the partnership. Pursuant to Mair v Wood (1948) SC 83, this makes all the partners in a partnership jointly liable for any action of a partner on behalf of the business. This also implies that the partners in a partnership can be sued for obligations that arose from one of them. Notably, such partners are legally bound by a contract or partnership debts that involves the partnership. Even when some partners did not take part in the contract or debt or did not know of the existence of the contract, they are all liable for the actions. RUPA notes that all partners are agents and principals to each other. Under section 40 of RPA, each partner has the fiduciary duty of accounting for the partnership and being held as a trustee for the business assets and profits derived from the use by him or her or the partnership. This section also states that the partners have a duty to refrain from dealing on behalf of the partnership but with personal interest that has adverse effects on the partnership and from conducting a competing business. In this case, if Thomas got into contracts on behalf of the partnership or pretended to act on behalf of the business, then Pierre and Chloe are liable and bound by the contracts. However, a partner’s agency to the partnership may be revoked in cases where the partner acted on his own interest and not for the partnership. In this case, Thomas acted on his interest towards the customers and he is separately liable for contracts he engaged with customers. Nevertheless, the judgment against one partner does not entirely relinquish the liabilities of Chloe and Pierre. This is because they may be sued later if the first action on Thomas was not conclusive. In this regard, the most noteworthy thing is that the burden of proof lies with Chloe and Pierre. References Bagley, C. E., & Dauchy, C. E. (2012). The entrepreneurs guide to business law. Mason, OH: South-Western. Clarkson, K. W. (2009). Business law: Text and cases : legal, ethical, global, and e-commerce environments. Mason, OH: South-Western Cengage Learning. Cross, F. B., Miller, R. L., & Cross, F. B. (2009). The legal environment of business: Text and cases : ethical, regulatory, global, and e-commerce issues. Mason, OH: South-Western Cengage Learning. Emerson, R. W. (2009). Business law. Hauppauge, NY: Barrons Educational Series. Gibson, A., & Fraser, D. (2013). Business law 2014. Pearson Higher Education AU. Law Commission UK. (2003). Partnership Law. 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