The Law of Business Organizations - Example

BUSINESS LAW PART A Business law The idea of developing business organizations in order to conduct business activities began centuries ago, however the 20th century saw the explosive emergence of both the types and number of business organizations. For instance simple forms of sole proprietorships turned out to be the most intricate multinational corporations. Informal engagements became partnerships and sole proprietorships. In the process business structures began taking shape in the business ventures (Steven, 2012). At the national or state level more formal arrangements were established, they included the limited liability corporations and companies. The business organizations offeredprotection and stability to officers and investors while developing guidelines in the company and within the state laws where they carried out their businesses. Sole proprietorship Sole proprietorship is the most flexible and the simplest business structure (Daniel, 2010). The sole proprietor has all the decision making powers and total control over capital investment, profits and policies. Characteristics Liability A sole proprietor normally has unlimited liability. Unlimited liability means that thepersonal property of the sole proprietor is subject confiscation to pay the debts of the business. In situations where the business is declared insolvent, the personal assets can be used by the proprietor to pay off debts and liabilities (Mark, 2011). This means that in case of a huge loss the proprietor’s personal property can be vended to satisfy the claimants. Income tax The tax rates in sole proprietorship organizations are very low as it is imposed on a single person’s income. Continuity of the organization Sole proprietorship continuity depends on the good health, death or life of the sole owner. Control The sole proprietor has the entire control of the enterprise. The whole business is under the control of one person who can do whatever he or she likes. Profit retention The owner bears all the risks of the business. He therefore, enjoys all the profits and suffers the losses. It is the only form of business organization where the owner benefits from 100% profit. Advantages of sole proprietorship Staying in contact with the customers In this form of business organization the entrepreneur has direct contact with the clients and customers (John, 2008). This helps in identifying the likes and dislikes of the customers while at the same time producing goods that will satisfy the customer. Easy dissolution The dissolution of the organization is very easy and can be dissolved at any particular time. There are no legal restrictions on matters of dissolution. Easy transfer of ownership Sole proprietorship can be transferred easily to another individual because there are no legal barriers involved. Flexibility There is flexibility in the sole proprietorship venture. Business policies can be redone to site the existing market demand and the conditions of people. Quick decisions The owners have the ability to make quick decisions on their own about the welfare and development of the business therefore saving time. Secrecy For an enterprise to grow successfully secrecy must be a key factor in development (John, 2012). A sole trader might be able to hide and maintain secrecy about the unique techniques of generating profit and production. Disadvantages of sole proprietorship Expansion difficulty Expanding the business in sole proprietorship might be very difficult because of the limited capital and limited life of the proprietor. Lack of capital The resources of one person might be very limited. This will automatically hinder the expansion of the business. Lack of audit and inspection In many sole proprietorship organizations audits and inspections are not common. This automatically increases the probability of having illegal and fraud operations being carried out. Lack of skilled personnel The sole traders have limited resources this automatically limits their ability to hire and pay the services of skilled and qualified personnel which is a huge disadvantage. Management difficulty A person might not be able to perform all the tasks given to him or her effectively (Larry, 2009). The person might be a good administrator but a bad accountant. This might cause the business to suffer huge losses. Risk of loss In case of a loss the sole owner bears all loses, whereas in a joint stock company or partnership all the members or partners bear the loss. General partnership In general partnerships there are two or more partners who are responsible and manage over business operations and business debts (Steven, 2012). Each partner makes a contribution in money, time and skills. And later on the partners also share the companies’ losses and profits. Characteristics Liability Liability is in two levels; if the assets of the company are not sufficient enough to cover the liabilities of the partnerships then all the partners are severally and jointly liable with their entire assets. Income taxes The partnership itself is never taxed but the income flowing into the individual’s personal income is taxed. Continuity of the organization There are two ways in which continuity can be maintained; one is where if a partner dies his potion of partnership is given to his heirs. Two, if a partner dies the entire organization goes to the remaining partner. Control There is usually a joint ownership of the enterprise and equal rights in the management or control of the business. No single individual has ultimate control over the business. Profit retention In this form of partnership two or more people share the profits and losses of the business. Compliance This business structure does not need any form of legal document. Expansion Partnerships usually have higher chances of acquiring loans for capital and expansion at favorable terms unlike corporations since they apply for loans as individuals. This also because they use their personal assets as guarantee. A certificate of registration must also be filed together with a statement of partnership authority. Advantages of a general partnership 1. Partnerships do not need to pay income tax and this tax benefit is the biggest advantage that general partnerships benefit from. 2. The partnership is also easy to establish because no legal formalities are required to establish it (Larry, 2009). This makes the process cheaper, simpler and with less paperwork unlike a corporation. 3. The ability to raise more funds is also high as the owners are many. There is also a wider pool of skills, contacts and knowledge. 4. The business is also well managed unlike the sole proprietorship due to the large pool of skilled labor. 5. Workload is distributed among the partners, thus, reducing the workload for each partner. Disadvantages of a general partnership 1. A general partnership has unlimited liability.The partnership brings along personal liabilities in debts and business obligations. If the company is sued or declared bankrupt in a court of law, then all fines must be paid by individual partners (Steven, 2012). 2. At times some partnerships allow one partner to make decisions on behalf of the entire company. This might be risky because all partners will be held responsible for the consequences of the decision. 3. General partnerships also have management problems. A general partnership may have limited access to a variety of managerial skills especially where the partners manage the business themselves. Limited partnership A limited partnership is almost similar to general partnership they main difference is that in a limited partnership partners have limited liabilities stipulated in documents (Larry, 2009). It is also a partnership where one owner is a limited partner while the other one is a general partner. Liability The limited partners usually enjoy limited liabilities for any judgments, debts and liabilities of the enterprise. Income taxes Losses and profits in the business go to the partners who are then taxed according to their personal income tax returns. Continuity of the organization Limited partners can actually leave the business entity without having to dissolve the limited partnership. Profit retention Limited partners have the opportunity to share the profits and losses without even having to participate fully in the business. Compliance Unlike the general partnership, to form a limited partnership there must be a certificate of limited partnership which should be registered by the state together with the payment of the state filing fees. Control General partners have more responsibilities and therefore more control. In addition their liabilities are unlimited for judgments, debts and other liabilities. C-corporation A corporation is usually a legal entity which is usually governed by a state corporation law. Characteristics Liability They have limited liability, meaning that directors, officers and shareholders of the corporation are not liable for liabilities and debts of the corporation. Income taxes C corporations are usually taxed in corporate levels. Dividends are taxed by the government as income. Continuity of the organization Corporations unless voluntarily dissolved can last forever unlike sole proprietorship and partnerships. Control A corporation’s management is under the board of directors who are usually selected by the shareholders. Profit retention A profit sharing proposal is developed which clearly dictates the amount of net profits that will be distributed on equal bases among the employees. Expansion A c corporation has unlimited growth potential especially through the sale of stocks. The number of shareholders also has no limit. Acorporation needs to register under the laws of the state and register a legal name with a state government and sign the articles of incorporation Advantages of c-corporations 1. It is easier to get the business up andrunning because inventors have the ability to provide a large pool of capital and resources together (John, 2012). 2. Shareholders are also not liable for the debts in the corporation. Disadvantages 1. In order to establish a corporation,promoters must file the articles of incorporation with the state and pay a filing fee (Mark, 2011). 2. They also face the problem of double taxation where profits are taxed twice both as dividends and at the corporate level. S-corporation A business might decide to be an S corporation in order to evade income taxes but still retain the limited liability advantage. Characteristics Liability S corporations have limited liabilities. This means that they are not personally accountable for the debts of the enterprise. Income taxes In this partnership the shareholders income is taxed directly instead of the corporation, this assists in preventing double taxation. Profit retention The owners share net profits and report their rates on personal income taxes Continuity of the organization There is no total reliance on a single person therefore the illness or death of a stakeholder might not affect the operation of the corporation. Compliance S corporations must sign formation documents with the state. The documents are also known as the articles of incorporation. Control S corporations have a restriction of up to 100 shareholders in matters of ownership. All shareholders must be US citizens and S corporations cannot be under C corporations and have a single class of stock. Expansion The s corporations must sign the articles of association with the relevant state they are in Limited liability Company Liability Owners have limited liability on matters of business judgment, debts and other liabilities. Income taxes Owners have the opportunity to decide on how the limited liability company will be taxed which might be either a corporation or a partnership. Continuity of the organization Most limited liability companies lack continuity of life because the company can be dissolved because of a member’s withdrawal, disability, bankruptcy and death. Profit retention Owners are allocated profits and losses using different lines like ownership interest. For example an owner who has shares worth 10% might be allocated a 30% profit. Control Members have usually have control over the limited liability company according to the units of membership or the amount of shares they own Compliance Some states do not permit the running of limited liability partnerships however in some states registration of the company is a must. Expansion If one intends to expand the company into another state a foreign qualify should be taken. After the qualify one should expect to receive a certificate of authority and then file annual reports. Advantages of LLC 1. The business entity is linked with accounting, medicine and law and partners are not responsible over the mismanagement of other partners. 2. The LLC enjoys wide of range sources of capital especially through sale of shares and debentures. 3. The liability of shareholders in a LLC is limited. 4. The large size of LLC enables such forms of business units to enjoy economies of large scale operations. Disadvantages of LLC 1. LLCs must comply with several legal requirements, making their operations inflexible and rigid. 2. The process of registering LLCs is expensive and lengthy. 3. Compared to other forms of business units, there is no much case law/legal precedent because the LLC is a new form of business unit. 4. It is more difficult to transfer ownership in an LLC than with a corporation. 5. Shareholders are still personally responsible over business creditors, lenders and landlords. PART B Background of the Business The wood molding manufacturing business is currently a sole proprietorship form of organization which seems to have low skilled man power and a limited pool of resources. The enterprise also seems to be growing at a tremendous speed, which is making the owner rather afraid of the risks of managing a huge business venture. It is, therefore, advisable that the sole trader ventures into a Corporation form of organization which guarantees the sole trader continuation of the business, a large pool of resources, skilled labor and expansion. The Best Form of Business Unit The best form of business unit the wood molding manufacturing business should adopt is the C-corporation.C-corporations have unlimited growth potential, this is the ultimate solution for an ambitious entrepreneur (Steven, 2012). C-corporations guarantee the provision of large pools of resources and capital. Possible Limitation of the Selected Form of Business Unit One of the factors the owner will need to consider constitutes of giving up some of his powers to other corporate members. The decisions are also made by all members; this is why decision-making is slow since all members must agree. Additionally, the owner must be willing to share business profits with other members. The C-corporation might also be taxed twice at the corporate level and when offering dividends. How the C-Corporation Will Overcome Business Worries The C-Corporation has a lot of advantages. For instance the corporation easily attracts investors and in this case the furniture entrepreneur seems to looking for prospective clients. Even though the partnership maybe more expensive to establish it has features thatare very alluring to the investors (Mark, 2011). The large pool of resources and capital might also provide the opportunity to establish an unlimited growth potential. The liability of the owners will be limited such that personal property of the partners will not be sold to recover the debts of the business. If injuries occur within the business premises, the risk will be distributed among all partners of the business. With the implementation of the C-Corporation, the owner will no longer worry about hiring outside installers when there is a backlog of work. This is because in a corporation, different talents are combined such that each partner is assigned the responsibility that he or she can perform best. References Daniel, L. (2010).Federal Income Taxation of Business Organizations.New York: Foundation Press. John ,E.(2012).The Law of Business Organizations. Clifton Park, NY: Thomson Delmar Learning. John ,M. (2008). Internal Revenue Service, Paying Reasonable Compensation to the S Corporation Shareholder-Employee. Alabama: Currency Doubleday. Larry ,E. (2009). “The Emergence Of The Limited Liability Company,” Maryland: Weston Hall Press. Mark P. (2011). Reasons for the Decline in Corporate Tax Revenues, New Jersey: Pearson Prentice Hall. Steven, M. (2012). Economics: Principles in action. Upper Saddle River, New Jersey: Pearson Prentice Hall. Read More