What Kind of Business Structure to Opt for - Assignment Example

Dear MS Marge Your legal issue regarding what kind of business structure to opt for Thank you for approaching me in regard to your above legal issue. Before I go ahead and provide you with the legal advice that you have sought from me, I would like to summarize the facts on which I have based my advice. Summary of facts You are a very good seamstress and therefore want to use these skills to enter into business to offer your skills in sewing, making repairs and sewing school badges and color award onto blazers. You are thinking of starting a new business and you want my advice on what business structures are available for your new business. You also have a friend known as Wilma who is thinking about going into business with you. You want my advice on what business structure options you have and the advantages and disadvantages of each of them. What advice is required? You have approached me in my capacity as a Business Lawyer seeking my advice on what type of business structure to opt for and the advantages and disadvantages associated with each of them. You also have a friend, Wilma who is thinking of joining you in this kind of venture. For the sake of your convenience, I will present this advice with the help of headings to make it easier to read. The Parties involved in this situation Marge (you): the one who owns the business idea and dream. Wilma: your friend who is thinking of joining you. The legal issue that needs solving Can Marge as an individual own and operate a business? If her friend Wilma joins her in the business venture, does this attract legal implications and how are both of them affected? Possible Business Structures and their formation In your situation there are two possible forms of Business Structures that are available for you, namely: I. Sole Proprietorship and II. Partnership Sole Proprietorship is a business structure that is formed, owned and operated by an individual with the aim of making profit. While, Partnership is a structure that is formed between two and twenty persons who mutually agree in writing or verbally to jointly own a business venture with the aim of making profit. It is governed by The Partnership Act 1891 (Qld) (‘the Act’) in relation to formation, operation and dissolution. Advantages and Disadvantages of Sole Proprietorship Business Structure Advantages i. Ease of formation: It is less complicated and cheaper to start in terms of its formation since there are few legal requirements involved. Besides, the business can be named after the owner. ii. Tax benefits: The sole proprietor is not required by law to file a separate business tax report although they are expected to list the business figures and information in their return submission. This helps in saving additional accounting and tax filing costs. iii. Decision making: The owner reserves all the right to make all the business decisions including relinquishing the business to their family relation. iv. Low starting capital cost: The initial amount of capital injected in the business is low compared to other business structures. He can also engage the services of his family members to eliminate overhead operation costs. v. The sole proprietor enjoys all the profit generated in the business alone. He does not have to share his earnings with any person. vi. The sole proprietor in the boss of the business: He does what he wants at any time without having to consult another person or party. He can execute any sale or transfer at his own discretion vii. Privacy: The business owner does not experience interference from any person and can therefore enjoy maximum privacy. viii. Easy to dissolve: the owner can change his legal structure or wind up his business later when prevailing circumstances unfavorably change. Disadvantages i. Unlimited Liability: The proprietor is held directly and fully responsible for all violations, losses or debts accrued in the business. ii. Taxes: The proprietor must meet self-employment taxes. In addition, some tax benefits are not deductible like employees health insurance premiums. iii. Lack of continuity: In the event that the proprietor is incapacitated or deceased, the business is dissolved or liquidated and assets distributed to his beneficiaries. iv. Difficulty in raising capital: These forms of business structures do not issue any money-generating investments like stocks. Therefore the owner has limited capacity to generate the initial business funds since they rely on personal assets and loans to raise capital. v. Tedious to operate. The owner has to solely meet all the day-to-day responsibilities and decision making unless he seeks assistance from family members. Advantages and Disadvantages of Partnership Business Structure Advantages i. Taxation: In the case of family partnerships where partners are husband and wife, the partners can enjoy certain available tax benefits. ii. Capital: Business start up funds is provided by the partners. This implies that the more the partners, the more the amount of funds pumped into the business thereby increasing the profit potential. In addition, they can raise more capital through stocks and sale of shares. iii. Shared Responsibilities and Decision Making: Decision making and responsibility of running and managing the business is shared by the partners, creating room for specialization and division of labor. iv. Business continuity: In the event that one member dies, is sick or incapacitated, the business may still continue. Disadvantages i. Disagreements: disputes, wrangles and disagreements may arise due to ideological differences among partners and this may affect both the business and relationship among partners. ii. Unlimited Liability: In the case of ordinary partnerships, members share business risks, losses and liabilities. iii. Profit Sharing: The profit accrued in the business is shared equally and this creates a loop hole because some partners may not put a fair share of effort in the daily management and running of the business. iv. Slow Decision making: For a decision to be made all members’ opinions must be mutually sought for and a common agreement arrived at. v. Profits Taxation: All the accrued profits are taxed at marginal tax rates of individual member tax rate. vi. Difficult to Form. There are so many legal procedures and documents involved in the formation of such a business structure. vii. Difficult to Dissolve: All the members must be consulted in the event of dissolution or when one or some members are pulling out. The relevant law and legal rules relating to these legal issues Partnership existence is determined by these three factors: The contract that exists between the partners. This is defined in the Partnership Agreement which is a written Document; May be partly done in writing and partly oral or, May be partly or wholly implied following partners conducts The Partnership Act 1958 and The law that exists concerning fiduciary relationships between the partners. Parties are bound by any agreement that they sign in writing. Parties are at liberty to negotiate any terms they want in an agreement, provided all the essential elements necessary for a contract are stated (agreement, legality of object, intention, consent, legal capacity) Identification of Express terms: these are terms that are explicitly included in the contract. Identification of implied terms: These are terms that are read into the contract but were not subject of express agreement. Terms v Representation: Terms are statements that govern the obligations and rights of the concerned parties while, Representations are statements designed to induce another party to enter into contract. It should be decided whether a statement is a term by scrutinizing the intention of the parties. Objective test: would a reasonable third party understand the statement? Partnership property includes: Items brought into the partnership property as partnership property; Consider partners’ intentions as shown by their actions: (Harvey v Harvey); Items acquired on the account of the business and Items acquired for the purposes of and in the course of the partnership business (ss 24 and 25 Partnership Act (Vic)). Termination of a partnership: A partnership may be terminated by: The partners By agreement (s 30) By expiration of agreed fixed term of partnership (s 36) Operation of law (s 37) Supervening illegality (s 38) The courts (s 39). Application of the facts to the rules In the event that the business is to be dissolved, mutual consent is required regarding sharing of property. That means you must seek opinion of Wilma to be able to do this. Business name is chosen upon consent of all partners. Therefore, both of you must agree on a common name of your business. The earnings of the business are mutually shared. You cannot enjoy all the accrued profits alone. Responsibility in running and management are shared. That means you must co-exist in the day-to-day operation of the business. Decision making is corporate. You cannot solely influence the direction the business takes without comprehensive discussion with Wilma. No individual is the boss of the business. Inasmuch as you are the original owner of the business idea, both of you jointly own the business in equal capacity. None of you is superior to the other. There are Legal Documents involved and legal processes must be followed. Conclusion and answer to the legal issue In light of the above legal implications in formation, ownership, management, and dissolution of Partnership form of business structure, I advice that you take time and carefully go through the legal provisions stipulated in the Partnership Act and decide whether you want to incorporate a third party into your business idea. Ask yourself whether you want to share your profits with someone else who did not have the business vision. Review the advantages and disadvantages of both Sole Proprietorship and Partnership forms of business structures as I have discussed in this letter and weigh them in regards to what picture you had in your mind when you were coming up with the business idea. Evaluate them closely and keenly against a back drop of the legal enactments spelt out in the Partnership Act. In my capacity as a Business Lawyer, and considering the fact that you sought my advice regarding which kind of business structure to opt for, I have carefully studied the facts that you presented to me and weighed them against the back drop of the available business laws and enactments and the advantages and disadvantages associated with each business structure available for you. Its therefore imperative that I advise you to opt for Sole Proprietorship form of business structure in order to protect your long thought business ideas and to be able to enjoy the benefits of autonomy. Yours faithfully, Read More