Business Enterprises and Law Essay
Businesses have got rules and regulations that define the governance and commerce of their business derived from the practice of traders with the aim of regulating the business culture and operations such as corporate contracts, staffing strategies, employment relationship and customer care among others (Smith et al., 2005). Various bodies such as Uniform Partnership Act (UPA) and Uniform Commercial Code (UCC) among others stipulate the statutory and mandate to be stimulated by businesses (Kelly et al., 2005).
Law suits and patents concerning breaches to this rules and regulations referred to as business law have been filed due to misconception or ignorance towards adherence to these laws. For instance the court case between Metal Bellows, Infusaid corporation, Intermedics Infusaid and Intermedics where the involved parties are engaged with the distribution and manufacture of an infusion pump but fails to fully define their business as either a joint venture or a partnership.
The patent also filed by commonwealth calling for injunction action to be taken against Philip Giordano for breaching their partnership agreement which stipulated fair distribution of partnership profit and accessing the partnership books when he withdrew cash for personal use from the partnership account without the consent of his fellow partners. The other instance needs a clarification between a sole proprietorship business and a Limited Liability company (LLC).
Susan owns a service oriented LLC where she teaches swimming and is still an employee at a local gym. However, she was forced to open a sole proprietorship business for teaching water aerobics because the gym does not recognize her rights as a subcontractor. From the above facts, this paper will discuss the various types of business enterprises (which include sole proprietorship, general partnership, limited partnership, S corporation, C Corporation and limited liability company/ limited liability partnership, their benefits and costs relating each business enterprise to the above cases and others.
A sole proprietorship is a business entity owned by one person running the business under his name or by use of other existing names with jurisdiction consent, for example in US the jurisdiction mandates him to use the trade name “Doing Business As” (Steingold, 2008). The owner is not separable from his business and therefore profits and debts incurred by the business are also his. This prevents the business from enjoying liability as other business enterprises (Kelly et al., 2005).
For instance this business entity faces difficulties in raising capital as its shares cannot be sold in the stock market because of the limited legitimacy it has. Also it cannot borrow bank loans for the lack of guarantors needed to secure the return of the money. This is because the business enjoys unlimited liability which is disadvantageous due to the liability the business owner faces especially in instances of court cases such as patents. Sole proprietorship also has limited opportunities of hiring employees because of the nature of the business which may lack appropriate resources to handle a large number of employee (Steingold, 2008).
Moreover sole proprietors have to pay premiums to benefit from health insurance; however this is not the case in countries that offer universal health care insurance cover. Furthermore, as profit margins improve due to growth of the business, risk factors also increase forcing the proprietor to form corporations or limited liability companies (LLC) which increase the benefits of liability while still paying the sole proprietorship tax (Schneeman, 2002). Therefore, the life span of the business entity cannot be determined they maybe closed down at any time for example when the owner dies, becomes insane or incurs losses among others (Steingold, 2008).
However, the fact that sole proprietorships are not corporations they are not double taxed like corporations, instead the owner pays income tax from the profits made (Steingold, 2008). The Massachusetts Limited Liability Company Act (LLC Act) allows sole proprietorship to convert their business entity to LLC without paying liquidation taxes like corporations (Schneeman, 2002).
Therefore, Susan should utilize this opportunity and merge her businesses to form one LLC where she will reschedule her business plan to balance her teaching services appropriately. This will reduce the amount of income tax she pays as profits for the two businesses will be taxed as one and enjoy higher liability shield due to the combination of different business features.
In an attempt of increasing the loop for raising business capital an association between two or more persons or a joint venture between businesses ensues, where the term persons refer to individuals, corporations and partnership with other associations (Gage, 2004). The association or joint ventures are governed by the statutory mandate of state laws for example Uniform Partnership Act (U.P.A) (Mass. Gen. Laws ch. 108A) (Gage, 2004). The stakeholders in the partnership contract become co-owners of the partnership profit. However U.P.A stipulates policies, law and regulations that divide partnership into two categories; General Partnership and Limited Partnership (Gage, 2004).
A general partnership occurs in instances where two or more persons form an association without the need of legal formalities (DeMott, 2001). General partnerships advocates for joint tenancy ownership to allow ownership of part or whole of the partnership business to the other persons in case of death of one partner. The former defines a tenant while the later defines a joint tenancy. Instances where both the husband and wife have formed a partnership, third part individuals or organizations cannot claim ownership to the business against one of the partners as the other still owns it fully (DeMott, 2001). This business entity also has the advantage over corporate entities because it is not double taxed (Arthur & Sheffrin, 2003).
This business enterprise is defined by policies stipulated in Part II of U.P.A. According to U.P.A section 25, the assets, liabilities, transactions and profits are separate entities from the partnership stakeholders (DeMott, 2001). Therefore, are not liable to business risks and debts because their personal properties cannot be confiscated by their creditors in instances where the partnership is indebted to them due to the liability shield they earn from the U.P.A section 40(h) (DeMott, 2001).
Every partner is considered as a legal entity of the partnership where they automatically become an agent that is they can represent the others partners and thus has a right to act on behalf of the partnership with consent of the other partners, therefore can earn title deeds of real estates through the use of the partnership name which however can only be transferred in the partnership name (DeMott, 2001).
However, Uniform Commercial Code (UCC) and Bankruptcy Act considers each stakeholders to be a person in a such a business entity stipulating two mandates of liability; joint and sever liability (Arthur & Sheffrin, 2003). Therefore, in case of bankruptcy or close down each stakeholders is liable to the partnership debts or a particular partner will be entirely responsible for the debts incurred by the business (Arthur & Sheffrin, 2003).
Another draw back of this business enterprise is the concept of fiduciary duty which limits the scope of wealth gained by individual stake holders as one cannot benefit at the expense of the others or the partnership (Arthur & Sheffrin, 2003). This business enterprise can be one form of partnership to formed by the stakeholders however, in the future Commonwealth and the other partners should rely on the Revised Uniform Partnership Act (RUPA) of 1994 to avoid such instances as the rights of partners are fully protected (Gage, 2004).
Limited Partnership (LP)
This business enterprise is similar to the general partnership but has defined roles for its stakeholders. LP constitutes general partners who manage the business and are liable to any debts incurred by the business and limited partners who act only as investors and do not take part in the management of the business.
Their key stake is only sharing the partnership profits. LP is divided into two sectors public and private LPs. The public LP arises when an LP registers with the Security Exchange Commission (SEC) with the aim of publicly trading in the exchange or filing reports through the exchange to extend their popularity. On the other hand private LPs are not liable to the public therefore cannot trade or file their information on the exchange.
UPA demands an existence of a statute in any LP to act as an identification mark and differentiate it from the general partnership. It also stipulates that LPs should adhere to the mandate of their statute. LPs contain a standard limited partnership agreement which defines the liability of each limited partner in the event of offsetting debts. The amount contributed by the limited partners as capital depicts the extent of limited partners’ liability. On the other hand general partners are in control of the business thereby having all the rights to manage it but have an unlimited liability. They also have a fiduciary duty to fulfill unlike their counter partners.
Referring to the Meinhard Versus Salmon case where Meinhard sued Salmon for breaching their fiduciary agreement when he signed a lease with the Midpoint Realty Company on behalf of their partnership and did not include him into the deal. The court ruling supported Salmon as not having acted in bad faith even though he breached their fiduciary Act. In the future Mienhard should form a limited partnership if his stake is to only be an investor and not an active member of the partnership.
Limited Liability Company (LLC)/Limited Liability Partnership (LLP)
This business enterprise is similar to the general partnership with a difference in the state of liability accorded to stakeholders. In general partnership the stakeholders enjoy unlimited liability while in LLPs the partners are protected from the wrath of liabilities. Therefore the former business entity is advantageous because stakeholders are covered from liabilities caused by negligence, errors and incompetence of the other persons in the partnership (Wineburg, 2001).
The LLC Statute (Mass. General Laws ch. 156C) stipulates regulations that exempt partners of LLC from liability accorded to creditors due to a default in an obligation that existed between one partner and the creditor (Smith et al., 2005). Furthermore, mistakes conducted by one partner are not spread to the others as he carries his own cross alone, however, for a partnership to be acknowledged as an LLC/LLP partners should exhibit potential of settling claims either by having insurance cover to liabilities or owning assets that can be used to offset a claim. This business enterprise will best suit Metal Bellows, Infusaid corporation, Intermedics Infusaid and Intermedics as their interest as a joint venture and partnership will be provided (Wineburg, 2001).
This is a business enterprise that contains a legal body which is completely separate from the business in that they are not at all liable to any liabilities incurred by the business. It is mainly formed with the intention of generating income while acting as a source of employment to the community. Corporate are normally regarded to be C corporations unless elected to form an S corporation (Palmiter, 2006).
An S corporation is not liable to income tax payment; the income is divided among the shareholders who then fulfill their individual obligation towards income tax payment. For instance the S corporation Statute (Mass. General Laws ch. 156D) has legal rights to demand the taxation of valid state elections (Sitarz, 2004). This business enterprise is formed when legalized by the state of incorporation through signing of an incorporation contract where an IRS form 2553 is filed within 75 days (Palmiter, 2006). S corporations have the same taxation policies like partnerships and sole proprietorship where they are not liable to double taxation (Sitarz, 2004).
S corporate losses are transferred to the shareholders and thus can be paid from the income benefit each gets. They are also protected from liabilities and the profits attained by each individual are higher than the other business enterprises because of exemption from corporate income taxation (Sitarz, 2004). Due to the large pool of investors raising capital is not as difficult as for the sole proprietors and partnerships. However numerous regulations are required to set up an S corporation which is an expensive process.
Also only 75 members are supposed to form an S corporation therefore there is a limit to the number of shareholders (Sitarz, 2004). Shareholders must be US citizens and are liable to the support of S corporations during elections. Furthermore the IRS of shareholder-employees is always at their back to demand for employment taxation before provision of benefits to the shareholders. Also they are not offered health care insurance cover (Sitarz, 2004).
C corporations have a similar business structure like an S corporation but with unlimited restriction to the number of shareholders and citizenship as individuals from other countries can also be shareholders. Shareholders of this business entity are not exempted from double taxation as they are liable to income tax and corporation tax.
Moreover the corporate losses cannot be passed on to the shareholders like in S corporation. However, the corporation can offer its shares to the public through stock exchanges markets thus increasing the scope of its investors which raises capital easily and quickly. The corporate is eligible to forward losses to the next years and can opt not to give the shareholders fringe benefits (Truitt, 2004).
Therefore any state business should establish either a C corporation or S corporation depending on the number of shareholders that are targeted. Hence Metal Bellows, Infusaid Corporation, Intermedics Infusaid and Intermedics can form a C corporation as their business operations are targeting the domestic and international market, hence will require a large sum of capital to be able to accomplish their goals (Palmiter, 2006).
From the information relayed, it is essential to plan business entities before deciding which business enterprise to establish thus fully benefit from it and minimize legal petitions, patents and injunctions. Also proper definition of a business entity is essential to avoid confusion of business policies and regulations.
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