Law of business association
Law of business association
Law of business association
Before embarking on any business venture, it is important to critically analyze the business idea such that, what type of business it is and what it endeavors to accomplish, are clear right from beginning. Moreover, it is essential to have in mind that the business will most definitely attract taxes. Therefore, choosing the appropriate legal structure is essential as it will determine what percentage of taxes the company attracts. Also, it is of basic importance to conduct a needs assessment for the business such that the selection of the business structure matches the needs of business (Need, 2006). Issues like the personal liability the company faces, the amount of paperwork required and the amount of money to be raised are important pointers that ought to be put into consideration.
There are various forms of businesses including sole proprietorship, partnership, corporation, S corporation and the Limited Liability Company (LLC) (Lewis, 1916). Sole proprietorship is the simplest business structure since it just involves one individual who operates and owns the enterprise. All the business expenses and income are included in the owner’s personal income tax return. These tax aspects are attractive and they make sole proprietorship appealing. Corporate structures on the other hand are the most complex of all business structures. Also, they are a very expensive venture to undertake. The owner and the corporate structure are two different entities and due to this, it requires a lot of regulations as well as tax requirements. This is not an appropriate business structure for the new business especially because it is an expensive venture and the partners do not have much to invest in the business (Reed & Reed, 2009). An S corporation could have been an appealing business structure because it has tax benefits while still providing the business owners with protection in terms of liability just like a corporation. However, just like a corporation, an S corporation is subject to rules similar to those of a corporation meaning higher legal and service costs (Lewis, 1916). A limited Liability Company would not be a good choice for a startup with the partners not being very experienced in the business world due to its complexities of startup and operation.
Partnerships are most appropriate for businesses that are operated and owned by two or more individuals. In this case, there are four people who have come together, each from different areas of expertise, and designed a smart phone app which aims at giving people basic medical advice to help them diagnose their illnesses. Generally, there are two varieties of partnerships including limited partnerships and general partnerships. General partnerships have the partners manage the company as well as take responsibility for the debts incurred and other obligations. On the other hand, a limited partnership comprises of both limited and general partners. Limited partners have no control whatsoever over the company neither are they subjected to the same liabilities general partners have. General partners are the owners of the business and they assume liability that comes as a result of the partnership.
The major advantage of a partnership is that it does not pay tax based on its income but instead it passes through the losses and profits incurred to the individual partners. However, partnerships are more involving and expensive since they require more legal and accounting procedures at startup (Lewis, 1916). That said, a limited partnership is the most business structure for the proposed business. This is so especially because Rohit, Ariel, Charn and Levi are the major partners in this business. They will be the general since they are the owners of the idea and will assume liability that will result from the partnership.
The general partners came up with the idea but do not have much money to make the investment. Their intention is to make a small start with the hope of growing little by little. Charn’s father, who is rich, is willing to invest most of the money needed to start the business. This means he can be allowed to invest, a positive boost for the new and upcoming business especially because the partners do not have much money to invest (Need, 2006). Charn’s father can be considered as a passive member in the partnership. In this case therefore, Charn’s father will be a limited partner and will not be entitled to any management aspect of the business. He will not contribute actively in meetings and decision making matters. Moreover, his liability for the business’ debts and obligations are limited to the proportion initially made at the startup. This means that every entitlement, be it in terms of losses or profit, will be calculated in accordance with the percentage of initial investment.
Having the business set up as a Victorian partnership, there are the general partners and a limited partner. The general partners are Rohit, Ariel, Charn and Levi. The limited partner in this case is Charn’s father and by virtue of him being a limited partner, means that his entitlements to the business are limited with regards to the initial investment made to the business. This therefore means that he plays a minimal role to the management and decision making process of the business. Of the four general partners, each has their own specialty and skill that is going to be used to positively impact to the business success . Rohit is a software engineering student and he has the expertise of developing the software application. Ariel is a nursing student and her advice was required to inform the medical aspect of the business especially because the software app is designed to help people self diagnose the medical complications. Charn is an accounting student and he is required to take care of the business side of things. Levi is a law student and will deal with everything to do with legal aspects of the business.
It is clear that from the beginning, Ariel the nursing student had a concern which was ensuring the all risks associated with doing the business are minimized at all cost. This could be because she had predicted some danger especially because the app does not only help people to carry out self diagnosis but also it encourages people to conduct surgery on themselves. Ariel being a nursing student, should have been in a position of warning the members on the dangers of selling such a product to the public (Lewis, 1916). This is because most likely when someone is sick or is attending to a sick person, they are most likely not in their right state of mind especially due o panic or even pain. This therefore is most likely to lead to a scenario where the procedures get misinterpreted or even have an important procedure skipped. This can therefore lead to injury or even the death of a patient. Smart phones are so much being handled by children who might access the app and end up injuring themselves. More research in terms of laws governing such practices as self diagnosis and surgery should have been top of the agenda before launching the app. It is evident that little effort was devoted to this because Levi said there was no legal problem with operating such type of business and his word was taken for that.
A partnership business structure stipulates that all general partners are equally entitled to the benefits of the business. Every partner has their own expertise which will be used to positively benefit the business (Banoff, 1979). Rohit is the software engineering student and therefore he has the expertise to develop the app. However, it is unlawful that Rohit built into the app a mechanism that automatically diverts one half of the sales revenue to him personally. He further claims that this is fair because the app belongs to him. It is important for him to realize that by virtue of agreeing to enter into a Victorian partnership, he loses all rights to possession of the app despite him having developed it. The app is owned by the four general partners and every decision has to be made by all the partners.
It is essential for all the participants in a business get to understand what business structure has been agreed on and what their role and position will be in the business. In this case, partnership business structure was chosen. In this case, there are general partners and limited partners. When it comes to the general running of the business, including decision making and management aspects, general partners are involved. On the other hand, limited partners come in as passive players who choose to invest in the business but do not take part in the management and decision making processes of the business (Dudin et al., 2013). Following the demands by Charn’s father who is seeking access to the business records and accounts as well as getting involved with the general affairs of the business running, it is evident that all the partners were not informed of their roles, responsibilities and entitlements. This is so because if it were otherwise, such demands would not have been put across because everyone would be aware of what is expected of them. Therefore, it is important to enlighten Charn’s father on his position in the business and what he is entitled to. It is not until he gets to understand what influence he has to the business that he will get to know why he is not entitled to the business records and accounts of the business. It is also important to get legal services involved where such partnerships and each partners’ entitlements are documented for future reference.
Banoff, S.I., 1979. Tax Distinctions Between Limited and General Partners: An Operational Approach. Tax L. Rev., 35, p.1.
Dudin, M., Ljasnikov, N., Pankov, S. and Sepiashvili, E., 2013. Innovative foresight as the method for management of strategic sustainable development of the business structures (No. dud2).
Lewis, W.D., 1916. Uniform Limited Partnership Act. U. Pa. L. Rev., 65, p.715.
Need, W.C.D.H.P., 2006. Human resource management: Gaining a competitive advantage.
Reed, A.M. and Reed, D., 2009. Partnerships for development: Four models of business involvement. Journal of Business Ethics, 90(1), pp.3-37.