Small Businesses and the Law Assignment Essay Example

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Title : Small Businesses and the Law Assignment

Small Businesses and the Law Assignment

A. What is the legal structure of their business?

The structure of the business is sole proprietorship. It is owned and run by one person. The owner of the business obtained the suitable licenses for the business to start operations. Nevertheless, the sole proprietor is supposed to get a certificate of the business’ name from the local government offices where the business is operating (Childers 2008).

The sole proprietorship has the legal control of a: business assets apart from claims made by the creditors. The owner of this business gets and business profits in addition to losses and reports them as individual income for tax purposes. The owner is legally accountable for all losses and is supposed to pay all business debts. As a result, the owner of the business assumes the business risks to the extent of all his/her assets, irrespective of being utilized in business or utilized personally (Childers 2008).

The business owner chose sole proprietorship because it is very easy to establish this business and the business structure is very informal with less legal or governmental limitations. Still, all profits are kept by the owner and therefore the owner does not have to share profits with anybody else. According to the business owner, he makes independent decisions. He does not need to consult anyone when making business decisions. Consequently, the business structure offers flexibility to respond swiftly to changing market demands. The business structure also requires low start up capital as compared to other business structures. Again, it has tax advantages whereby the owner reports income and profits on personal income tax return and pays taxes on net income. Taxes are calculated at owner’s individual tax rate which can be less than joint corporate taxes. Finally, it would be easier for the owner to terminate the business in case of any business difficulty (Robert 2006).
B. Why did they choose that business structure?

C. What factors did they consider before making the choice?

The factors the business owner took into consideration before choosing sole proprietorship is legal liability. Protection of personal assets is very important and therefore the owner ensured that he could personally afford the risk in case of any potential liability. The owner was starting a tax-consulting business and hence sole-proprietorship was the best option for him since there are minimal liability risks. The other factor was tax implications. According to the owner, it would be easier for him to pay taxes on all net profits on the business. Expenses required in setting up the business was another consideration. Sole proprietorship was easy to establish since this business structure requires no special forms to be filled or any charges to be paid to begin the business (Lewis 2008).

Still, the business does not require any special operating rules to follow and also this business structure is easy to start. Furthermore, sole proprietorship does not require election of officers to run the business, maintain records of crucial business decisions and follow other formalities. The business owner also took into consideration personal needs. The owner wanted 100% ownership of his business and did not want to work with partners. Finally, the business owner wanted flexibility. According to him, the business structure allows him the greatest room for growth. It is easy for him to expand the business into whatever he wants it to become. Furthermore, it is easy to change the business structure depending on his needs and also market expectations (Gordon 2007).

Operating business as a sole proprietor legally binds the owner as personally accountable for each and every business debt, for all business operating costs being sued, for business insolvency, and various financial or legal maladies. Furthermore, a creditor or lawsuit may legally take away the business assets, as well as the personal assets of the sole proprietor, for example their home, savings and can even obtain a lien against future wages. Basically, there are very many liability risks involved in carrying out a business as a sole proprietor (Lewis 2008).D. What, in their opinion, are the legal risks involved in the type of business carried on?

E. What legal precautions did they put in place to protect their business and themselves against liability?

The business owner has sheltered himself from personal liability by holding the titles of the personal properties with his spouse. He has also obtained a release from his clients. Here, he has requests his clients to sign an agreement indicating they do not hold hi responsible for any damages he may cause, including his negligence. Finally, the business owner has bought an insurance to cover potential damages (Robert 2006).

A. Identify legal principles studied in class that are applicable to the information gathered

In sole proprietorship, the business is not a legal entity. This means that according to the law, all debts and claims against the business are charged against the sole proprietor’s individual property. In case the owner of sole proprietorships is sued, insurance is the only form of protection against him/her losing everything he/she owns (Mike 2007).

Sole proprietorships are not taxable entities. This is the reason the sole proprietor is not required to fill out separate tax forms for the business. They are only needed to add a few forms regarding their business entity to their individual tax returns, and this is the only financial reporting that the law requires then to do. The state laws do not necessitate the entrepreneur to do anything special, for instance filing documents with the secretary of state. In case the owner has an intention of using a trade name, nevertheless, he/she might be required to file a fictitious name statement form, whereby the secretary of state record office. Moreover, the sole proprietor is required to get any essential permits or licenses needed by the state to run that specific business form. Finally, the law does not differentiate the sole proprietorship business owner and the business itself since there is unlimited personal liability (Mike 2007).

B. What other legal precautions/protection do you think the business owner should put in place?

A sole proprietorship does not provide protection against liability. Even if insurance passes some types of liability to the insurance carrier, the liability continues to rest with the business owner. Therefore, in my opinion the business owner should obtain a limited liability and therefore an entity is needed. The owner should get a single-member LLC as this will provide limited liability protection to the business owner as a sole proprietor (Steve 2009).


Childers, J., 2008, Trump University Asset Protection, John Wiley and Sons, New York.

Gordon, L., 2007, Legal Issues for Entrepreneurs, Juta and Company Ltd, California.

Lewis, J., 2008, Asset Protection Strategies, CCH, New York.

Mike, P., 2007, Surprisingly Simple: Independent Contractor, Sole Proprietor, and LLC Taxes Explained in 100 Pages or Less, Mike Piper, Sydney.

Robert, K., 2006, A guide to asset protection: how to keep what’s legally yours, John Wiley and Sons, New York.

Steve, K., 2009, The small business start-up guide: a surefire blueprint to successfully launch your own business, Cornell University, New York.