Week 7 Business Law

Answer

Case study Three: Business Entities

This milestone examines the case of Josh and Jeb who have been friends for years. The two have started Arcadia Sports; a joint business that sells sporting products and offers outdoor excursions such as camping, white water rafting, and rock climbing. They have agreed to share profits equally and that Jeb be involved in the daily operations and management of the business. Essentially, Jeb is a rich wind power tycoon while his friend is a lifelong outdoor enthusiast desiring to share his ambitions with others. During their first whitewater excursion, one of their customers fell from the raft and permanently injured her spine. During the same period, the government closed Jeb’s wind farms, making him bankrupt and unable to offset his dues.

1. Advantages and Disadvantages Of Business Entities

Sole proprietorship is a form of business unit where a person decides to start the business on its own and has the full control of over it in terms of management and profits. Forming this business unit can be appealing to entrepreneurs due to several reasons. One, it requires few legal formalities to be formed and the sole proprietor exercises full control over the business in terms of management and profit (Kubasek, Browne, Dhooge, Herron, & Barkacs, 2017). Reportedly, the proprietor has the power and authority to hire workers, determine business hours, and transform the nature of the business (Kubasek et al., 2017). Lastly, the sole proprietor enjoys all the profit alone and these revenues are taxed as personal income and thus not subjected to double taxation.

Despite the fact that sole proprietorship is an appealing form of business unit, it has numerous disadvantages. When a person sustains injury and decides to take legal action against the business, the sole proprietor takes personal liability for the losses, as well as, obligations linked to the business (Kubasek et al., 2017). Secondly, funding sole proprietorship is limited to the proprietor’s personal funds, as well as, any loan he or she obtains. Similarly, the business can collapse in case the proprietor falls sick or dies. Lynott (2017) also noted that there is high possibility that a sole proprietor will struggle in the early stages since the business incurs large capital costs as compared to the revenues it generates.

Partnership is a form of business unit where atleast two persons have agreed to share the management and profits generated in accordance with the Uniform Partnership Act. A major advantage of partnership is that its formation is easy because the partners are not required to formulate a written agreement to form the partnership, although it is recommended. Secondly, in partnership, income is often taxed as individual income for the partners involved. This implies that business losses can be deducted from the partner’s taxable income. However, a major disadvantage of partnership is that all the partners are personally liable for the business’ debts and losses. Secondly, as seen in the case scenario provided, Jeb hardly take part in the daily operations and management of the business yet still share the profits generated equally with Josh. Therefore, a major limitation is partnership is that profit is shared equally among partners regardless of whether they participate in the management of the business or not.

The largest and probably the most prevalent form of business unit is a corporation. A corporation is established when stocks are sold to investors who consequently chooses a board of directors to manage the operations of the business. A major advantage of a corporation is that revenues generated are taxed as income to the stockholders and not partners. Secondly, it is easy for stockholders to raise capital as they can sell the stock. Another advantage of corporations is that stockholders have limited liability to any loss that the business may accrue. Despite these advantages, corporations experience double taxation of their profits and that many legal formalities are required before they are established. Essentially, starting a corporation is not a better idea for Josh and Jeb. However, in case their business survives, they may decide later to form a corporation of Arcadia sports.

Another option for business organization is the Limited Liability Company (LLC) that refers to an unincorporated form of business organization that supposedly offers similar benefits as corporation and partnership (Prabowo, & Zakyy Umami, 2018). As already stated, corporations enjoy limited liability and partnership offers tax and advantages and management flexibility these benefits are put together in LLC, making it more appealing to numerous businesses (Lynott, 2017). A major limitation of forming limited liability company is that the business is regarded a property of the state and this can expose the organization to a greater risk of litigation in federal courts. To eradicate this limitation, a limited liability company may restrict its members to a single or few states.

1. Specific Business Entity for Arcadia Sports

A limited liability partnership would be the most appropriate recommendation for Josh, Jeb, and Arcadia Sports. Jeb acts as the partner who contributes hugely to the business in terms of financial resources given his well-established wind power business. Unfortunately, he does not take part in the daily operations of the business. On the other hand, Josh acts as the subject who offers skills and expertise on everything related to outdoors and sporting products and thus regarded as the face of the company’s operations. In this scenario, the liability protection is a proper and suitable selling point and limited liability partnership safeguards individual partners from personal liability for careless acts of other employees or partners not under their direct control. Another critical factor for limited liability partnership is that each partner is not personally liable for the business’ debts, as well as, other obligations.

1. Type When Josh and Jeb Would Be Personally Liable for Jane’s Damages

Based on the features of each form of business unit already discussed, Josh and Jeb would be personally responsible to Jane for the injuries and damages under a partnership. Schwidetzky (2018) argued that under a partnership, all the partners are personally responsible for all the debts including those of their partners. As such, in this case, after Jane recovers to take legal actions against Josh and Jeb, the two will ultimately bear the costs of the damages.

1. The Ability of Jeb’s Personal Creditors to Seize the Assets and Profits of Arcadia Sports

The only business entity that would allow Jeb’s creditors to personally seize the profits or assets of Arcadia Sports would be general partnership. Under a sole proprietorship, Jeb’s creditors would have the ability to seize all his personal assets because sole proprietorship is not a separate legal entity and therefore the sole proprietor is personally liable for all the actions and debts of the business (Schwidetzky, 2018). In this case, Arcadia Sports would be regarded an asset of Jeb’s for the sake of persons seeking payment. Similarly, In case Jeb’s wind farm business together with Arcadia Sports was established either as limited or limited liability partnerships, there would be a significant change in handling of debts.  Specifically, regarding Arcadia Sports, persons seeking debt repayment for Jeb would only have to get Jeb’s investment in the business, thereby leaving all assets owned by Josh out of this. Similarly, in case the wind farm together with Arcadia Sports was established as corporations, the debtors would have scarce recourse concerning assets linked to Acadia Sports. In particular, they would confiscate the assets that Jeb invested in stocks as opposed to the business itself since them the business and Jeb are separate legal entities. However, in the case of a general partnership, both Josh and Jeb would share unlimited liability for their obligations and actions. For this reason, Arcadia Sports would be regarded as an asset towards repaying debts that Jeb has. In this business unit, it is easy for Jeb’s creditors to recover the debts since each partner is personally responsible for partner’s debts.

Conclusion

             Regarding the person liable for Jane’s damages, it is apparent that Josh will take up the personal liability irrespective of the form of business unit they decide to establish. Based on the features of each form of business unit, it is assumed that both Josh and Jeb established a Limited liability partnership. This implies that Jeb would have limited liability and can only be held liable to the limit of his capital contribution. Regarding seizing of the assets, the assumption is made that Jeb’s personal creditors have the capability of seizing the revenues that Arcadia Sports generates because him together with his partner are regarded as a single legal entity.