Legal Underpinnings of Business Law

Legal Underpinnings of Business Law

Steven Jackson

BUS670: Legal Environment

Dr. Fiorentino

February 17, 2014

Tinker’s Home Security Service (Sole Proprietorship)	Tinker &Tailor’s Home Security Service (General Partnership)	Tinker & Tailor’s Home Security Service (Limited Partnership	Tinker & Tailor’s Home Security Service, Inc. (Corporation)	Tinker & Tailor’s Home Security Service, LLC (LLC)
In a breach of contract, I am personally liable for all actions taken in the lawsuit. All debts incurred by the business fall upon myself and my personal assets can be affected.	During a lawsuit, my partner and I are both equally held liable no matter who committed the tort. Our personal assets can be affected and we both will be responsible for the debt incurred.	As a limited partner I am only held liable for debts up to the amount that I originally invested. All other actions in a lawsuit must be taken care by the general partners.	As a shareholder in a corporation, I will have limited liability during a lawsuit. I am not liable for corporate debt but only the purchases made for stock.	In an LLC, I will have limited liability and my personal assets will not be affected. The LLC will only be held liable for the debts and liabilities incurred by the business.

Today in the business world the number one concern for most companies is profit and loss. From the outside looking in, most consumers only assume that every business is making a huge profit but not realizing the complexity of running a business. One of the biggest dangers of running a business is the possibility of a lawsuit. Depending on the type of business organization you have will determine how liable you are during a lawsuit. I will discuss the pros and cons of these business organizations as well as the personal liability exposure an owner has in each one.

Running head: LEGAL UNDERPINNINGS 1

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LEGAL UNDERPINNINGS

As you can see from the above matrix, the amount of personal liability exposure decreases with the bigger business organizations. According to Seaquist (2012), “Each type of business organization offers certain benefits as well as drawbacks that should be carefully weighed before deciding which form is best suited to the new venture.” The sole proprietorship is the easiest and quickest business organization to get started, but you are held more liable when compared to a corporation or LLC. As the owner of a sole proprietorship all of my assets can be lost in a lawsuit. Corporations and LLC’s are more complicated and very expensive but they have limited liability, which is very helpful if the company were to be sued. As the owner of an LLC, my personal assets will not be affected during a lawsuit, only the business.

As the owner of a sole proprietorship I know that I have unlimited personal liability for all debts incurred by the business. I am basically responsible for all the debts, contracts, and legal issues that the business has. According to Seaquist (2012), “Many times in a business failure of a sole proprietorship, it leads to personal bankruptcy”. To limit my personal liability I would first think to get a partner. A general partnership would mean that my partner and I would equally be held liable for all debts, but our personal assets can still be affected. The best thing for me to do would be to turn the company into an LLC. As an LLC, the company is a separate entity from the owner. “If a person sues the company, only the assets of the company can be used to pay any legal judgment. The personal assets of the owner are safe” (LLC vs. Sole Proprietorship, para. 4, 2011).

As a member of a general partnership, my partner and I will be equally held liable for all debts and our personal assets can be considered part of the business. According to www.bizfilings.com, “Partners in a general partnership bear responsibility for the actions of the other partners. General partnerships are undoubtedly the easiest to create and have the lowest ongoing cost, but they also provide the highest risk to the partners” (para. 10). To limit my liability exposure it would be best for me to become a limited partner. Under this partnership, the general partner will have unlimited liability and the limited partner will have limited liability. Therefore, my personal assets will be protected and I can only be held liable for the amount that I invested in the partnership.

As a limited partner in a business I only have limited liability while the general partner has unlimited liability. In my situation as a limited partner I know that my liability exposure has already been decreased and can only be held liable for debts in the amount that I invested in the partnership. To make sure my liability exposure remains limited, I need to make sure that I do not get involved with running the business. According to Beckman v. Canada (1999), “A limited partner does not become liable as a general partner unless, in addition to exercising his rights and powers as a limited partner, he takes part in the control of the business” (para. 47).

As the owner of a corporation I have limited liability. According to Seaquist (2012), “Because a corporation is deemed to be an entity separate from its owners, the owners of a corporation are not personally liable for corporate debts beyond their investment in the company. All that a shareholder risks in purchasing a share of stock is the money paid for its purchase.” To limit my liability exposure and maintain it, I need to show that my business exists as a separate entity. A simple way of doing this can be by keeping my business and personal assets separated. Attorney Randall Fisher (2013) states, “Under no circumstances should you use personal accounts for business expenses or business accounts for personal.”

As the owner of an LLC, I have limited liability and my personal assets will remain safe from any debt incurred by the business. To decrease and maintain limited liability exposure I will need to make sure my LLC status is known.

If a judge cannot distinguish between what belongs to the business an what belongs to the owner- and the owner cannot prove the rules have been followed- the judge may determine the company effectively less like a corporation or LLC and more like a sole proprietorship or general partnership- entities that lack the same liability limitations. (Fisher, 2013, para. 14)

Simple things like having business cards and letterheads can also help maintain your LLC status.

A business that I have always wanted to open up is a fitness center. Growing up as an athlete playing college football and running track, I always had the desire to own a gym. Having my own gym could mean that I can put all the equipment and necessities that I feel are important to live a healthy lifestyle. The best business organization for me to open my fitness center would be a general partnership since I plan on it being small. The main reason why I would choose a general partnership is so that I can have someone help manage and run the business. I personally feel like opening my first business would be easier if I had a partner to help with ideas and day-to-day issues. Having a general partnership is also easy to form since it can only take a verbal commitment or handshake. Also, we would only need a business certificate which is not hard to get and inexpensive. This partnership will mean that we are a tax-reporting entity and not a tax-paying entity. Therefore, profits are split between my partner and I, and then taxed as personal income on our own tax return. In this general partnership of a fitness center, we both have unlimited personal liability. This means we will equally share all of the debt and legal issues that is accrued by our business no matter who is at fault. Also, our personal assets can be affected if we are involved in a lawsuit.

Owning a business can be very rewarding and a personal goal that someone might strive for. I feel that it is very important to know about the legal side of owning a business and to know what options you have. I think that the liability exposure that one has should be one of the major factors that helps a person decide what kind of business organization they want to have. Whether if you are determined to have a sole proprietorship or comfortable with just being a limited partner, I think that you will end up learning more about legal underpinnings no matter what kind of business organization you are involved with.

References

Beckman v. Canada, (1999). CanLII 9371 (FCA), [2000] 1 FC 555 para 47. Retrieved from http://canlii.ca/t/4lp9

Bizfilings.com, (2014). Choosing the right type of business partnership. Retrieved from http://www.bizfilings.com/learn/form-partnership.aspx

Essortment.com. (2011). Limited liability company vs. sole proprietorship. Retrieved from http://www.essortment.com/limited-liability-company-vs-sole-proprietorship-23913.html

Fisher, R. (2013). 5 Steps to limiting personal liability in business. Retrieved from www.thefisherlawoffice.wordpress.com/2013/02/12/5-steps-to-limiting-personal-liability-in-business/

Seaquist, G. (2012). Business law for managers. San Diego, CA; Bridgepoint Education Inc.