Business Law Assignment 2

pdf

School

University of Iowa *

*We aren’t endorsed by this school

Course

148

Subject

Business

Date

Apr 3, 2024

Type

pdf

Pages

Uploaded by AmbassadorElementOryx34

INTEROFFICE MEMORANDUM To: Michael J. Pocchia, Esq. From: Bobbie J. Tremmel Date: January 26, 2024 Re: Mom & Pop General Store ASSIGNMENT Discuss the advantages and disadvantages of our client’s new business as each type of business entity, discuss the relevant facts that should be considered in determining the right business entity for them, determine which business entity is best for their situation, and explain what considerations went into concluding the best business entity. FACTS Our client, Mom and Pop, has opened a General Store. They are considering doing business with online retailers who will sell through their General Store. The online retailers will be shipping directly to the customer so the store will not be housing any inventory. They have asked the firm to help them determine the best business entity to structure their new business as. ISSUES 1. What are the key advantages and disadvantages of operating Mom and Pop's business as each different type of business entity? 2. What relevant facts should be considered in determining the ideal business entity for Mom and Pop? 3. What entity is most appropriate for Mom and Pop? 4. What key considerations caused you to reach this conclusion? ANALYSIS 1. What are the key advantages and disadvantages of operating Mom and Pop's business as each different type of business entity?

A. Sole Proprietorship Advantages: This entity is the simplest, least expensive, and easiest to set up, manage, and operate. A sole proprietorship is an unincorporated business owned by one person. They require no government filings and sometimes only need a local license and a registered name to operate. Sole proprietors own all the profits and assets of their business and have sole discretion in decision-making and control. There is less federal and state regulation when filing taxes. Disadvantages: Sole proprietorships provide the least legal and financial security to the owner because the business is not a legal entity and therefore is not separate from the owner like a corporation. Thus, the owner is responsible for all aspects of the business and has unlimited personal liability for all debts and financial obligations of the business. Sole proprietors pay income tax and self-employment tax for the business's income on their tax returns, so if there are not enough business write-offs, they can end up paying high taxes on their income. B. Partnership Advantages: This entity’s ownership is not limited to one person and is owned by two or more individuals. The partners share in the profits, assets, and management of the business, whether they contribute their money, labor, or skills, and they share in all the responsibilities, losses, and liabilities. Disadvantages: Partnerships have unlimited personal liability. Each partner is equally liable personally for all debts incurred and is legally responsible for the business acts and personal actions of the other partners. Tax liabilities are passed through to the individual, and each partner pays taxes on their net income separately.

C. Limited Partnership (L.P.) Advantages: This entity is formed by one general partner and one limited partner. The general partner takes part in and manages the day-to-day operations of the business. The limited partner does not take part in the daily business activities, giving the general partner more control over the decision-making. The limited partner makes financial contributions and shares in the profits of the business, and their liability is also limited to the extent of their investment in the business. Limited partnerships do not pay federal income tax, instead, they each pay taxes on their profits earned. Disadvantages: Limited partnerships are more complex to manage. They must comply with numerous statutory formalities, such as state filings, annual reports, and filing fees. Limited partners cannot participate in the day-to-day activities and decision-making or they risk losing their limited liability status, thus relinquishing full control to the general partner. General partners thus assume all the responsibility of the business and have unlimited personal and joint and several liability for the business’s debts and obligations. D. Limited Liability Partnership (L.L.P.) Advantages: A limited liability partnership functions like a limited partnership except the partners are not liable for any losses incurred due to another partner's negligence or misconduct. They also reap the benefits of pass-through taxation. Disadvantages: Depending upon the state, LLPs can be expensive to form and maintain. Some states require liability insurance, and some states have more required documents and filing fees than others.

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

E. Limited Liability Corporation (LLC) Advantages: This business entity combines different aspects of a corporation and a partnership. It is flexible, easy to operate, and has excellent liability protection. Owners are members and have limited personal liability, shielding their assets from the company’s debts. This entity has pass-through taxation; federal tax liability is more flexible, as it can be taxed as an S. corporation or a C. corporation, depending upon the business description. Disadvantages: This entity is more expensive to set up and maintain than a sole proprietorship. It requires more filings and is more complicated to form. A member can only transfer their financial interest in the LLC to another person, but that person will not become a member of the company unless voted in by all members. F. C. Corporation Advantages: This entity is separate and distinct from its owner and is responsible for its debt. Just like an LLC, this entity has excellent liability protection. The only liability a shareholder has is the amount of money they have invested in the corporation. This entity has unlimited growth potential because it can sell an unlimited number of stocks to an unlimited number of shareholders to raise money. Disadvantages: This entity is subject to double taxation. It pays taxes at a corporate level on its profits and the shareholders also pay taxes on their dividends. It has more formalities and is costly to set up and maintain, requiring more complex filings and rules to follow than any of the other entities. G. S. Corporation : Advantages: Like an LLC, this business entity has excellent liability protection and is easy to operate, having only a once-a-year tax filing requirement. It is not subject to double taxation.

It does not pay taxes on its profits, instead, profits flow through to the owner, and the business’s net income is taxed as their personal income. Dividends are flexible and can be designated to the owner and employees as dividends, so the corporation does not have payroll tax. Disadvantages: The number of shareholders is limited in this entity and is more costly to set up. It also has the potential to face more scrutiny from the IRS. 2. What relevant facts should be considered in determining the ideal business entity for Mom and Pop? The new dynamic of doing business with online retailers selling through their general store, and the amount of time and effort they want to put into maintaining the business and managing the day-to-day activities are the relevant facts to most consider. 3. What entity is most appropriate for Mom and Pop? Considering they want to operate the business on a smaller scale and have more time to relax than they did with their last general store, a limited liability company filing would be the best entity for them. The desire to allow online retailers to sell through their store opens them up to more liability than before. They will not be housing the inventory; however, they will be acting as the middleman between the retailer and the buyer, so they must protect themselves from being legally responsible. 4. What key considerations caused you to reach this conclusion? Mom and Pop are in their golden years and still have a desire to keep working and run their general store. Considering they want to open their store up to conduct business with various online retailers, they are also opening themselves up to more liability. Operating under an LLC will protect their assets and shield them from any liability that could arise from being a middleman.

CONCLUSION 1. What are the key advantages and disadvantages of operating Mom and Pop's business as each different type of business entity? A. Sole Proprietorship: In this case, the advantage of operating the business as a sole proprietorship would be the control, simplicity, and ease of formation, however, the disadvantage comes with the liability factor. Opening to online retailers makes them vulnerable to losing their assets because the business is not separate from the owner. B. Partnership: The advantage here would be sharing the day-to-day business activities and business profits, but in this case, mom and pop are already considered partners because they are married. The disadvantage is unlimited personal liability; each partner is personally and legally responsible for the business acts of the other partners. C. Limited Partnership: I don’t see an advantage to running the business as a limited partnership in their case because they are married and are considered one; unless they each want to take on two separate and distinct roles with clear and concise legal and written boundaries and parameters. D. Limited Liability Partnership: Like a limited partnership, I don’t see an advantage in running their business as this entity. However, if they did choose this entity, this would give each of them protection from being liable for each other’s negligent actions or misconduct and would also shield their assets from creditors. This type of partnership, like a limited partnership, is best for those who want to segregate their responsibilities, i.e. one person invests financially and the other manages day-to-day operations. E. Limited Liability Corporation: The advantages of operating as a limited liability company far outweigh the disadvantages. This business entity is ideal for them because it is a hybrid of a corporation and a sole proprietorship which provides a degree of liability protection from the business debts. There is also flexibility when it comes to taxes because they can choose to be taxed as a corporation or a partnership. F. S. Corporation: The advantage of operating the business as this entity would be like operating an LLC, but it would be more costly for them to set up and maintain. G. C. Corporation: In this case, there is no advantage of operating their business as this entity. This entity pays taxes at a corporate level and shareholders pay taxes on the dividends.

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

2. The facts to be considered in determining which business entity is best for Mom and Pop are time, money, and doing business with online retailers. 3. The entity most appropriate for Mom and Pop is to set up their new business as a limited liability company. Yes, this entity will take up a little more time than they may want, but the benefits outweigh the liability. 4. When taking into consideration all the advantages and disadvantages of each entity, the key considerations that caused me to conclude that they should set up as an LLC are as follows: 1. Time. 2. Money. 3. Protection. RECOMMENDATION Considering that Mom and Pop want to run things on a smaller scale and want more time to relax in their retirement years, I recommend that they set up their general store under a limited liability company.

Sources used: Fundamentals of Business Organizations for Paralegals, seventh edition. https://efinancemanagement.com/financial-accounting/forms-of-businesses https://www.indeed.com/career-advice/career-development/sole-proprietorship https://www.forbes.com/advisor/business/types-business-ownership/ https://www.caminofinancial.com/en/blog/entrepeneurship/types-of-business-ownership/

Business Law Assignment 2

Related Documents