Scenario:
You have decided to develop a business that concentrates on importing fair-trade world goods for sale in retail mall outlets in several different American cities (Detroit, Philadelphia, Seattle, Las Vegas, Atlanta, and Dallas). The theme you have selected is, "A Small World." Because of the nature of this business, you will need to investigate world economic trends and theories, as your products will come from many different countries and cultures. Your product line will be primarily décor items, some small furniture, small gifts, and bric-a-brac items. The stores will be relatively small (about 4,500 square feet) and packed with items, so that there is a lot for potential customers to see and touch. You will also offer free coffee samples for shoppers (and may also decide to sell some), but coffee will likely be your only consumable product. The outlet stores will follow regular mall hours and because of the parking provided at the malls, parking should not be an issue.
The malls usually have high foot-traffic, so the potential for a lot of impulse buyers is high. This is good, because you will likely have little money for advertising. You are unsure about product mix and about the range of products. You have also thought about adding a sales Web site and perhaps selling home décor products to other retailers, such as Target, J.C. Penney, and Sears.
Based on the above scenario:
1. Choose a legal form for your business and provide your rationale for choosing the legal form and rejecting the other possibilities. Remember to show a solid understanding of the legal issues here.
2. Address any trademarks, copyrights, and other legal issues.
3. Write a mission statement and organizational objectives.
4. Provide the responsibilities and titles of top management.
5. Outline the basic idea as to how the management structure will be interrelated (for example, who will work for whom, and what will those relationships entail?)
6. List company products or services.
7. Describe how the company's mission, objectives, and products are strategically integrated.
Legal Form Chart:
Many learners have questions about what legal form their budding enterprises should take. Here is a primer on legal form and some concerns about maintaining that form.
Form Impact Finances
Sole proprietorship You and the business are one Business income is the same
and the same. There is no as your income.
personal liability protection.
Partnership The business is one with you Business income flows
and your partners. There is no through the partners as
personal liability protection. Ordinary income.
Corporation The business is different from The business pays taxes as
you. There is personal liability a separate entity.
protection.
Types of Corporations:
Traditional (C) The business is different from The business is doubly
you. You are protected from taxed – first on profit and
liability. Then on any money
distributed, such as
dividends.
Nonprofit The business cannot make Profits must be spent.
profit.
Limited liability company You are protected from The business is taxed like
(LLC) liability. A partnership. Profit and
loss flow through as
ordinary income.
Sub-chapter S You are protected from The business is taxed like a
liability. Partnership.
There are also some hybrid styles as well. Limited and general partnerships are examples.
Sole proprietorships have the great disadvantage of leaving you open to any liability, and they do not provide any tax benefits. In these lawsuit-happy days, it simply is not good business not to protect yourself as strongly as possible from personal liability.
Therefore, one could surmise that almost every business organization should be a corporation of some sort. There are some advantages to a sole proprietorship, in that it is easy to set up and requires little record keeping or other formalities.
Partnerships also have the great disadvantage of not providing liability protection (and worse, you can also be held liable for the acts of other partners). There are no tax benefits. And in many states, when one partner dies, the partnership is automatically dissolved. The benefits include ease of setting up (just an agreement between the parties) and little administrative work.
A corporation is a legal term for a fictitious entity that is independent from its shareholders. If the corporation is traditional (usually because it is large), it is in C form and more likely than not also incorporated in the state of Delaware (because corporations incorporated there have many benefits in terms of oversight, laws, shareholder control, and things such as poison pill defenses against hostile takeovers). Most investors providing funding will want you to be a C Corp and most likely incorporated in Delaware.
The principle benefit is protection from liability (but there are things you have to do – see below). The corporation can be sued, but lawsuits cannot touch the personal assets of investors and owners. The company can provide for fringe benefits. There are some tax benefits, and the corporation can retain earnings. It is also easy to raise capital by selling stock. However, a corporation can be costly to form, require a lot of administration, and may not be very flexible.
A sub-chapter S (Sub-S) corporation is a form of corporation that provides the liability protection, but allows income and losses to flow through the corporation to the owners as if it were a partnership. While it can be somewhat costly to form, it is the best compromise for a small organization. The limited liability company (LLC) is very similar to the Sub-S, except that it has more flexibility (depending on local state laws). For example, a Sub-S Corp is limited to 35 shareholders. LLCs can have an unlimited number of shareholders. A few states tax the LLC like a regular corporation, but most tax it as a partnership.
As mentioned earlier, the largest benefit in being a corporation is protection from liability, because even something like a bookkeeping service can have potential liability issues in every business. But the corporation can be gotten around (called piercing the corporate veil) if the managers and owners do not carefully do two things:
1. Funds of the shareholders and the business cannot be commingled. There must be separate bank accounts and funds must be carefully kept separate (that is, no paying personal bills with company checks).
2. The owner must 'follow the corporate form'. They must have annual meetings (even if there is only one owner), keep corporate minutes, et cetera.
After all, a corporation is supposed to be a separate entity, and if the owners interchange cash or do not treat it like a real company, it is clear that it is a sham. The courts will then void the corporation, and the owners will be exposed to personal liability.
One would argue that almost everyone should have a corporation and not a sole proprietorship or partnership. Even though liability may seem unlikely, and given you will have insurance, the possible problems from liability are so huge that it does not make sense not to have the protection of incorporation. Remember, McDonald’s lost a very large settlement to a person who opened their cup of coffee while holding the cup in her lap. Tort lawyers always sue everyone to find the 'deep pockets'.