BUS607 Assignment Week 6 Final Paper Memorandum

Name

BUS 607 Business Law for the Accountant

Instructor

UAGC

21/8/2022

MEMORANDUM

DATE: 15th August 2022

TO: Manager,

FROM: Associate,

SUBJECT: Recommendation on a new business entity.

I am writing to recommend that the client form a corporation because a corporation would be more likely to survive a lawsuit, especially one involving product liability. If the client remained with a sole proprietorship, they would be personally responsible for any damages and judgments that resulted from selling faulty products. By forming a corporation, however, the new business entity will allow the client to maintain personal protection against potential lawsuits because it separates the corporate ownership from the owners' assets.

Advantages of a corporation include:

1.      Confined individual responsibility

It is important to remember that a company is its entity under the law and is not the same as its shareholders. In a corporation, the shareholders are shielded from personal responsibility for the obligations of the business. The primary benefit is that directors' exposure to the company’s creditors is limited. Creditors' claims in a bankruptcy proceeding are typically restricted to the value of the company’s assets, while shareholders are shielded from personal liability. Because of this, unless you guarantee a debt, a creditor will not be allowed to seize your belongings to satisfy the bill. However, many financial institutions still call for guarantor signatures.

2.      Modifications to the transfer of ownership process

Since a company is its entity, its shareholders do not have immediate title to the business’s assets. If anything, they possess shares in the company, which in turn possesses the assets. The ease with which ownership may be transferred is greatly enhanced. It is much simpler to entice investors when property owners may be transferred. It is important to have a clear organizational structure so that investors like venture capital firms and angel investors may enter and exit their investments on the conditions they have committed to.

3.      Unrestricted longevity

Incorporated enterprises also have the additional benefit of having a potentially infinite lifetime. When a shareholder passes away, his or her shares may be sold or given to heirs. Conversely, sole proprietorships instantly collapse when their principals die away.

4.      Quick and easy believability

Having your company formally recognized as an entity may immediately increase your company’s respectability. Everyone you approach for funding, loans, supplies, clients, or employment will quickly see your seriousness and long­term focus. However, a greater investment of time and resources is needed to form a corporation. A company must keep its financial records independent of those of its shareholders. Corporations must submit their own financial accounts and tax reports and pay an annual registration cost. If you want your firm to succeed in the long run, the challenges you face along the way are necessary.

5.      Increased availability of funding sources

Securing funding and grants may be simplified by switching to this way of operation. It may improve your company’s reputation, which can help when seeking funding or bargaining with a supplier. There will be a greater likelihood of interest from potential investors like venture capital companies and angel investors if a corporation is successful.

6.      Diminished tax rates

There are tax advantages to forming a corporation, and big businesses can pay less in taxes. Tax rates for corporations are often far lower than those for individuals.

Duties of the owner

On forming a corporation, the owner’s duties would be largely the same as those of a sole proprietorship. The owner would still have to be responsible for all of the financial decisions and ensure that all taxes were paid on time. The client would also have to ensure that suppliers were paid and ensure product quality. The only real difference would be the potential risk of being sued if someone was injured from using the defective spray bottle. This personal liability can be eliminated by forming a corporation. Duties of the owner will include:

1.      Preparation and strategy

To a large extent, it is up to the owners to steer the ship. They are responsible for developing and implementing the company’s business strategy, marketing initiatives, and other initiatives necessary to maintain profitability and competitiveness. The ability to do research and prepare ahead is crucial for a company owner. In order to meet deadlines, reduce stress, and strike a better work­life balance, more company owners are turning to time management applications.

2.      Accounting and finance

Proper financial management is essential for a company’s survival, and the responsibility falls on the shoulders of the company’s owners. The entrepreneur is on the hook for securing the first funds needed to launch the company, whether it via a traditional bank loan or a crowdfunding campaign, as well as for covering the costs of developing and launching the product, acquiring marketing assets, and staffing the company. Do not lose sight of the need to keep up with your company’s banking, payments, taxation, and general accounting.

3.      Validity and lawfulness

As a business owner, you must comply with all applicable local, state, and national regulations. As was previously discussed, it is crucial to understand the legal criteria for running a business and incorporating your company. If issues arise with either workers or clients, he should be familiar with fundamental employment legislation and have access to legal counsel—the owner drafts, reviews, and signs all legal contracts and sales agreements.

4.      Business­to­Consumer Promotion and Sales

Marketing and sales are essential to every business’s success, regardless of how special or innovative its goods may be. Initially, the owner is expected to participate in sales calls and close transactions. In addition to his other duties, he will be in charge of the company’s marketing efforts, including the development of campaigns, the approval of advertisements, the management of social media and email marketing, and the sending of press releases.

1. Service to the Customer

In the first phases of a company, it is usual for the proprietor to handle the majority of customer service. A customer service representative’s duty may include responding to emails and phone calls, engaging in live chat sessions, and using client relationship management (CRM) software. It is down to them to increase their company’s good name recognition and satisfaction levels among consumers to the point where those customers spread the word about their company and return for more. As the company expands, additional customer support representatives will be added to the payroll.

5. Recruiting and human resource management

An important part of successful company owners is assembling a strong management team. Recruiting new workers, as well as enhancing the skills of current employees, falls under this category. The business owner is responsible for establishing work responsibilities, conducting performance evaluations, and determining employee compensation, perks, and career growth opportunities.

Liabilities

Regarding liabilities, once again, the client would remain liable for any damages or judgments brought against them for negligence or other legal wrongdoing. If a product was defective and someone got hurt, the owner and business entity could be liable because they are legally separate entities. However, the fact that the owner was a corporation would reduce the risk of being sued, and any judgments against the business entity would be held by it instead of the owner. An organization’s liabilities are the total of all of its owed debts and other contractual commitments. Financial and legal issues are all possible sources of trouble for your business. Liens and promissory notes are two common forms of financial obligations that may be filed against a business. On the balance sheet, creditors may be found mostly in liabilities. Your firm might be held legally liable for any statements or conduct made by its workers. Liabilities in the law include, for instance, those involving defective products. Examples of liabilities are:

1.      Debts

Your firm takes on debt responsibilities when it opens a corporate credit card account, gets longer repayment terms from a vendor after a credit application approval, or takes out a loan from a financial institution. Your company’s balance sheet will include long­term debt if it has any financial commitments with maturities of a year or more in the future. Long­term debt includes things like mortgages and bank term loans. Also included on the balance sheet, but classified differently, are commitments to pay interest or principal on debt that matures in less than a year. Due credit cards, accounts payable to vendors, and overdraft facilities are all forms of revolving credit.

2.      Contractual Liabilities

Contracts Liabilities arise from contracts existing anytime your company makes an express or implied agreement with another party. The moment you approve the consulting firm’s engagement proposal, your business has entered into a legally binding agreement. A contract is formed whenever your business commits to a transaction to provide services. There is an implicit contract between your business and the supplier of office supplies when your firm orders such supplies. In most cases, there are no interruptions in the progress of contracts. However, a supplier, contractor, or joint venture partner may disagree with the company’s performance on the agreement and take legal action to remedy the breach.

3.      Concerning Human Resources

Compensation obligations, payroll tax payments, compliance with unemployment insurance, and worker’s compensation laws are all liabilities associated with human resources. Companies that do not pay their payroll taxes are aggressively pursued by the Internal Revenue Service and state revenue bureaus. If you do not pay your taxes and any related penalties as soon as you are told, one of these agencies may shut down your business until you do. In addition, businesses risk legal action from disgruntled employees who, for instance, may file a claim for wrongful dismissal. Additionally, they may be held responsible for any misconduct on the part of its staff, such as sexual harassment or false advertising.

Breach of contract

When a contractual breach happens or is claimed, a party or both sides may desire to have the agreement executed on its grounds or seek compensation for any pecuniary loss caused by the purported breach.

The next step is usually litigation when negotiations fail to resolve a contract disagreement. A small claims court is a forum for resolving disputes between private parties where the amount in dispute is less than a certain threshold (often $3,000 to $7,500, according to the state). Contracting parties do not have to resort only to the court system or formal contract breach litigation to resolve their disagreements. A contract disagreement may be resolved by mediation or binding arbitration, both of which need the parties' consent. It is possible to avoid going to court by using “alternative dispute resolution” strategies instead of going to court over a business disagreement.

Remedies for Contract Violation

When one party to a contract is in violation, the other party may seek relief (also known as a

“remedy”) from the court. Legal recourse for contract violations often includes the following:

•       Damages

•       Specific Performance

•       Cancellation and Refunding

1. Damages

The most typical remedy for a contract violation is the payment of damages, which may take the form of monetary compensation or other benefits. Among the many forms of damage are:

The goal of compensatory damages is to restore the non­breaching party to the position it would have occupied if the breach had not happened.

The party at fault must pay punitive damages if the other party suffers a financial loss due to the breach. In the context of commercial contracts, punitive damages—intended to penalize the wrongdoer for very egregious behavior—are seldom given.

Nominal damages are assessed when a breach has occurred, but the non­breaching party has suffered no real monetary loss.

In the case of a breach of contract, the parties may agree to liquidated damages in the form of a monetary payment in exchange for the loss that has been calculated and agreed upon in advance. Any liquidated damages awarded must be based on a fair projection of potential monetary losses arising from a violation.

2.  Specific performance

If the non­breaching party feels insufficient money damages, particular performance may be an option. Simply put, specific performance is when a court orders a party violating a contract to fulfill an obligation under that contract. If the subject of the contract is unusual or one­of­a­kind and monetary damages would not be enough to put the non­breaching party back in the same position it would have been in if the breach had not happened, then specific performance might be an adequate solution for breach of contract.

3.  Refunds and Cancellations

If the non­breaching party has benefited from the breaching party’s violation of the contract, the non­breaching party may terminate the contract and seek reimbursement. The term “refunding” refers to putting the non­breaching party back into the position it was in before the breach, whereas “cancellation” of the agreement indicates that it is null and invalid and that all parties are released from any responsibility under the agreement.

If the owner has been mentioned in a violation of agreement lawsuit or feels another company has failed to respect its contractual duties to an organization, quite a deal may be at risk. If involved in a business disagreement, one should talk to a local attorney with expertise representing small businesses before making any final decisions. A business attorney can help assess the benefits and drawbacks of bringing a violation of contract litigation against any other available remedies.

Risk of loss

The risk of loss is the risk that an owner/stockholder may lose his investment. It is true that if the spray bottles were found to be defective, the business entity would be responsible for paying any judgments or damages. However, the business owner would not be personally liable for those damages. The risk of loss is always present in a corporation because it protects against personal liability with potential financial loss. The corporation is also more likely to survive lawsuits that may occur because of potential judgments against it. By forming a corporation, the client can protect themselves and their investment from any lawsuit that might come against them.

Non­forming goods

In a corporation, non­forming goods are those items that the corporation is not allowed to sell, such as defective goods or goods not certified by law. These goods pose a risk to the corporation and are therefore non­conforming goods. However, since a corporation is an entity separate from its owners/stockholders and not legally responsible for its actions, non­conforming goods do not pose a risk of loss to the corporation. Personal liability can be eliminated by forming a corporation.

The potential liability to consumers

Consumer potential liability can be categorized under product or consumer protection laws. Depending on the jurisdiction, the law may differ, but the premise of these laws is meant to protect consumers from dangerous products and services. Product liability laws are concerned with protecting product owners from dangerous products. If a seller places a defective product on the market for sale, that defect would be considered a breach of that seller’s duty to the buyer. In other words, if a seller sells a product with an inherent defect that causes damage to another party, then the manufacturer would be held liable for damages.

References

Drucker, P. (2017). Concept of the Corporation. Routledge.

Eisenberg, M. A. (1989). The structure of corporate law. Colum. L. Rev., 89, 1461.

Gevurtz, F. A. (2010). Corporation law. West Academic Publishing.