Factors Considered In Deciding the Form of Legal Business Entity
When starting a new business, it is very important to decide the form of legal entity which may be appropriate based on a number of factors. The legal entity can be sole proprietorship, partnerships (general and limited liability partnerships), limited liability companies, or corporations. One of the most important factors to consider when deciding the appropriate form of legal business entity is complexity. If one has limited capital and wishes to start a simple business unit, then sole proprietorship is the most appropriate. The second factor is the need for protection from the risk of liabilities. If the new business operates in a volatile industry where it is possible to experience huge financial losses, then a limited liability company or partnership can be considered appropriate. The ease of formation is another factor. It is easy to form a sole proprietorship as opposed to other forms of businesses. The issue of taxation may also influence the form of business entity that a person or group of people may choose. The aim is always to minimize tax as much as possible. According to Chiappinelli (2006), another important factor that should always be considered is the ease with which capital can be raised. It is easier to raise capital in limited liability companies or in corporations than it is in sole proprietorship.
- Taxation of various forms of business entity
In sole proprietorship, the business entity and its owner are legally considered the same. It means that the IRS only considers the earnings of the owner for the purpose of tax, and not the business itself. General partnerships are also not taxable in the United States (Harris, 2009). Tax is only levied on the earnings of the individual owners. However, a limited liability partnership may be taxed as an entity. Under the law, limited liabilities companies are independent entities hence are taxed. Corporations are also subject to income tax because they are considered independent legal entities, separate from their owners.
- Potential legal liability of various forms of business entity
In sole proprietorship and general partnerships, the business entity and its owners are fully liable to all the losses that their business may incur. It means that their personal properties may be used to settle debts of their businesses. In limited liability partnerships, the liabilities of other partners are limited, except the general partner whose liabilities are not limited. In a limited liability company, the liabilities of the shareholders are limited to their investment in the company, and their personal properties cannot be used to settle debts of their business (Klein, Ramseyer, & Bainbridge, 2012). In corporations, the liabilities of the owners are limited to their investments in the business.
Ease of Formation and Operation of the Various Legal Forms
Sole proprietorship is the easiest form of business entity to start. One only needs to decide the business name, search for its availability, register the business, obtain a license from federal, state, and local governments, and start operations. It is also relatively easy to start a partnership. The partners will choose a suitable business name and check for its availability. The business will then be registered by federal and state authorities before obtaining the license to start operations. The partners will need to understand their tax obligations. For a limited liability company, the shareholders will need to choose a name and search for its availability before filing article of association and paying a fee ranging from $ 100 to 800 based on the states. The shareholders will then be expected to an operating agreement to define rights and responsibilities of the members. The entity will then obtain a license which allows them to start operations. It is relatively complex to start a corporation. The members will start by selecting a name and searching for its availability, before appointing the initial directors. The directors will file the formal documents to the government and pay relevant fee. The members will need to set corporate bylaws and hold the first meeting of the board of directors before issuing stock certificates to initial owners. The entity can then get the license to start operations.
Types of Agents That Exist in the Law Relative to Business Entities
In sole proprietorship, the owner of the business is the only agent responsible for all the legal operations of the firm. However, if he legally hires an assistant to help in the operations of the business, then the assistant will also be a legal agent acting on behalf of the owner. In partnerships, all the partners and their employees are the legal agents of the business. In limited liability companies, the board of directors and the employees of the business are the legal agents. In corporations, the board of directors and the employees are the legal agents. Any binding agreement that any of these forms of businesses may have with outside parties may make these parties their legal agents, depending on the nature of the agreement. There are cases where this may happen unintentionally, but the law recognizes such third parties as legal agents unless the agreement is terminated.
Relationship of Agents and Principals
A relationship between an agent and principal is created when the principal legally appoints the agent to act on its behalf. The agent will be mandated to use the name of the entity that has assigned it the responsibility of handling a given task. The agent will have the duty of undertaking the given task in the expected manner and within the set time. The agent is not expected to have conflict of interest in the entire duration when the relationship exists (Hynes, 2015). The principal has the duty of explaining to the agent the specific tasks to be undertaken and the time within which the assigned tasks should be completed. He may also offer guidance to the agent from time to time to ensure that there is progress towards the right direction. The principal has a duty to pay the agent as per their agreement for the tasks completed.
Manner and ways in which actions of agents can cause liability to their principal
According to Halbert and Ingulli (2012), actions of an agent can cause liabilities to their principals through their actions with third parties. Once a legal relationship is formed between an agent and a principal, the agent is legally considered part of the business entity for which it is acting as long as the actions are in line with the assigned responsibilities. Any engagements between the agent and third parties are assumed to be with the blessings of the principal. It is assumed that the engagements are meant to benefit the principal. In case such engagements lead to any form of liabilities, then the principal will be expected to incur the resultant costs. Sometimes the third party may act in bad faith, but if this cannot be proven by court of law, then the principal will be fully liable. According to Emerson (2009), agents are always assigned specific roles. When an agent acts outside the prescribed jurisdiction, then the principal may not be liable. However, the principal will have to prove to the court of law that the agent and third party knew that the agent was acting outside the assigned jurisdiction.
Ethical Issues Present In Agency Relationships
The agency relationship is increasingly becoming popular in the modern business world as business entities try to improve quality of their products by focusing on activities they can do best and outsourcing others they consider complex or time consuming. However, there are ethical issues present in agency relationship that makes it work. There is the duty of loyalty where the fiduciaries are expected to put the interests of the corporation ahead of their own (Hynes & Loewenstein, 2012). There should not be any conflict of interest for the entire period of relationship, and attempts to divert assets, opportunities, or information of the corporation may be considered a breach of this loyalty. The two parties may also set fiduciary standards which will ensure that at all times the agent will act in the best interest of the client. The relationship between the agent and other third parties must be in the interest of the client and utmost good faith should be observed at all times.
Chiappinelli, E. (2006). Cases and materials on business entities. New York: Aspen Publishers.
Emerson, R. (2009). Business law. Hauppauge: Barron’s Educational Series
Halbert, T., & Ingulli, E. (2012). Law and ethics in the business environment. Mason: South-Western.
Harris, L. (2009). Mastering corporations and other business entities. Durham: Carolina Academic Press.
Hynes, J. (2015). Agency. Hoboken: John Wiley & Sons Publishers.
Hynes, J., & Loewenstein, M. (2012). Agency, partnership, and the LLC in a nutshell. Chicago: Thomson Reuters.
Klein, W., Ramseyer, J., & Bainbridge, M. (2012). Agency, partnerships, and limited liability entities: Unincorporated business associations: cases and materials. New York: Foundation Press Thomson.