Name of the Student
Institution of Affiliation
Date of Submission
Business structure
The current business environment has become very competitive resulting from globalization and internationalization of the markets. The business structure gives business some competitive edge depending on the formation and the legal obligation of the business. John needs to understand the benefits associated with various forms of business ownership as well as their shortcoming before deciding on which to take (Noe, 2017). He requires an in-depth understanding of the statutory requirement, the ownership, liabilities, dissolution and taxation of each form of business structure. Some of the alternatives that John can consider are discussed below.
Sole proprietorship
A sole proprietorship is a form of business entity wholly owned and managed by a natural person who has no separate legal entity from business. The business structure lacks special rules and regulation to govern its operation (Nickels, McHugh, & McHugh, 2008). The advantages of the sole proprietorship are that John will have full control of the business which facilitates faster decision making. A sole proprietorship has business secrecy as no law compels them to publish their financial statements. The owner of the business enjoys all the profit of the business alone, and there is a sense of satisfaction as the owner is his boss.
The shortcomings of a sole proprietorship are; no limited liability, and in such, in case the business is insolvent, the personal wealth of the owner can be acquired to clear the loans, limited access to capital. The business has a limited managerial ability as the owner has no expertise in all areas. Lastly, the business life cycle is limited to the owner, and in case he dies or becomes bankrupt, the business comes to an end.
Limited liability company
A limited liability company combines a partnership with a corporation to form a limited private company. It has a liability shield of a corporation and tax pass through and flexibility of a partnership. Under the LLCs rule, one is not liable for the business debts unless he secured them personally. In the case where the distribution of members renders the LLC insolvent, they may incur personal liability (Ribstein, 2008). Where there is only one member, the LLC is disregarded in the taxation process where the owner files the LLC income or loss in an individual tax return.
Advantages of LLC business structure include members have limited liability which means their assets are protected from creditors. The LLC is not taxed at the corporate level and thus enjoys pass-through taxation. The LLC also has the flexibility of management where members can manage the business themselves or hire an outsider who is experienced to run the business on their behave. The cons associated with LLC includes; the limited liability has limits such that a court can rule that the structure does not protect personal assets, again, the LLC is considered as a partnership for taxation purposes where the members are recognized as self-employed (Ross, Westerfield, & Jordan, 2012). The LLC lacks continuity as a member turnover, death or goes bankrupt, the business is dissolved leaving the remaining members with the legal and financial obligation.
Partnership
John can join hands with the two people working with him to form a partnership. A partnership is a business structure where more than one person come together to form a legal relationship to carry business as co-owners. The partners are guided by the partnership agreement which stipulates profit and loss sharing of the partners, the obligation of each partner and any payables to a partner who participates in running of the business (Osterwalder, Pigneur, & Tucci, 2005). The advantages of a partnership are that it is easier to raise capital, few legal formalities, different expertise by partners for quality decisions and the profit margins of a partnership are higher since they don’t pay income tax. The shortfalls of a partnership include they have unlimited liability; continued disagreement among the partners can lead to the dissolution of the business venture and a withdraw of one partner from the partnership may bring to an end of the business.
If John decides to change V-Engines to a company, there are some legal and statutory document that he must obtain. First, John needs to acquire a certificate of incorporation which signifies that V-Engines has been incorporated as a legal entity under Companies Act. He also needs to acquire a Memorandum of Association which is signed by all shareholders agree to form a company. John also needs to prepare an Article of Association which states the rules of the company. As a director of V-Engines, John will have the following duties under the Companies Act 2006;
- To exercise powers as provided for by company’s law
- To advance the interest of the business by acting in utmost faith
- Make rational decision judgement
- Act in reasonable care, skills and diligence (Austin, Ford, & Ramsay, 2005).
- Should have no conflict of interest
As an employer, John has the following responsibilities towards his employees;
- Take necessary safety and health regulations
- Delegating work to employees in accordance with the contract of employment
- Respect workers human dignity
- Pay the worker’s wages and other necessary payment
References
Austin, R. P., Ford, H., & Ramsay, I. (2005). Company directors: principles of law and corporate governance.
Nickels, W. G., McHugh, J. M., & McHugh, S. M. (2008). Understanding Business 9th ed. McGraw-Hill Irwin: New York, NY.
Noe, R. A., Hollenbeck, J. R., Gerhart, B., & Wright, P. M. (2017). Human resource management: Gaining a competitive advantage. New York, NY: McGraw-Hill Education.
Osterwalder, A., Pigneur, Y., & Tucci, C. L. (2005). Clarifying business models: Origins, present, and future of the concept. Communications of the association for Information Systems, 16(1), 1.
Ribstein, L. E. (2008). An analysis of the revised uniform limited liability company act. Va. L. & Bus. Rev., 3, 35.
Ross, S. A., Westerfield, R., & Jordan, B. D. (2012). Fundamentals of corporate finance. Tata McGraw-Hill Education.