The Future of Acme Fireworks
Acme
Fireworks is a small business operating as a sole proprietorship for the last
two years. In light of new agreements, Acme Fireworks has an opportunity to
grow as several large businesses want to purchase fireworks displays on a
regular basis. Since the company currently has only fifteen employees and the
owner has self-funded the business, the owner is considering expanding, but is
unsure how to proceed. A small business
owner may find the changes and regulations daunting as, “A new venture is often
complex, with factors that may be unique to that venture” (Blair & Marcum,
2015, p. 249). As the business advances, the owner must make choices that
protect his assets and allow the business to thrive. It is crucial for a small
business owner to understand key regulations and evaluate the specific needs of
a business, to make the best financial and legal decisions for the
company.
Elements of Valid Contracts
The
first area the owner must consider is contracts. Several businesses have asked
the owner to create and set off large fireworks displays for set amount money,
but is this a valid contract? A valid contract is enforceable by the courts and
offers protection for each party entering the agreement. Every valid contract
must contain five elements to be enforceable by the courts which are: a clear
offer, acceptance from all parties, consideration, legality, and capacity. Does
the agreement between Acme Fireworks and the businesses contain all the
elements?
For
an enforceable contract, the offer must clearly state the intent and
expectations of the offeror and offeree (Rogers, 2012). If the terms are
ambiguous or vague, it could void the legal agreement. The contract must
contain reasonably specific terms, so the deal is undeniably clear. The offer
discussed between Acme Fireworks and the business contains clear terms. Acme
Fireworks will provide fireworks displays in exchange for payment for the goods
and services.
Both
the offeror and offeree must accept the terms of the contract. The offeree must communicate acceptance of
the offer in the manner specified by the offeror (Rogers, 2012). The offeror
may request the acceptance by various means of communication such as
face-to-face, telephone, fax, email, or certified letter. Since the businesses
and the owner already discussed and agreed on the pricing, both parties have
accepted the terms.
Contracts
involve an exchange of services, money, or goods between parties. The
consideration is the item or action exchanged (Rogers, 2012). For the courts to
consider a contract as enforceable, both parties must offer equal and fair
consideration. The courts are less apt to enforce extremely one-sided or unfair
agreements. Both parties are contributing fair consideration as the businesses
have agreed to pay Acme Fireworks the agreed upon amount in exchange for
several fireworks displays.
Legality
and capacity are two clear-cut elements required for an enforceable contract.
Contracts that violate laws or public policies are not enforceable by the
courts. None of the parties are requesting the other to directly perform
illegal actions to fulfill the agreement. The contract between the businesses
and Acme Fireworks satisfies the criteria of legality. A valid contract
requires that each party must have adequate
mental competency to understand the terms of the agreement (Rogers,
2012). Mental incompetence, intoxication, and age are factors that may void a
contract. This specific contract meets the requirements of capacity as both
parties are professional adults who are familiar with various business
operations.
The verbal agreement between the businesses
satisfies the five elements required for the courts to consider this contract
as legal and enforceable. An enforceable contract prevents either party from
not fulfilling their part of the agreement without possible legal consequences.
If either party breaches the contract, the courts can impose penalties or order
the party to uphold the agreement, but who regulates business contracts for
goods and services?
Uniform Commercial Code & Common
Law
The Uniform Commercial Code (UCC) regulates contracts
that pertain to the sale of goods that are movable, tangible objects (Rogers,
2012). The fireworks displays are transportable and purchasable; therefore, the
UCC would have jurisdiction over this agreement if the majority of this
agreement pertained only to goods provided.
The UCC will not enforce the terms of these contracts. Since the contracts
created between Acme Fireworks and the businesses involve a service of setting
off fireworks displays, common law will regulate this contract . In common law,
judges use stare decisis to review
the verdicts from previous similar cases to determine the best judgment for
current trial. Common law allows for consistent rulings involving trials which
no specific law exists (Segal, 2019).
Employment Types
While the UCC governs tangible goods, common law
regulates intangible areas of ownership such as patents, copyrights, services,
real estate, and employee contracts (Rogers, 2012). Acme Fireworks will need to
hire additional staff in response to production demands. An employee is a
compensated agent for the principal, or in this case employer, whose primary
duties include, “Loyalty, obedience, performance, notification, and accounting”
(Rogers, 2012, section 12.1, para. 9). In turn, the principal must cooperate
with, compensate, and reimburse the agent (Rogers, 2012). While employers
should create and terminate employment agreements ethically and
non-discriminately, most state laws do not guarantee job security. In the US,
the employment-at-will doctrine maintains that businesses or employees can
terminate the employment agreement for any reason, with only a few exceptions.
Three
exceptions to at-will employment are public-policy, implied-contract, and
covenant-of-good-faith-and-fair-dealing (Muhl, 2001). Some states recognize
some or all these exceptions, while other states reject all three. Before
hiring additional staff, the owner of Acme Fireworks needs to know which
exceptions are applicable within his state. The public-policy exception is a
termination that does not follow state policies. Under this exception, an
employer may not terminate an employee for filing a workman’s compensation
claim or refusing to perform illegal acts requested by the employee (Muhl,
2001). Thirty-eight states support the implied-contract exception. While most
employment agreements do not involve specific contracts, sometimes employer’s
words or distributed materials could be interpreted as one. For example, the
information included in an employee handbook, may imply that a contract exists
between the employer and employee. The covenant-of-good-faith-and-fair-dealing
exception prevents employers from terminating employees out of malice or
without just cause with or without a contract (Muhl, 2001). These exceptions
promote fairness in the employee-employer relationships.
Employment contracts are binding, and the owner can be found
liable for damages if these contracts are terminated. Since Acme Fireworks is a
relatively new company and the other businesses may dissolve their agreements,
the owner may want to avoid contracting employees at this time. Unless Acme
Fireworks requires employees with specialized skills who request contracts, the
business can employ regular at-will employees or consider using a temporary
employment agency the business secures funding for full-time employees.
Liability
As a sole proprietorship, the owner of Acme Fireworks is
liable for legal claims filed and ruled against the company and its agents. If
a tort occurs within the agent’s job scope, then both the agent and principal
may be liable for damages (Rogers, 2012).For this reason, the owner must hire
agents who are trustworthy and will act in the best interest of the company.
Even if all agents perform their jobs perfectly, accidents occur. Due to the
dangerous nature of manufacturing fireworks and creating displays, the company
has strict liability if an injury occurs. If an individual is hurt
unintentionally or carelessly due to negligent actions or failure to act, the
courts will hold Acme Fireworks responsible (Rogers, 2012). If accidental injury or damages occur, the
courts will hold the owner of a sole proprietorship personally liable for
damages and the owner’s personal assets are vulnerable in the event of a law
suit. Changing from a sole proprietorship may reduce the owner’s liability, but
each entity type has different advantages and disadvantages that must be
carefully weighed.
Business Entity Comparison
Not only do entities differ in liability, each one has
different regulations on procuring additional funding for the business. Since
the owner of Acme Fireworks has self-funded the business presently, one should
consider the possibilities and limitations of each entity. There are four
primary business entities: sole proprietorship, partnerships, limited liability
companies, and corporations. The simplest entity is a sole proprietorship which is where most
small businesses start from (Rogers, 212).
One owner operates the business operations without additional partners,
owners, contracts, and can dissolve the business at any time. A sole
proprietorship has the most straightforward regulations. The owner pays taxes
on the income earned from the business, but the government does not require the
company to file as a separate entity.
While these aspects seem ideal for a small business like Acme Fireworks,
a sole proprietorship has several disadvantages. The owner is solely liable for
the business, which increases the vulnerability of the owner’s assets. Without
investors or partners, a sole proprietorship has limited options for additional
financing (Fay, 1998).
A partnership exists if one or more competent parties
agree to own and actively participate in the business operations. Therefore, a
partnership is easier to form than limited liability companies and
corporations. Unless agreed upon, each associate maintains equal ownership,
liability, and responsibility for debts regardless of the amount of their
investment (Rogers, 2012). Allowing a business to have multiple partners is a
way to increase capital, but due to the unlimited liability each partner has,
this is less than ideal for all parties especially if the company is considered
high-risk. Another disadvantage is the difficulty one party may have making
changes, transferring ownership, or dissolving the business. According to the
doctrine of delectus personae, all partners must consent to the transference of
ownership rights (Fay, 1998). Since the expansion of the business is a
financially risky endeavor for the owner, and the goods and services involve a
level of danger, proprietorships and partnerships are discouraged (Blair &
Marcum, 2015). While a partnership would decrease the owner’s financial risk,
it does not protect his assets.
A limited liability company (LLC) would allow Acme
Fireworks to operate as a separate entity from the owners, thus separating the
owners’ assets from the business assets (Blair & Marcum, 2015). An LLC is, “A
partnership surrounded by a corporate shell.” (Witner & Simons, 1993, p.
22). Each state has different
regulations applicable to the formation and taxation of an LLC. Partners in an LLC are
not personally liable for the business, which protects their assets. Partners
are taxed on their income, and depending on the rules of the state, may receive
a double tax if regulations require the business to file. States can choose to
tax LLCs as a corporation or a partnership, and it is common for states to
enforce similar tax standards for both entities (Witner & Simons, 1993).
One advantage of an LLC is that the
entity has various ways to increase financial sources. An LLC is not limited to
a set number of shareholders or types of stocks (Fay, 1998). Members of the LLC can choose to invest
without actively operating the business. The disadvantages are the different
state regulations which may be costly to form and maintain. The agreements are
complex, and therefore may require professional advice and additional lawyer
fees.
Establishing
Acme Fireworks as a corporation is an option to alleviate the sole financial
burden on the owner, but corporations often receive increased taxation, costs,
and more state and federal regulations. A corporation is considered a person with Constitutional
rights within reason. A corporation can own property, must pay taxes, and can
face criminal charges like an individual (Rogers, 2012). Corporations are the
most costly and complex entity to form. A corporation is a legal entity and is
subject to many government regulations. Shareholders have the benefit of
limited liability since the company as an individual is responsible for its
operations. Corporations are double-taxed since the shareholders file taxes on
their earnings and the business must file also. The main benefits of a
corporation are limited liability for the shareholders, continuous existence,
the availability to raise revenue and the ease that one can transfer ownership
(Witner & Simons, 1993). The owners hire a board of directors to actively operate
the corporation, so partners who want limited liability and less control would
prefer an LLC. If the owner of Acme wants to maintain a level of operational
control, a corporation is a less desirable entity option.
Recommendations for Acme Fireworks
Acme
Fireworks should change the entity to a limited liability company. As a sole
proprietorship the owner could lose his personal property in the event of a
tort claim. Transporting and detonating fireworks is a potentially dangerous
venture. Because these operations are hazardous, the court will hold the
company strictly liable when an individual is harmed intentionally,
negligently, or through no fault of the company. For Acme Fireworks to maintain
the supply and demands, the owner must hire additional staff, which will
require more funds. By listing Acme
Fireworks as an LLC, this will allow the owner to procure funds by partnering
with other owners. An individual can sue the LLC, but the owner’s property is
protected because the courts will view the company’s assets separately. A
corporation would allow the same benefits, but if the owner wishes to maintain
control of the daily operations, the owner can do so under an LLC. An LLC receives many of the same corporate
benefits without many of the strict regulations and costs. Corporations are
double-taxed, while the owners of the LLC are taxed on their incomes. For these
various reasons, an LLC is highly recommended for Acme Fireworks.
Every
business is different, and every owner has specific needs to maintain and grow
their company. The complexities of business law may overwhelm a business owner
but understanding the basics will alleviate the anxiety of owning a business.
If an owner enters valid contracts, then the courts will enforce these agreements,
thus reducing financial and property loss if the other party fails to uphold
the agreement. By understanding and following state and federal employment
laws, the owner can avoid lawsuits pertaining to employment agreements. Entity
types have different regulations for funding, taxation, and liability, so the
owner must carefully consider all options and choose appropriately. The future
success of Acme Fireworks depends on these decisions. As an LLC, Acme Fireworks
can procure funds to continue to operate and flourish.
References
Blair, E. & Marcum, T. (2015). Heed our advice:
Exploring how professional guide small business owners in start-up entity
choice. Journal of Small Business
Management, 53(1), 249-265. Doi:
10.1111/jsbm.12073
Fay, J. (1998). What form of ownership
is best?. CPA Journal, 68(8). Retrieved from http://search.ebscohost.com.proxy-library.ashford.edu/login.aspx?direct=true&db=f5h&AN=957125&site=eds-live&scope=site.
Muhl, C. J. (2001). The employment-at-will
doctrine: Three major exceptions. Monthly Labor Review, 124(1),
3-11. Retrieved from http://www.bls.gov/opub/mlr/2001/01/art1full.pdf
Rogers, S. (2012).
Essentials of Business Law
[Electronic version]. Retrieved from https://content.ashford.edu/
Segal, T. (2019,
February 27). Common Law. Investopedia. Retrieved from https://www.investopedia.com/terms/c/common-law.asp
Witner, L. &
Simons, K. (1993) Tax aspects of limited liability companies. CPA Journal, 63(8), 22-25. Retrieved from
http://eds.b.ebscohost.com.proxy-library.ashford.edu/eds/detail/detail?vid=7&sid=6cad51ac-6448-4852-b0a6-88db0ed8c8af%40sessionmgr102&bdata=JnNpdGU9ZWRzLWxpdmUmc2NvcGU9c2l0ZQ%3d%3d#AN=9401100842&db=bsh
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