Bus Law Case Study
Betty Wilson has decided to open a coffee shop and is considering various options including franchising, sole proprietorship, joint venture, corporation and partnership. In addition to determining the best legal entity to form, Betty has to decide if she will employ or partner with various friends and family members. Finally, she plans to name the coffee shop The Gathering Place and must determine if the name is available and a good choice. This paper will evaluate the pros and cons of various business options, address the dilemma of whom to hire and determine if The Gathering Place is a viable option for the name of the coffee shop.
Legal Entity Analysis When forming a business, the owner or owners have many legal entities to consider. Before selecting one type of business formation over another, the owners should consider the advantages and disadvantages of each legal entity to determine the most viable option. To assist Betty, in making her decision; sole proprietorship, joint venture, partnership and franchising options will be evaluated. Sole Proprietorship A sole proprietorship can best be described as a business entity with only one owner and that owner has complete control of management decisions.
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Typically, a sole proprietorship can be formed with very little expense or time investment. Essentially to form a sole proprietorship the owner is in business once the required licenses are obtained. While timeliness and cost effectiveness are advantages of this type of business formation, a significant disadvantage is that the owner assumes unlimited personal liability for any liabilities incurred by the business (Armstrong & Permenter, 2011). Another disadvantage is that because a proprietorship is not a separate entity the owner is responsible for all tax payments associated with the organization’s profits (Kubasek, et al. 2012). Partnership A partnership is considered “a voluntary association of two or more persons formed to carry on a business as co-owners for profit” (Kubasek, et. al, 2012, p. 437). Similar to proprietorships, the partners assume liability for the company’s tax liability. A general partnership is similar to a sole proprietorship in that the business partners assume full personal liability for the liabilities of the business. In a limited partnership however, only one partner is required to be a general partner. Other partners can reduce their risk by becoming limited partners.
A limited partners’ liability extends only to the extent of the partner’s financial investment in the business. In addition, limited partners traditionally earn a dividend or return on their investment. Corporation Although the types of corporations are numerous, at a macro level corporations can be classified as publicly or closely held. A closely held corporation is one that is privately owned and stock is not traded on any of the exchanges (Kubasek, et. al, 2012). Privately owned corporations have one or more owners, who traditionally also actively participate in management decisions and day to day operations.
On the contrary, the ownership of publicly held corporations fluctuates with each transaction that occurs on the security exchange where the organization is traded. Owners, also commonly referred to as shareholders, do not actively participate in the management decisions of the company. For the purposes of advising Betty, Subchapter S corporations and Limited Liability Corporations will be considered (both will be assumed to be closely held). Subchapter S Corporations. A Subchapter S company (“S Corp”), is an incorporated organization that operates like a corporation.
A key advantage to a S Corp is that the business is not subject to corporate level taxation (Owen, 2008). Instead for income tax purposes, the business is treated similar to a partnership. Another advantage to S Corps is that the owner’s liability is limited to his investment in the company. In other words, if a company defaults on any debts, the owner’s personal assets cannot be seized to repay the debts of the organization. Limited Liability Company. A limited liability company (LLC) is a “hybrid corporation-partnership, similar to the Subchapter S corporation but with far fewer restrictions” (Kubasek, et. al, 2012, p. 69). Similar to S Corps the company is taxed as a partnership and the organization’s partners liability is limited. A significant difference between a LLC and a S Corp is that the S Corp has defined requirements that must be met to qualify the business as a S Corp. Amongst those qualifications is the limit to the number of partners who own the S Corp. A LLC has no limit on the number of owners (Owen, 2008). Franchising Another alternative to the various business formations is franchising. In a franchising arrangement the one party (franchisee) sells goods or services trademarked by another party (franchisor).
There are marketing and branding advantages to franchising. A franchising arrangement provides the franchisee with access to proven marketing strategies and branding materials. While there are advantages, franchising agreements also have disadvantages. A franchising agreement is a binding contract that defines the responsibilities, including financial obligations of each party. The franchisee may be required to pay royalty fees for a specified period of time. (Nyadzayo, Matanda, Ewing, 2011). This could bind the franchisee to fulfilling financial requirements even if the company is not performing successfully.
Another limitation is that a franchisee is typically operating a trademarked business so the opportunity to open a business under a name other than the franchise name is unlikely. For example, Betty would not be able to purchase a Starbucks franchise but operate it as “Gathering Place”. Business Formation Recommendation to Betty Based on the research of various business entities, the most viable option for Betty is to form a LLC. With a LLC she can limit her liability and choose to include a partner. It often takes years for new businesses to ecome thriving and profitable. A franchise could place Betty in a position where she is obligated to buy unneeded inventory, advertisement, etc. This type of financial obligation could limit the success of Betty’s coffee shop. Staffing the Coffee Shop Betty has received support from her husband to pursue this entrepreneurial opportunity. There have also been friends and family who have expressed interest in potentially partnering with or working for Betty. In successful business partnerships, the business partners visions and belief systems align and are similar.
If Betty wants a business partner, her husband, who is willing to provide financial support but not management oversight, is the best option. Betty will need help staffing the coffee shop and could consider hiring Alice and Erma as employees. She should be cautious with Alice whose husband has already indicated he does not support his wife working. If Alice lacks support at home, it may lead to employment problems like attendance issues. If Betty has to performance manage unsatisfactory behavior, it could create friction between Betty and her sister. Hiring Erma, could be an opportunity to lead Erma to Christ.
Considering the personal aspects of both Alice and Erma, Betty should consider employing Erma but not Alice. Betty should be honest with her sister and explain that she does not want to see friction or stress between Alice and her husband because of the coffee shop. Betty could explain to Alice that the opportunity to work at the coffee shop in the future is possible once Alice and her husband are in agreement that Alice should work part-time. Before hiring Erma, Betty should explain the service expectations, dress code, company’s mission and vision to ensure Erma will be able to comply with the expectations of the organization.
Business Name A corporate search on the business name Gathering Place found that several other businesses are already operating under some variation of the business name. There is even one company called Gathering Place Cafe & Sweet Treats, Inc. This business appears to be similar in nature to the business model Betty plans to follow. Betty will need to create a new name for her coffee shop to better differentiate her business from others in the area. Christian Worldview As a Christian, Betty desires to open a Christian coffee shop.
This business model implies that Betty seeks to operate a Christian business. It should be noted that for a business to be a Christian operation, it requires more than Christian ownership. The mission and vision of the business should be to advance the word of God (Bretsen, 2008). Management decisions must extend beyond maximizing shareholder value or satisfying the interest of a broad spectrum of stakeholders. In the New Testament, Christians are taught “You are the light of the world. A town built on a hill cannot be hidden. Neither do people light a lamp and put it under a bowl.
Instead they put it on its stand, and it gives light to everyone in the house. In the same way, let your light shine before others, that they may see your good deeds and glorify your Father in heaven” (Matthew 5:14-16, New International Version). Following these teachings, a faithful business will glorify God by actively and openly disclosing how Christian principle is used in day to day operations. References
Armstrong, J. , & Permenter, J. (2011). The advantages of an incorporated practice. Optometry – Journal of the American Optometric Association, 82(12)-770. Bretsen, S. (2008). The creation, the kingdom of god, and a theory of the faithful corporation. Christian Scholar’s Review, 38(1), 115-154. Kubasek, N. , Brennan, B. , Browne, M. , (2012). The Legal Environment of Business: A Critical Thinking Approach. New Jersey: Pearson Education, Inc. (Original work published 1999). Nyadzayo, M. , Matanda, M. & Ewing, M. (2011). Brand relationships and brand equity in franchising. Industrial Marketing Management, 40(1), 1103-1115. Owen, S. (2008) A random walk through the Subchapter S minefield. Journal of pass through entities. 21-50.