Overview
Write a 3–page executive briefing of potential factors and issues associated with four types of business entities in the context of U.S. contract law.
One of the most common ways in which business managers are involved with business law is in relation to contracts. Organizations of almost any size will most likely need to create, negotiate, review, approve, adhere to, and resolve conflicts associated with contracts. A business determines its legal standing by determining what type of legal entity it should be identified as. The type of legal entity can significantly impact how contracts are handled, as well as how they are interpreted by the courts.
Assessment Instructions:
For this assessment, consider that you work as a manager in a relatively small, privately-owned U.S. business. The company president (who is also the owner) inherited the company from his father, and thus has never started a business. He is considering creating a spin-off business (possibly with one or two associates), but is unsure of which type of business entity would be best to use for that new business. The new business will be utilizing numerous suppliers and distributors, and thus contracts will play a major role in the success of the business. The president knows you took a university-level business law class, and asked you to put together a paper analyzing the four most common business entities in the context of contracts to help him decide what to do.
Research each of the following types of business entities:
• Sole proprietorship.
• Partnership.
• Corporation.
• Limited liability company (LLC).
Consider potential factors and issues associated with each of these types of business entities in the context of contract law. Write a paper analyzing the following for each of the above four types of business entities:
• Who in the business entity would typically create and negotiate a contract? Explain the pros and cons of each entity in this context.
• Who in the business entity would typically approve and sign a contract? Explain the pros and cons of each entity in this context.
• Who in the business entity would have liability associated with the contract? Explain the pros and cons of each entity in this context.
• What are the effects of the type of business entity on the ability to contract for the sale of the business? Explain the pros and cons of each entity in this context.
Based on your executive audience, your executive briefing should be no more than three pages, and should be well organized and written in clear, succinct language. Follow APA rules for attributing sources that support your analysis and conclusions.
By successfully completing this assessment, you will demonstrate your proficiency in the following course competencies and assessment criteria:
• Competency 2: Evaluate the role of contracts in commercial transactions.
o Analyze contract creation and negotiation for the most common types of business entities.
o Analyze contract approval for the most common types of business entities.
• Competency 4: Evaluate legal options to create a business entity.
o Analyze contract liability for the most common types of business entities.
o Analyze how choosing among the most common types of business entities affects the ability to sell a business.
Academic Integrity and APA Formatting
As a reminder related to using APA rules to ensure academic honesty:
1. When using a direct quote (using exact or nearly exact wording), you must enclose the quoted wording in quotation marks, immediately followed by an in-text citation. The source must then be listed in your references page.
2. When paraphrasing (using your own words to describe a non-original idea), the paraphrased idea must be immediately followed by an in-text citation and the source must be listed in your references page.
Suggested Resources:
The following optional resources are provided to support you in completing the assessment or to provide a helpful context.
Provided Resources
• Analyzing a Case Law | Transcript.(attached/provided)
o This multimedia presentation points out key areas of a case law. Use this presentation to help you complete your case analyses. Refer to this media as often as you need to.
• Business Law Foundational Concepts | Transcript.(attached/provided)
o This media piece offers interactive flashcards that you can use to learn (or review) foundational terms and concepts in business law. Refer to this study aid often and as needed.
Library Resources
• DuBoff, L. D. (2004). The law (in plain English) for small business. Naperville, IL: Sphinx Publishing.
Internet Resources
Access the following resources by clicking the links provided. Please note that URLs change frequently. Permissions for the following links have been either granted or deemed appropriate for educational use at the time of course publication.
• Nolo. (2013). Nolo law for all. Retrieved from http://www.nolo.com
o This resource provides helpful background on a range of legal issues. You may find the Free Legal Information section of the site particularly helpful.
Business Entity Implications For Contracts
A majority of businesses may use contracts for similar purposes; however, their legal standings with other parties in such arrangements vary significantly depending on the type of legal entity. This variation influences how deals are handled and interpreted by courts. Unfortunately, some entrepreneurs lack knowledge of the different legal standings, explaining the emergence of conflicts over contracts. Based on this premise, this paper analyzes different types of business entities and the parties charged with creating and negotiating contracts, approving and signing contracts, and being liable for the arrangements. The paper also explores the effects of the different types of entities on contracts for the business’s sale to equip entrepreneurs with adequate knowledge required in selecting the ideal business form.
Sole Proprietorship
Sole proprietorships are entities owned by a single person and may often exist as a family-owned business. Sole proprietors are in charge of their own business, and thus, they assume all the managerial roles within the entity. Sole proprietors are responsible for creating and negotiating contracts with other parties. In essence, the sole proprietor has exclusive control over agreements made with external parties.
The sole proprietor’s position in creating and negotiating contracts has positive and negative in the entity. On the one hand, creating and negotiating contracts in a sole proprietorship is cost-effective and easy because the proprietors undertake the tasks independently. However, this practice can also be detrimental to the firm. As the literature suggests, the sole proprietorship size makes it challenging to convince clients of its merits (Permwanichagun et al., 2014). In this context, other businesses and government agencies may not deal with sole proprietors because of the perception of the lack of professionalism of the unincorporated business. Therefore, despite being cost-effective, a sole proprietorship may lose several business contracts because of the underlying perceptions of lack of professionalism in such an entity.
Besides negotiation, the sole proprietor is responsible for approving and signing contracts. This practice creates efficiency because several individuals are not required to review the agreement and sign it, as is the case of incorporated businesses. Conversely, the approach increases the chances of contractual error because only the business owner approves the contracts.
Because of their sole involvement in business, sole proprietors are liable for all contracts. This unlimited liability implies that the proprietor is likely to enjoy all profits arising from the agreement. However, the owner is also likely to suffer all the damages to the contract because the former and the business are the same.
As noted, sole proprietorships are owned by a single person. Therefore, it is efficient for owners to contract for the transfer of the business to other parties. However, such contracts may also be challenging because the owner must convince a buyer about the entity’s merits.
Partnerships
Business partners have equal rights in creating and negotiating contracts. This practice enhances partnerships’ success in entering into contracts because partners can use their expertise to seal business deals. However, the involvement of several parties in business contracts increases the risks of conflicts on contract negotiation.
All business partners would typically approve and sign a contract. This approach facilitates better decision making in business contracts because each member can review the agreement and identify potential pitfalls. Conversely, the approach may delay contracts’ approval because all partners’ signatures must be obtained before sealing the deal.
All business partners also incur the liabilities associated with contracts. The unlimited liability implies that all partners would enjoy all profits stemming from the agreement. Unfortunately, all partners would also suffer losses for their associate’s actions.
Partnerships are mainly owned by two or more people with a common goal. This joint ownership constrains the business’s transferability because a new person cannot join the entity without other partners’ approval. However, partners are more likely to contract the sale of their business because of the entity’s formal structure, which makes it appear more legitimate than a sole proprietorship.
Corporation
Corporations are separate entities from their owners. Therefore, agents and officers assigned the duties of running the corporation are likely to negotiate and make contracts (“Contracts law,” n.d.). This approach is beneficial because it limits the number of parties involved in a deal, which can sometimes could cause confusion in business. However, it also increases the risk to the entity because the negotiators are not owners of the firm; thus, they may not fully act in the firm’s best interest.
Moreover, selected signatories, such as CEOs, are responsible for approving and signing contracts. This approach fosters quicker approval of contracts and business efficiency by removing bureaucracies and utilizing experts. However, the strategy also increases the risk of the principals being held liable for an agent’s misconduct in the contract.
Despite agents approving contracts, the principals bear the liability of every agreement. This unlimited liability is beneficial because the principals enjoy any profits generated from the contract in the form of equity. Unfortunately, the shareholders bear the losses, yet the agent may still receive remuneration for their duties.
Corporations are separate entities from their owners. This business’s nature makes it easy to transfer ownership to other parties through the sale of stocks. However, corporations have rigid formalities and legal procedures that may slow down the business’s sale to other parties.
Limited Liability Company (LLC)
Like corporations, LLCs exist as separate legal entities from their owners. Business contracts in these entities are created and negotiated by managers hired by LLC members to run its operations (Stim, n.d.). Corporations benefit from the expertise and efficacy of their managers in negotiating contracts with other parties. However, reliance on the manager also increases business risks because agents may not act in the entity’s best interest.
The LLC’s managers are also responsible for signing and approving business contracts. This approach creates efficiency in business contracts because one agent can act on behalf of several owners. However, it also increases the LLC’s liability for the agents’ contracts regardless of whether it was done in the firm’s interest.
Owners of the LLCs are not personally liable for business contracts. However, the firm may be sued for any damages associated with an agreement. The limited liability is beneficial because the court cannot call upon business owners to pay for the company’s damages. However, the shareholders may bear the contract’s losses based on the value of their shares.
Like corporations, LLCs exist as separate entities from their owners. Therefore, owners can sell the business to other parties. However, LLCs have formal structures and rigid procedures which constrain business transferability to other parties.
References
“Contracts law” (n.d.). FindLaw. https://corporate.findlaw.com/business-operations/contracts-law.html
Permwanichagun, P., Kaennamee, S., Sakolnakorn, T.P.N., & Naipinit, A. (2014). The situations of sole proprietorship, e-commerce entrepreneurs and trends in their e-commerce: A case study in Thailand. Asian Social Science, 10(21), 80-88. http://dx.doi.org/10.5539/ass.v10n21p80
Stim, R. (n.d.). Contracts: The proper signatures. Nolo. https://www.nolo.com/legal-encyclopedia/contracts-the-proper-signatures.html
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