US 311: Business Law I
You are the manager of Acme Fireworks, a fireworks retailer who sells fireworks, puts on ground display fireworks, and large aerial display fireworks. The company started in the owner’s garage two years ago and now has 15 employees that you manage. The company started as a sole proprietorship, and the owner has never changed the entity. The owner has informed you that the company has received inquiries from several large businesses wondering if the company could create several fireworks displays on a regular basis. The owner told the inquirers that the company could fill such display orders, and a price per display was agreed upon. It was discussed that most of the cost for a fireworks display is for skilled labor, insurance, and the actual service of setting off the fireworks. No other details were discussed. The owner is anticipating that new employees will need to be hired, but he is worried that if the large orders for fireworks displays do not continue, the company will not have the funds to pay the new employees. The owner is now considering changing the business entity, but he does not know what entity to form or how to form it.
The owner has asked you to do the following:
Determine if the contracts with the businesses will be governed by common law or the Uniform Commercial Code (UCC), and explain why.
Analyze whether the owner formed a contract with the businesses, and apply the five essential elements of an enforceable contract.
Explain the potential personal liability to Acme Fireworks if a spectator is injured by a stray firework from a fireworks display.
Discuss the different employment types and relationships relevant to agency law, and analyze the advantages and disadvantages of each type specific to Acme Fireworks.
Explain why Acme Fireworks should not operate as a sole proprietorship. Recommend a new business entity, and provide rationale to support your recommendation.
For each task, be sure to analyze the relevant law, apply the facts to the law, and make a conclusion.
Require five (5) more pages added to this paper. Must be double-spaced pages and formatted according to APA style.
Add two more scholarly resources, referenced and listed on last page with others.
Must address the topic of the paper with critical thought. That is, describe what your response is to the content, either positive or negative, and defend your position. If multiple options, alternatives, and/or positions are present and are being rejected, you must also defend the reasons for rejecting an option.
Must end with a conclusion that reaffirms your thesis.
As the manager of a small business, Acme Fireworks, has its challenges. First and foremost, on my mind are the legitimacy of the contracts the owner recently mentioned. The owner stated that inquiries were made of the company by several large businesses to determine if the Acme Fireworks can create several firework displays on a regular bases and the owner advised that we could and there was an agreed upon price per display. My job as the manager will be to determine if these are considered legal and binding contracts, what our liability will be and how to minimize personal assets, as well as analyze our hiring needs and abilities.
Thesis statement: Although Acme Fireworks is currently a sole proprietorship, once the business form is determined there will be positive changes because it will be pertinent to determine the appropriate employment relationships for Acme Fireworks moving forward and business form will help with protection from liability and taxes as well.
Determining whether common law or Uniform Commercial Code “UCC” the governing law in this situation is not so simple. “Common law requires a description for the quantity, price, performance time, nature of work and identity of an offer to be part of a valid contract.” UCC only stipulates the quantity is a necessity term in its contract. However, UCC according to Rogers, (2012) is appropriate for contracts related to movable tangible goods, which would be the firework displays. “Articles 1 and 2 of the Uniform Commercial Code have many provisions that, together with their Official Comments, require courts to look to usages of trade in deciding contract disputes. A usage is defined as “any practice or method of dealing having such regularity of observance in a place, vocation or trade as to justify an expectation that it will be observed with respect to the transaction in question” (Bernstein, 2015). The reference indicates how UCC applies to Acme Fireworks in that the displays are a movable tangible good. Based on the reference, at this point it appears that UCC will be the most appropriate form.
Another important aspect of UCC that asserts its appropriateness to the Acme Fireworks can be found in Section 106 of Article 2 where the context of contract were limited to the future and present sale of goods. This means that the goods or in this case the fireworks including the part of performance of the exchange between Acme and the buyers are the elements that would constitute the enforceability of the contract. However, UCC also stipulates that such contract can be enforced by law or would only constitute action or defense if the value afforded by the sale of goods were worth more than $5,000 (Legal Information Institute, 2003). If the owner is planning to pursue the inquiries for fireworks display on a regular basis with the large businesses, the provisions of UCC ascertains that any contracts entered into the said agreement is enforceable, rendering legal statute affording the rules of breach and termination if the aforementioned contract price is more than what was prescribed under Article 2 Section 106 of UCC. Given the said provision of UCC on the enforceability of contracts, it is apparent that Acme Fireworks and its owner can accept the regular orders, but the contract made into such exchange only applies to the movement of the goods from Acme to the buyer regarded as the sale of goods. This means that the other aspects of the agreement such as exclusivity of Acme Fireworks as the sole supplier of the display on a regular basis may not be covered by the contract under UCC (Schwartz and Scott, 2003). However, more research and investigation is needed at this point before coming to this conclusion.
As the manager, I will need to determine if there is a valid contract here, which may be difficult considering the limited information provided by the owner. A valid contract requires five essential elements according to Rogers, (2016), which are an offer, which is an invitation for another to enter into a contract; acceptance, which is an agreement to the terms of an offer; consideration of something with legal value requested and received as price entering into the contract; legality in that it is not against public policy and is legal; and capacity, which is the competence to enter into a contract legally. “In the traditional notion of contract formation, the general rule is that formation of contract requires an offer and acceptance to be communicated between the parties. However, the Estonian Law of Obligation deviates from this rule and adopts a broader approach to contract formation through the mutual exchange of declarations of intent (Kierkegaard, 2004). The reference indicates what the five essential elements of a legal contract are and a brief explanation. The second reference discusses declaration of intent with regard to contracts.
The context of intent can be interpreted as a form of consideration, which encompasses the third element of contract formation. This means if large business makes and offer and Acme Fireworks accepted the offer, a form of consideration had to be established. Consideration can be in a form of an exchange of negotiation or price haggle, which can be documented using price quotations. Once both parties made agreement regarding price, this is when consideration can be established. After consideration, the next element of contract formation is mutuality of obligation and statement of competency and capacity in which both parties would need to have a clear understanding of their responsibilities in the agreement. In this case if Acme entered into a contract with the larger business, its obligation is to ensure the timely, sufficient, and quality in executing the fireworks display on a predefined time, duration, and venue. On the other hand, the larger business assumes its obligation of paying Acme Fireworks on a timely and sufficient manner according to the agreed price. This mutuality of obligation should be clearly stipulated in the provision of the contract in writing, which brings the discussion to the last element of contract formation, which is the written instrument. All of the elements constituted during the formation of the agreement are contained in a written instrument generally known as the physical contract, which is a binding instrument that in an event of breach between parties result to legal consequences.
As the manager of Acme Fireworks I need to ensure all legal components are present and if not, determine how to proceed. I may need to further inquire with the owner more details of his conversations with these potential customers. I will most likely need to consult with the company’s attorney and then draw up written contracts that mutually benefit both parties to make it official and thus justify hiring more staff, etc. One of the important aspects that need to be established before deciding to hire more employees is to determine the duration of the agreement to supply the potential customers with the services of displaying fireworks. From the business perspective on profit and loss, large businesses contracting Acme to conduct fireworks display on a regular basis would mean a steady source of revenue for the business. However, undertaking orders for display with larger quantity on a regular basis encompasses greater demand to produce more fireworks and it translates to greater manpower requirement. On the other hand, hiring more employees means higher expenses for the business and ascertaining the efficient cash flow and revenue should cover the overhead cost of having more employees.
Furthermore, Acme and its owner needs to decide whether to hire employees on a project-based duration or should the business hire regular employees. However, the risk associated with having regular employees are higher overhead cost, which without assurance of continuous business with the potential clients would mean loses for Acme. In addition, Acme Fireworks has no cash on hand sufficient enough to sustain the excess overhead expenses. This is the reason that having a contract as a written instrument necessitates the assurance of acquiring a continued business with the potential clients. A contract in effect would establish the client’s obligation to pay Acme for its services at a predetermined price and the duration in which the fireworks display services will be provided. For example, the contract should stipulate that Acme holds exclusivity as the only provider of fireworks display for one year or so. Moreover, the contract would stipulate how long each display should last including the venue, schedules, and the other costs incurred during fireworks display performances. These elements are the essential basis for Acme in deciding whether to hire more employees, how many, salary base, and the volume and type of fireworks that would be needed to produce in every scheduled display.
There can be some serious risks at play with a business such as Acme Fireworks. I will need to determine how we can best minimize these risks for law suits or personal liability that can come from any unfortunate, unexpected situations such as a spectator injury during a firework display. Obviously all efforts are made to minimize risks to spectators as well as employees. However, there is also a need for pyrotechnic insurance to protect professional and personal aspects should something go wrong. Hiring experienced, professional and skilled staff will be pertinent in this process as well. According to Akhbari, (2016), the promoter has a duty to deliver a safe place for spectators to view fireworks and the hired operator has the responsibility of putting off the fireworks in a safe manner that does not result in any injury to spectators. According to Raible, (2015) the most vital consideration business owners face is protecting their personal assets from claims that might arise from creditors and others in business. Clearly any business involving explosives has a high risk of liability. The reference indicates where liability and safety are placed within the company. As the manager of Acme Fireworks, I need to ensure all legal components are in place, ensure the hiring of qualified experienced specialized staff in order to best ensure responsible fireworks displays providing a safe environment for all.
It will be pertinent to determine the appropriate employment relationships for Acme Fireworks moving forward. “Employment and labor law are statutory regulations the government has enacted to govern some aspects of employer-employee relations” (Rogers, 2012). An agency affiliation exists where there is an agent who agrees to act on behalf of another known as the principal (Rogers, 2012). “Agencies are critical to modern business relationships since it is almost impossible for owners of businesses to conduct all transactions without help and without agency law, corporations could not exist at all” (Rogers, 2012). We need to determine what type of employee or agent we want, i.e., employees or independent contractors and determine what this means for the business. When choosing between contractors and employee part of the decision-making factor apart from the cost is the amount of liability that Acme will have to assume in circumstances where health and safety is in question. For instance, hiring new employees to work on the fireworks display operations will require the business to conform to the prevailing regulatory policies. This increases the risk of liability for the business because Acme is responsible for the welfare of the employees.
As compared to getting a contractor, the risk is limited to whether or not the contracted party is delivering their obligation as described in the contract, but the contractor is responsible for the safety of the his own employees and Acme is not liable to any harm that may occur as a result of the contractor’s negligence. On the other hand, if unforeseen circumstances arise involving injuries of the contractor’s employee, the subject of Acme’s liability is subject to investigation whether the cause of the injury originated from Acme’s faulty products. Unless established, the risk of liability rests upon the contractor’s accountability. On the subject of spectator’s injury, Acme could be also held accountable for the incident, but having a contractor will render the liability being shared between Acme and the contractor. A spectator’s injury during the fireworks display is an anticipated consequence, but could be easily avoided with proper safety measures. However, an accident cannot be anticipated and the only means of remedy when it occur is to create a protective blanket to protect the company from liabilities, which can be established with the use of a written instrument or contract.
Personal liability to the owner of Acme Fireworks if a stray firework injures a spectator can be huge for a sole proprietorship. There are many legal issues to consider and it is important that as the manager I assist the owner of Acme Fireworks in considering the fundamental issue of organizational form. According to Rogers, (2012), if the owner does not file appropriate forms with the state, by default Acme Fireworks will be a sole proprietorship. The foremost reason to become a recognized legal business entity such as an LLC, S-Corp, or C-Corp, is clear and simple: your personal assets are protected from liability (Milto, 2015). The owner of Acme Fireworks needs to weigh the risks and benefits of the different business forms. Does he want a sole proprietorship, a corporation or an LLC and which will benefit him the most? There are advantages and disadvantages to consider related to liability and taxes. According to Rogers, (2012), in contrast either a corporation or LLC has possible limited liability as long as the business owner is cautious to observe statutory regulations and not treat the business as a defense to hide behind. Before deciding which business form would be more appropriate it is important to see the differences between these forms. For instance adopting the concept of corporation as a business form encompasses limitations in liability, which means that the business will be treated by law as a standalone entity in which liabilities such as an injured spectator will be assumed by the corporation and not by the owner. This will also protect the owner’s assets from being liquidated in the event that the business’s assets will not suffice to compensate the value of the liability claims, the same nature of advantage can be attributed on tax liabilities (Lorrette, 2012).
However, the corporation form of business requires immense amount of documentation to maintain, which are mostly required by the State. Furthermore, the disadvantages of a corporation extends to double taxation in which the company pays tax when it turns a profit and another set of tax payable when the company distributes dividends to its shareholders (Lorrette, 2012). At the current rate of Acme’s growth and size, turning it into a corporation would take a lot of work for its existing employees, more employees are needed, and bigger capital is necessitated by the need to sustain a larger operational cost. Another form of business that Acme can consider to adopt is LLC or Limited Liability Company. While LLC generally protects the owner and his assets from liabilities arising from the incidents such as injuries of a spectator during a firework display, it still has its other advantages from which Acme can benefit from. Part of the beneficial outcome of adopting an LLC form is having tax flexibility. Since Acme Fireworks is a single proprietorship business transitioning into an LLC, it would adopt the Single member LLC Structure. This means that the profit and losses of the business are to be taxed by the IRS as a personal federal tax return (Bosko, 1993).
Another significant advantage of LLC is the minimized paper works needed to comply with the state regulations. There is less stringent requirements needed for compliance when taking the LLC business form and this would minimize the need for Acme Fireworks’ to expand its employee structure because there is less operational requirement to run the business and it would be easier to maintain a legal standing (Bosco, 1993). More importantly, LLC provides less liability to the business owner, which means that the owner of Acme will not be personally liable for debts and other financial responsibilities of the business. In addition, creditors will be prohibited to seek out the owner’s personal asset to compensate for unpaid obligations. However, the same protection cannot be afforded for liabilities involving personal injuries. There are also downsides to adopting the LLC business form such as self-employment taxes, and limited life existence. This means that when the owner steps out of the business, the LLC statute will also cease to exist.
There are three main points of consideration that the owner of Acme needs to take into account when making the decision. First is whether the agreements to accept the offers of the larger business would constitute a growth on revenue and how it can be put into a contract. Secondly, the business is also concerned about the legality of the contracts and how it will affect business decisions such as hiring more employees. Lastly, the owner of Acme Fireworks is thinking about adopting a new form of business to legitimize the forthcoming business acumens of Acme and to ensure its legitimacy given that the business is looking forward to acquiring larger orders. With the aforementioned considerations at hand and the information obtained pertaining to the applicable laws on contract and business ownership, the next step for Acme is to make a decision based on the following recommendations.
First, the provisions of UCC stipulate that contracts pertain only to the sale of goods in which the seller moves the goods by selling it to the buyer. However, the provision of UCC did not stipulate other provisions that would protect Acme from breach of agreements beyond the context of the sale of goods such as exclusivity as service provider of fireworks display. This means that if the owner of Acme is planning to pursue business with the large businesses, he would need a strong legal stance over the agreement that would secure the business from business risk associated with dealing with clients. In this sense, it would be best that the provisions of the common law on contracts should be applied in the process of establishing business with the larger clients. However, the problem is that Acme Fireworks is a sole proprietorship business, which automatically assumes the provisions of UCC. In order to move out of the UCC regulations and adopt the common law provisions, Acme will have to change its business form. There are several options to consider in choosing the business form, but LLC appears to come as the most suitable choice for Acme Fireworks.
First, there are concerns about liabilities of personal injuries of spectators apart from the usual financial and operational liabilities. Keeping the sole ownership status will render the owner liable to personal injuries and would cost the business considerable losses. However, incorporating the business will put such liability on Acme Fireworks and not as personal liability of the owner. This will protect the owner’s assets from being held as compensation for liability claims, but the drawbacks of incorporating will put the company is immense pressure in terms of expanding its employee structure because of the bigger operational requirement and not to mention the additional capital needed to sustain the cost of operating as a corporation. The next option is to adopt the LLC business form, which provides the same liability protection as that of incorporation, but with less pressure on operational, compliance, and cost requirements. Therefore, I might recommend at this point in my research that he pursue adopting the LLC as business form when incorporating Acme Fireworks.
Conclusion with thesis statement restated: Although Acme Fireworks is currently a sole proprietorship, once the business form is determined, positive changes will be forthcoming, appropriate for employment, liability and taxes. Moving the business to the next level by challenging its operational capacity to accept bigger orders on a regular basis would need adequate legal bindings through contracts in order to secure the business from imminent risks. At this point, it is recommended that the business operates within the conceptual boundaries of limited liability corporation to minimize compliance requirements, but ascertains protection from liabilities in addition to the fact that the LLC will entail stronger legal protection.
References
Akhbari, K. (2016). Fireworks Display Lawyers. LegalMatch. Retrieved from http://www.legalmatch.com/law-library/article/fireworks-display-lawy
Bernstein, L. (2015). Custom in the Courts. Northwestern University Law Review. 110 (1). 63-113.
Bosko, M. (1993). The Best of Both Worlds: The Limited Liability Company. Ohio State Law Journal,54(1), 175-198. Retrieved from https://kb.osu.edu/dspace/bitstream/handle/1811/64631/OSLJ_V54N1_0175.pdf
Dixon, C. (2016). Why Start an LLC? Advantages and Disadvantages of Limited Liability Companies.Rocketlawyer.com. Retrieved 1 July 2016, from https://www.rocketlawyer.com/article/why-start-an-llc-limited-liability-company-advantages-and-disadvantages.rl
Kierkegaard, S. (2004). Declaration of Intent: A Legal Conundrum? Review of Central & East European Law. 29 (4). 457-473.
Legal Information Institute,. (2003). U.C.C. - ARTICLE 2 - SALES (2003 Revision - WITHDRAWN). LII / Legal Information Institute. Retrieved 1 July 2016, from https://www.law.cornell.edu/ucc/2/article2#s2-106
Lorette, K. (2012). Advantages and Disadvantages of the Corporate Form of Business.Smallbusiness.chron.com. Retrieved 1 July 2016, from http://smallbusiness.chron.com/advantages-disadvantages-corporate-form-business-4389.html
Milto, L. (2015). What are the advantages of incorporating a business? Why can’t I work as a sole proprietor? AMWA Journal: American Medical Writers Association Journal. 30 (3). 131-131.
Raible, D. (2015). Is the C Corporation a Better Business Form Than the S Corporation for Today’s Entrepreneurs? Journal of Financial Service Professionals. 69 (3). 14-17. Database: Business Source Elite
Rogers, S. (2012). Essentials of Business Law. San Diego, CA: Bridgepoint Education, Inc.
Schwartz, A. & Scott, R. (2003). Contract Theory and the Limits of Contract Law. New Haven, CT: Yale Law School. Retrieved from http://digitalcommons.law.yale.edu/cgi/viewcontent.cgi?article=1307&context=fss_papers
