Case Studies
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Case Study 1: Memo
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Description of Business Entities
There are a few primary options for business entities that Javier can consider for starting his hot sauce business. In a sole proprietorship for instance, the owner and business are one and the same, and there is no legal distinction between them. This therefore leaves the owner of the business open to limitless liability for any debts or legal actions that are taken against it. Similar in nature, is a general partnership which is usually held by two or more individuals, with shared, unrestricted liability for each member. When it comes to a corporation, the business is usually regarded as a separate legal entity from its owners. Limited liability applies to the owners, but corporations are a little more complicated, with extra rules and corporate taxes.
Limited liability companies (LLCs) on the other hand, offer their owners the pass- through taxation of a partnership along with limited liability similar to that of corporations. Moreover, customizable ownership and management arrangements are possible with an LLC (Bougie & Sekaran, 2019). Compared to corporations and limited liability companies (LLCs), sole proprietorships and partnerships usually subject their owners to much more personal liability. LLCs usually have much more greater structure and management flexibility, but corporations must be capable of complying with the more complex regulations that are in place. Generally speaking, partnerships and LLCs are essentially taxed differently than corporations, which are usually subject to double taxation (Nickels et al., 2019).
Product Liability Issues and Recommendations
Javier's hot sauce contains some extremely spicy peppers, and therefore strict responsibility may apply because of the inherent hazards that may be potentially associated with the ingredients. Customers may still experience a couple of side effects such as wet eyes or stomach pain even in cases where the product is manufactured properly. In order to lessen this,
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Javier needs to make sure that the spice and any possible negative effects that are associated with its use are clearly labeled. If customers are adequately aware of the hazards, this notice may
therefore assist to prevent any liability claims. To cover any court cases or settlements, it would also be wise to get product liability insurance (Nosratabadi et al., 2019). The exposure of the business to a lawsuit would be limited by the insurance policy limitations. In general, it is advised that Javier should have liability insurance and transparent labeling in order to reduce the hazards that may be associated with this extremely spicy product.
Agency Relationship Analysis
Prior to the official foundation of the business, Antonio engaged in some unofficial promotional activities, which probably do not count as establishing an agency relationship. However, Antonio and the company would probably enter into an agency partnership given his expected position in sales and delivery if the business is up and running. Antonio would be under
a fiduciary duty as mainly an agent who is working on behalf of the principal to act loyally for the advantage of the business. In addition to abstaining from competing with the business, he would also have to declare any conflicts of interest. To guarantee that Antonio receives a fair salary for his job as an agent, compensation guidelines would also be applicable in this case. It is
advisable therefore to make these commitments clear in a formal agreement. The business is granted vicarious accountability for any harm Antonio may create while performing his tasks due to the agency designation. Ultimately, notwithstanding his prior informal engagement, Antonio's future formal role will probably satisfy the legal requirements for the agency.
Real Property Issues
It might be illegal to run a commercial manufacturing business on Javier's home property
as this could be a direct violation of the local zoning restrictions that are against mixed usage.
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Homeowners nearby may also voice their concerns over potential safety risks or annoyances such as resulting from the noise and smells emanating from the factory. Therefore, to prevent any objections or injunctions that would potentially shut down the business, Javier should look into the various zoning regulations and also speak with the neighbors. It could also be necessary
for him to move his operations to a location that is suitably classified.
Necessity of Transferring Rights to Property
Javier does not need to give up any of his possessory rights in order for the business to operate on the 50-acre land and this is because he already owns it. Javier could, however, give the LLC ownership of the property in order to shield it from liabilities if he comes up with an LLC. Javier's personal assets are also protected as he owns the property through the LLC. Despite the fact that this transfer is optional, it could also potentially help to reduce the risks involved.
Personal Property Issues
If Antonio's personal van is damaged while carrying out his business operations, then this
presents a liability risk. This is especially true for Javier's merchandise. If the vehicle sustains some damage while performing delivery tasks, then the business should pay for the repairs or replacement. Such risks should be covered by commercial auto insurance due to this kind of exposure.
Liability Issues from Using Personal Vehicle
If Antonio's vehicle is used for business, then the company will be responsible for any damages that are sustained during the delivery process. Although the van is Antonio's personal property, if it was used for business activities at the time of the accident, then the company would have to be liable for any repairs, lost property, or medical expenses. To safeguard the
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business in such circumstances, it is therefore advised to obtain a commercial auto policy with coverage for non-owned vehicles.
Estate Planning Issues
To eventually transfer control of the hot sauce business to Antonio and Maria, Javier needs to create a clear succession plan. A buy-sell agreement could be implemented as a means for Javier to gradually transfer the ownership interests to his offspring. On the 50 acres of land the family owns, Javier wants Antonio and Maria to share equally in it after his death. Javier and
his wife Elena should both have properly drafted the wills to formally record this intended division of the property to avoid any misunderstanding from occurring.
Estate Planning Vehicles
The transfer of Javier's real estate and business ownership to Antonio and Maria may be made easier with the use of a few key estate planning instruments. A person can designate in a will on how their assets should be dispersed when they pass away, but assets transferred through
a will must also go through the public and sometimes the probate procedure which can be prolonged at times. By avoiding probate and empowering the trust administrators to handle the assets on behalf of the beneficiaries, living trusts can be able to offer much greater privacy and control over asset distribution than basic wills.
Recommended Business Entity
It is my recommendation that Javier should establish an LLC in order to run his hot sauce
business much more efficiently. Javier's personal assets would be protected from any debts or lawsuits incurred by the business by the liability protection offered by the LLC structure.
Because Javier intends to include his son Antonio as the co-owner, creating an LLC also provides flexibility for personalized management frameworks and ownership stake division. The
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LLC model therefore is able to combine aspects such as tax efficiency with liability constraints, thereby allowing for Antonio's potential future co-ownership and leadership role in the company,
and at the same time also reduces Javier's personal risk exposure by creating an entity that is separate from the business.
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References
Bougie, R., & Sekaran, U. (2019). Research methods for business: A skill building approach
.
John Wiley & Sons.
Nickels, W. G., McHugh, J. M., & McHugh, S. M. (2019). Understanding business
. McGraw- Hill.
Nosratabadi, S., Mosavi, A., Shamshirband, S., Zavadskas, E. K., Rakotonirainy, A., & Chau, K.
W. (2019). Sustainable business models: A review. Sustainability
, 11
(6), 1663.
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