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1 ACME FIREWORKS Acme Fireworks BUS311: Business Law

2 ACME FIREWORKS Acme Fireworks Acme Fireworks started as a dream inside the owner's garage, and now, two years later, business is increasing. As of lately, the owner of the company has spoken to several companies that were inquiring about regular firework displays. If agreed upon, these changes could mean big things for the business. But, with these changes comes the decisions regarding business law that need to be made as well. In this paper, I will first address my response to the topic and defend my opinion on the matter, then discuss how the business is governed under common law, analyze the verbal contract made between the owner of Acme and the business that inquired about regular displays, explain the personal liability of the company to the bystanders of the shows in case of an accident, and finally why Acme should not operate as a business under a sole proprietorship and which entity would prove to be better for the company. In Acme Fireworks' situation, I can't entirely agree with the current choices that the company's owner is making regarding the expansion of the business. First, the owner spoke with several companies regarding regular displays of fireworks. During these discussions, instead of talking back to the office and doing more research on how the new business would affect the company, he instead agreed upon a transaction price. There are many things to consider with the new firework displays, such as the number of people attending the shows, amount of fireworks to be used in the show, and how many employees will be used for the setup and set off the fireworks. The company only has 15 employees plus the manager currently but depending on the displays, there could be the need for more employees. Also, operating under a sole proprietorship and taking on jobs that can increase liability on the business could mean destruction for the company. Operating under a sole proprietorship means that the owner is also liable for the company's business with his personal belongings. This will be discussed later in the paper in

3 ACME FIREWORKS greater detail, but I disagree with the owner's decision. Determining how the owner's contracts will be governed is extremely important as it decided what laws need to be followed, the common law or the Uniform Commercial Code. The Uniform Commercial Code (UCC) is “…a large set of standardized legal rules that applies to all commercial transactions, other than real property, within the United States and its territories" (Bernstein, 2020). Before the UCC was created, it became increasingly difficult for states to decide on decisions in the courts when contractual agreements involving businesses across multiple state lines were being handled. It was agreed upon that there was a need for a common law across all states that would make the court's decisions fairer for all. The UCC has evolved from common law statutes and is the governing body in most business transactions involving a contract. But the UCC does not cover all contracts, as article two applies to all contracts involving the sale of goods. Goods are defined as "…tangible moveable objects that can be owned" (Rogers, 2012, chapter 7). In the contract with the owner of Acme fireworks and the businesses regarding regular firework displays, there is no sale of goods. The contract will agree upon the sale of services, as Acme Fireworks will not be selling the customer a tangible object that can be owned. The deal will involve a regular firework show put on by Acme Fireworks employees and will in no manner involve goods, in which case article two will not apply to any contract held by Acme and potential clients. Therefore, common law will be used in this situation. When the businesses inquired about the services of new firework shows to the owner, the owner did several things that make his expression of words a binding contract. As a business owner, there are things that one should know regarding the acceptance of a contract. First is the definition; Cornell Law School defined a contract as "An agreement between private parties creating mutual obligation enforceable by law" ("Contract," n.d.). The

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4 ACME FIREWORKS definition does not define a contract as one written on paper and signed by both parties, rather an obligation agreed upon by both parties that can be enforced. In the Acme Fireworks situation, the business owner spoke to multiple companies that would like to hire his services. While talking to those businesses, the owner agreed upon a price for services provided and laid out a cost breakdown of the benefits. This situation then became a binding contract after the businesses agreed to the price. The type of contract is known as an express contract. An express contract is formed by both parties' language, otherwise known as the actual words they used when agreeing upon services or goods to be provided by the merchant, and is either expressed written or orally (Rogers, 2012). The contract had to meet the five elements of an enforceable contract as well, including mutual assent, offer and acceptance, adequate consideration, capacity, and legality ("Contract," n.d.). Mutual assent is the agreement by both parties, which goes hand in hand with the second element of offer and acceptance. In the Acme Fireworks situation, mutual assent and offer and acceptance were met when the owner told the customer a price for services, and the customers agreed upon the price. Consideration can be explained under the Bargain-for- Exchange theory, when the promisor makes a promise in return for something else ("Contract," n.d.). Consideration was fulfilled when the owner of Acme made a promise for firework display services in exchange for money agreed upon by him and the customer. This theory is usually expressed in terms of mutual assent and differs from the Benefit-Detriment theory, which describes giving a gift. Finally, the last two steps to make the contract legally binding, capacity and legality. Capacity is part of the five elements to ensure that both parties involved in the contract are of both age and proper mental state to agree upon the contract terms. This element of a contract was made so businesses could not go into a contract with a minor who does not understand the terms of the contract or someone who does not have the mental capacity to

5 ACME FIREWORKS understand the contracts. For instance, if Acme Fireworks were to sell their fireworks services to someone who does not have the mental capacity to understand the full binding terms of the contract, this contract would not be biding because Acme would be taking advantage of the customer in this situation. Legality is the four elements of a contract coming together to make the contract legally binding and enforceable in a court system. Although not written down and signed by both parties, Acme Fireworks acted in a way that bound them to the customer for the services agreed upon and thus initiated a contract between the two parties. Personal liability is a substantial concern when fireworks are present, as there is always the chance that someone could be injured if a display did not go off as planned. The owner needs to ensure he has a full understanding of what his liability is to bystanders. Personal liability is defined, in business terms, as "…means that a plaintiff who wins a court judgment against your business can satisfy it our of your assets" ("Personal liability," n.d.). The owner of Acme Fireworks is aware of his liability to some extent because, in the price breakdown of services provided to the customers, he included a line item for insurance. In the firework display business, insurance can be a critical element to the production. Because not all fireworks are produced the same, they can all have different reactions. Meaning, if one firework does not explode how it is intended, it has the potential to cause loss of life or limb to those bystanders enjoying the show. While insurance is a great way to cover the business, it may not fully cover the company if something happens. Because the owner of Acme has not changed the business entity out from under a sole proprietorship, any coverage that the business would not be able to cover would come out of his assets. Digital Media Law described this situation, "A sole proprietor is personally liable for the unlawful actions of her employees committed in the scope of their employment" ("Personal liability," n.d.). The employee's actions become unlawful if a

6 ACME FIREWORKS firework display misfires, causing injury, in which case the owner is liable for damages caused by the actions performed. Insurance will, in most cases, provide medical coverage to the bystanders, but if the insurance does not cover everything, then the owner will be liable to cover the remaining expenses. Running a growing business under the sole proprietorship entity can be very risky for the business owner. If the company is going to continue to expand, it should be re-formed under a different entity. Acme Fireworks started in the owner's garage as a small business. More recently, with the addition of new clients regularly, as mentioned previously, acting under a sole proprietorship can become devastating to the owner's finances should anything go wrong. Although it may be the easiest form of business to create because "There's almost no cost or bureaucratic red tape involved in forming a sole proprietorship…" (Mancuso, 2020, p. 10) it can become tricky as the business continues to grow. Suppose the company were to put together a large show that attracts a crowd of spectators, and something were to go wrong during the performance resulting in an injury to a spectator. In that case, all the owner's assets are now at risk if he or she gets sued for the accident. It would be in the best interest of the owner of Acme to reconsider moving his business under a new entity to avoid the chance of his assets becoming at risk. If he were to change the business to a new entity, the one that would fit the business style and benefit him the most would be a Limited Liability Company (LLC). The most significant difference between an LLC and a sole proprietorship is the separation between personal and business assets. Unlike a sole proprietorship, an LLC will separate the liability of the company and the individual assets. So, in the event of an accident occurring during a firework display, the victim could not come after the owner for what he owns personally. The taxation benefits stay the same when switching to an LLC, where the owner will keep pass-through taxation. Pass-

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7 ACME FIREWORKS through taxation means the owner will report LLC income, losses, credits, and deductions on their individual returns (Mancuso, 2020). Another benefit of an LLC is that most of them are managed by members of the company. In Acme Firework's case, since business is beginning to grow and there is potential for regular business year-round, allowing the manager to run the business under a "manager-management" arrangement gives the owner a chance to step back and let a trusted manager run operations. An LLC's benefits greatly outweigh the benefits of a sole proprietorship as Acme Fireworks continues to grow and take on new customers. If done right, Acme Fireworks is on its way to becoming a large company; the owner needs to consider all the changes and how business law will affect the company if it continues to grow. Acme Fireworks started two years ago in the garage of the owner with the dream of becoming a successful company. Two years later, it has 16 employees and new business opportunities that could bring that dream to life. Considering all things business and those related to business law, there are things that must be understood, such as operating under common law rather than the UCC, understanding when a contract is formed and how the company is liable to the bystanders once the services are performed for said contracts, and finally understanding how changing the business from a sole proprietorship to an LLC would greatly benefit the company and its potential investors for the future. All of these considered and changed, Acme Fireworks has unlimited potential.

8 ACME FIREWORKS References Bernstein, L. (2020). Uniform Commercial Code (UCC). Salem Press Encyclopedia . Contract . (n.d.). LII / Legal Information Institute. https://www.law.cornell.edu/wex/contract Mancuso, A. (2020). LLC or Corporation?: Choose the right form for your business (9th ed.). Nolo. Personal liability . (n.d.). Digital Media Law Project. https://www.dmlp.org/legal-guide/personal- liability Rogers, S. (2012). Essentials of business law . Retrieved from https://content.ashford.edu/

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