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Requirement
Stan is thinking about starting a toxic waste disposal business. He plans to collect the waste from businesses that produce it and then dispose of it in a sanitary landfill. In order to start this business, Stan will need a substantial amount of money to buy and develop the landfill site and purchase five trucks capable of transporting toxic waste. What concerns would you have about operating this business as a sole proprietorship if you were Stan? What alternative form of business organization would you recommend and why?
Identifies the two most significant issues (areas of concern for Stan) raised by this new business and its needs
Identifies consequences of operating as a sole proprietorship in relation to these concerns
Identifies consequences of using other forms of business organization in relation to these concerns
Comes to a conclusion that one form of business organization may be preferable and explains why
In 2006, Sally opened a restaurant called Traders’ Place in rented premises in Ottawa’s booming financial district. She operated the restaurant as a sole proprietorship. By 2012, the business had grown and she determined that she needed experienced help to run the business. In November 2012, Sally approached Marty to see if he would become the manager of the Traders’ Place business. He agreed and the following were the terms of his agreement with Sally. Each month, Marty was paid $1000 plus 1 percent of the total restaurant revenues for that month. Total monthly revenues, on average, were about $100 000. At the end of each complete calendar year that Marty worked, if the restaurant had made a profit for the year equal to or exceeding $200 000, Marty was entitled to receive 10 percent of the profits. Marty was responsible for managing the restaurant, including
? opening and closing the restaurant,
? hiring, firing and scheduling staff, and
? ordering food and paying suppliers.
Sally was responsible for the financial side of the business, including budgeting, accounting and payroll, as well as marketing. In 2013, Traders’ Place profits exceeded $200 000 and Marty was paid 10 percent of the profits in accordance with the agreement.
Are Marty and Sally carrying on business as a partnership? Explain your reasoning in relation to the facts involved.
Identifies the legal description (or definition) of a partnership to be used to help answer the question
Lists the factors a court would look at to help decide if the legal definition applied to Marty and Sally
Identifies facts that support answering “yes” to the question whether they are partners or not and explains why they are relevant to the factors mentioned above
Identifies facts that support answering “no” to the question and explains why they are relevant to the factors mentioned above
Arrives at a reasoned conclusion based on all the facts and the discussion presented
Solution
Answer 1: Stan and Toxic Waste Disposal Business
A. Identifies the two most significant issues (areas of concern for Stan) raised by this new business and its needs
The two areas of concern are:
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- has to bear all the losses company incur in the business
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- required to submit various taxes in conjunction to the profit earned from the company which becomes difficult to segregate properly
B. Identifies consequences of operating as a sole proprietorship in relation to these concerns.
The operating of the business might get difficult if Stan has to work in constant stress and that might adversely impact the business performance. Moreover, the financials of Stan might be mixed up with that of the company which will impact the future business operation of the business as per the financial decisions are concernred.
C. Identifies consequences of using other forms of business organization in relation to these concerns.
Stan is suggested to prefer limited liability form of company which will keep the personal and company finance separate thus allowing better clarity in the conduction of the business. Opening of a company where there is limited liability will help the owner in protecting himself from any issues arising within the company (Lerner, 2000). Such form of business will help Stan get away with all the personal losses if anything happens to the business.
D. Comes to a conclusion that one form of business organization may be preferable and explains why.
The issues arising out of sole-proprietorship business leads to various issues and it is sometime problematic to handle the business and handle the all the legal and financial issues that too at personal level. Therefore, consideration of limited liability with few members would be the suggested to Stan.
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Answer 2: Sally and Trader’s Place
A. Identifies the legal description (or definition) of a partnership to be used to help answer the question.
The legal definition of partnership is “the volunteer contract between two or more competent persons to place their money, effects, labour, and skill, or some or all of them, in lawful commerce or business, with the understanding that there shall be a proportional sharing of the profits and losses between them” (VanDuzer, 2009).
B. Lists the factors a court would look at to help decide if the legal definition applied to Marty and Sally.
Mentioned below are the factors a court can consider while judging it a partnership or other form of business:
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- All the partners should have contribution to the business
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- Juristic personality should not be separate and any personality can bind the personality.
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- The profits and net assets need to be divided among the partners among the dissolution of the business.
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- Partnership can be considered dissolved if any person dies or leaves the organization.
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- Partners need to stand for any shortfall while paying to the creditors and during liquidation of the business
C. Identifies facts that support answering “yes” to the question whether they are partners or not and explains why they are relevant to the factors mentioned above.
This is business is not a partnership.
D. Identifies facts that support answering “no” to the question and explains why they are relevant to the factors mentioned above.
This business is not a partnership as it fails to stand by any characteristics mentioned in the answer B. Marty has made no financial contribution to the setup of business and Marty will not be responsible for the company if Sally tries to dissolve the business. Moreover, Marty is entitled only for the few percentage of revenue (1%) and not the assets of the company if it dissolves in the later period. Marty is only responsible for the conduction of the business and Marty will not be responsible for any legal obligation related to the business that it has to face in the future.
E. Arrives at a reasoned conclusion based on all the facts and the discussion presented.
Considering all the facts stated above, we can state that the business is not a partnership and it is a sole proprietorship.
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Bentley, P. (1977). The partnership. Bath [England]: Chivers.
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Klepper, S., & Nagin, D. (1989). The role of tax preparers in tax compliance. Policy Sciences, 22(2), 167-194.
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Lerner, J. (2000). Venture capital and private equity. New York: Wiley.
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VanDuzer, J. (2009). Law of partnerships and corporations. Toronto: Irwin Law.
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