Liability is a responsibility or duty that obligates an entity to another, leaving it with no caution to evade settlement. Any business entity has the commitment to limit the level of liability obliged to it. The importance of limiting exposure to liabilities is to help realize when the company might be exposed (Emerson, 2009). The key is to recognize situations under which the business can be vulnerable. It is vital to recognize all the aspects of any liability associated with the business. The business owner should have knowledge of all the laws that apply to the type of business to limit liabilities.
Tinker’s Home Security Service is a sole proprietorship. A sole proprietorship is a type of business, which is unincorporated thus owned by one person (Seaquist & Coulter, 2012). The owner pays income tax from the business profits and faces little government regulation. In this type of business, there is no legal entity created and the owner is not safe from incurred liabilities. The debts of the business are the debts of the business owner and the profits flow directly to the business owner.
Contract breach is the failure to fulfill any terms of an agreement, either oral or written without any legal excuse (Emerson, 2009). Being the owner of Tinker’s Home Security Services, I sign contracts in my name. This is because there is no legal entity that separates me from the business. Once sued for a breach of contract, I will bear the burden alone. This is dangerous since all my personal properties are exposed to the liabilities of my business. I cannot be able to separate personal property from the business property since the business itself is part of personal property.
All the liabilities that come with the breach of contract are personal liabilities, and I will have to bear them using personal property. A sole proprietor is highly exposed to personal liability as compared to other business structures. To limit my exposure to liabilities, I can rely on asset protection strategies (Spadaccini, 2007). These strategies include assets protection trusts, bankruptcy and post-judgment asset exemption, insurance and using independent contractors.
Tinker and Tailor’s Home Security Services is a business under a general partnership. A general partnership business is an unincorporated business owned by two or more co-owners known as general partners (Seaquist & Coulter, 2012). All the partners take an active part in the management of the business. Every partner is jointly liable for the business obligations and is bound by the actions of the other partners.
When sued for breach of contract, I will partly bear the liability burden since I have other partners to bear the burden too. The partners will equally feel the burden. The personal liability, in this case, can touch on my personal properties since there is no legal entity separating my personal properties from my part of the burden. The advantage is that I will not bear the liability alone as in the case of a sole proprietorship. The liability will be equally shared between the partners, and each partner has a responsibility to bear his or her part of the liability. I can limit my personal liability by insuring my part of the business.
Tinker and Tailor’s Security Services can also be a limited partnership business. This type of a business combines the features of a partnership with those of a limited company. It however does not create a legal entity distinct and separate from the owners. At least one general partner and a nominal partner form a limited partnership. The general partners manage and control the business (Epstein, 2007). The nominal partners cannot engage in the management of the business, or they will lose their limited liability protection. They are liable only for the amount invested in the business. Nominal partners cannot withdraw their investment without the consent of the general partners.
If I am a nominal partner in this business, my personal liability is limited to the amount of capital I have invested in the business. My personal property, in this case, is separate from the partnership and cannot be touched in case of a breach of contract. However if I am a general partner, my personal liability is not limited to my investment (Seaquist & Coulter, 2012). My personal properties are also liable. The advantage is that the general partners are paid management fees as well as benefiting from the business profits. The nominal partner only benefits from the business profits. The main way I can limit my exposure to liabilities here is by being a nominal partner.
Tinker and Tailor’s Security Services can also be a corporation. This legal entity is separate from its owners. A group of shareholders who own the corporation incorporates it. The shareholders elect a board of governors who manage the organization. If sued for a breach of contract my personal liability is limited to my shareholding in the corporation. My personal property is separate from my obligation to the corporation. The contract is signed under the corporate name and thus the corporate assets are liable to in case the company sued. Personal exposure to liability can be limited by avoiding fraud, pledging personal property as collateral or personally guaranteeing loans and debts.
Tinker and Tailor’s Security Services can also be a limited liability company. A limited liability company limits the amount of debt passed on to the shareholders. The debts of the company are separate from the debts of the owners (Epstein, 2007). The profits of the company are passed on to the owners who then pay personal tax. It is different from a corporation in that the profits of a corporation are taxed before they are distributed to shareholders as dividends. When sued for a breach of contract, the personal liability is limited to the capital invested in the company as in the case of a corporation (Emerson, 2009). Personal assets cannot be seized to cover the company’s liability. Personal exposure to liability can be limited by avoiding personal liability for the company’s debts
My future business venture would be an information technology firm. The firm would engage in activities such as creating business solution applications and consultations. The best business organizational form for my business would be a limited liability company. LLC’S are very easy to set up. The setup process involves choosing a business name, filing an article of an organization, creating an operating agreement, registering the company among others (Emerson, 2009). Profits from the company are first distributed among the owners before taxation thus providing a tax shield. The owners can manage the business, or choose designated managers. Personal liability exposure is minimal since the debts of the company are different from my obligations.
The type of a business structure to form depends entirely on the situation of the person or people developing the business. The business owners may value the ease of formation, tax shield, management or the personal liability exposure when starting the business. All business structures have advantages and disadvantages, and it is upon the owners to evaluate the organizational form that best favors them.
Emerson, R. W. (2009). Business law (5th ed.). Hauppauge, N.Y.: Barron’s Educational Series.
Epstein, D. G. (2007). Business structures (2nd ed.). St. Paul, MN: Thomson/West.
Seaquist, G., & Coulter, K. (2012). Business Law for Managers. San Diego, CA: Bridgepoint Education, Inc.
Spadaccini, M. (2007). Business structures. Irvine, CA: Entrepreneur Press.
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