Business Law: Ownership Structure And Earnings Management

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Business Law: Ownership Structure And Earnings Management

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Business Law: Ownership Structure And Earnings Management

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Business Structures
Starting your own business is one of the most complex decisions one can make as it is attached to many risks and uncertainties. However, when an individual decides to start his own business, he needs to take many important decisions. However, one of the most vital decisions about starting a business is the select an appropriate legal structure for the company. Choosing an appropriate structure for your business depending on the number of people, planning to start a business, the sector in which they want to establish their business and the nature of capital and liabilities involved in the business, is very crucial as the structure of the business will impact the paperwork, tax liabilities and the distribution of profits. Thus, the significant elements, which need to be considered accurately before choosing a business structure, are legal liability, tax implications, formation cost, flexibility and future needs for growth (Fan, Titman and Twite 2010).
In the United Kingdom, the primary business structure available for starting a business is Sole Trader, Partnership, Limited Company and Limited Liability Partnership (LLP). In the case of “Think Big Consulting” as four people intend to start a business, the choice of a sole trader is entirely ruled out (Vom Brocke and Rosemann 2010). Therefore, this essay will discuss in detail all the advantages and disadvantages of the remaining business structures available in the United Kingdom, namely the Partnership, Limited Company and Limited Liability Partnership (LLP) to evaluate and suggest accurately the appropriate business structure for “Think Big Consulting”.
The first legal structure for a business which the “Think Big Consulting can adopt is a Partnership. In the United Kingdom, the partnership structure for a business is governed by the rules made under the Partnership Act, 1890.  A relation between two or more persons to carry out a business with an ultimate goal to earn profit is termed as Partnership. A minimum of two persons are necessary for this type of business with no limit on maximum number of members since 2002. In partnership business along with the Partnership Act, the rules laid down by the agreements between the partners also govern various aspects of the said business (Barnes and Hunt 2013).  In a Partnership business, each partner is personally liable and his liability is unlimited, which means that if the partnership assets are not sufficient to pay the debts of the partnership business, then the personal assets of the partners are sold to satisfy the debts of the said partnership business. Therefore, in a partnership business, forming a Partnership Agreement becomes vital accurately defining the relationship between each partner and dispute resolution methods in case of a dispute. The Partnership Agreement must also specific the profit distribution ratio of each partner. Each partner pays taxes individually on his share of profits (Monem 2013).
The advantages of choosing Partnership structure of the  business is the management of the business is divided among the partners who have different skills and talents. Therefore, the productivity and the decision-making in a business increase positively. Another advantage is regarding the capital of the business, two or more people coming together to start a business can invest a bigger capital in the business compared to an individual person. However, the partnership business has many disadvantages inherited in its nature (Hill, Cronk and Wickramasekera 2013).
The primary disadvantage of a partnership business is that it imposes an unlimited liability for each partner. In case the business incurs a loss, the personal assets of every partner are open to satisfy the debts. This makes all the partners personally liable for all the obligations and debts of the partnership business. The partnership business makes each partner accountable for the wrongful actions of another partner too. For example, if one of the partners defrauds particular clients without the knowledge of other partners and escapes, the other partners will be liable for his fraud even when they did not contribute to it. Another disadvantage of a partnership business is that the United Kingdom law does not give Partnership a status of a separate legal entity (Cavusgil et al. 2014). This puts the continuity of the business in danger because a partnership dissolves with the death or resignation of any one partner in the business. Partnership business to be successful requires a healthy relationship between the partners. However, over the years, there is a threat of conflicts and opinion clashes between the partners, which may be detrimental to the success of the business (Ali, Salleh and Hassan 2010).
An informal agreement is a kind of agreement that is non binding in nature. It is made between two or more parties and is mostly oral in nature. It is a kind of unspoken agreement. The main element of an informal agreement is that it relies upon the honor of the parties at the time when it gets fulfilled. It is generally not enforceable and is therefore different from a legal contract which is easily enforceable. In the given case study, Michael, James, Tim and Anna are ll friends who are to become business partners. In this situation, they are not bound by any formal contract. They have the liberty act flexibly in taking business decisons. All the friends are young and free of mind and they have enough time to retire. The advantage of having enough time will enable them to expand the business efficiently. Not many people who are young get the opportunity of grabbing business. They have sufficient time in making dynamic changes in the nature of business.
 A lot of children are part of the business entrepreneurship; this may include difficulties down the line. Therefore, there should be fixed set of rules to define the limitations of their powers. Children should not be given huge responsibilities to make important decisions of the business. However, they may make decisions related to work policy. Additionally, each of them holds their own personal wealth. In case if the business went bust they might have to keep their land as security. Keeping their personal property as part of their own business is indeed a risk that is involved.
When married couples become a part of a business there are many associated problems that one faces. The most important one being is the risk of personal problems being ventilated at business place. This may affect the productivity of the business operated.
There are multiple advantages of setting up a Company. The most significant advantage of a company is the limited liability on the members. In a Company, the shareholders are responsible only to an extent of their unpaid share amount in a company, which is decided when a shareholder agrees to purchase shares of a company. If the shareholder has fully paid for the shares he owns in a company, he is not personally liable for any debts or liabilities of the company. Another advantage, which the Company structure possesses, is ease in capital accumulation. It is relatively easier for a company to collect capital, as there is an option open to a company to sell its shares to various investors. However, a company is prohibited from issuing its shares to the public at large. The Companies Act, 2006 in the United Kingdom makes provisions for transfer of shares in a company subject to the rules set by a company in its Article of Association. And, most importantly a Company has its own legal personality and survives its members which means that a company does not dissolve or discontinue with the death, resignation or retirement of any of its members (Engau and Hoffmann 2011).
However, a company structure has certain inheret disadvantages attached to it as well. To run a Company, the members of the Company need to comply with several formalities relating to registration, taxations, record keeping, which attracts penalties if the compliance, is ignored. The above mentioned factors are to be kept in mind by the: Think Big” founding partners. These compliances are set in the rules formed by the Companies Act, 2006 that even make the members of a company criminally liable for certain breaches of compliance. Therefore, multiple compliances including registration fees and record keeping increase the cost of running a company. In case of a company, the disadvantage of double–taxation is evident in its nature (Mehrani, Moradi and Eskandar 2011). Double-taxation indicates that the company due to its separate legal person’s status has to pay taxes and the members of a company who are the shareholders of a company pay taxes on their profits made out of the company’s operations. Another disadvantage of a company structure is that if the winding up process or the process to change the name or structure of the company is very complex, time consuming and requires the compliance of several formalities which reduces the flexibility of the company to grow in future with changed or advanced goals.
With the increased growth in industrialization, the need for a new business structure, which is suitable for the modern era, was evident. Therefore, in the year 2000, United Kingdom enacted the Limited Liability Partnership (LLP), which introduced a new form of business structure namely the Limited Liability Partnership (LLP). Limited Liability Partnership is a form of business structure is a combinations of both Partnership and a Company incorporation the advantages of both Partnership and a company in its basic features. A Limited liability Partnership Agreement between the members forms the said Partnership (Meidutē and Paliulis 2011).
Limited Liability Partnerships suggest that a number of people exceeding two will come together to start a business and share the costs, risks, profits and liabilities of a business. However, in a Limited Liability Partnership the liability of each partner is limited to the amount he has invested in the business. The Limited Liability Partnership also prohibits the partners from being liable for the wrongful action of the other partners. However, even in the case of Limited Liability Partnership the requirement of have a Limited liability Partnership Agreement is paramount (Simpson, Lefroy and Tsarenko 2011).
The advantage of Limited liability Partnership is that it limits the personal liabilities of every partner. This is the important feature of the Company structure, which is adopted by the said structure to provide protection of the individual assets of the partners of the business. The nature a Limited Liability Partnership is very flexible as they have its own individual personally different from its partner. However, there are no business structures which are free from risks and disadvantages and even after Limited Liability Partnership features the best of both Company and Partnership and  it consist of various disadvantages like increased formation cost and complex nature. With many formalities regarding registration and taxation, the cost of forming a Limited Liability Partnership is higher compared to a General Partnership business. Another inherent risk in every type of partnership business is the risk of conflicts between the partners, which can cause significant financial losses and eventually lead to the partnership to dissolve (Asif et al.2011).
The partners who decide to establish a business together are bound by the following responsibilities: work for the greatest common advantage, be just and faithful to each other, render true accounts and full information of all the things affecting the firm to any partner, his or legal representative. If the business partners derive any profits for him from any transaction, them he shall be accountable for the profit and pay it to the firm. The business partner has the responsibility to indemnify the firm for any loss that is caused by the neglect in the working of the business or the firm. The four business partners are also bound by the liabilities stated above. They are expected to proceed with their duty in a just and lawful manner. Any issues that arise with regard to the working of the firm, it will be duty of the business partners to incur the loss if any. Legally, every partner is liable jointly with all the other partners. One can be held responsible for another partner’s negligence or carelessness. This means that if the partnership firm is insufficient to meet the financial obligation then they may have to use the personal assets to pay off the debts of the company.
Therefore, after all, the pros and cons of the business structures available in the United Kingdom are discussed above, it will now be easier to decide which business structure is the most appropriate for “Think Big Consulting”.  In the present case, as four friends have decided to start a marketing business called the “Thing Big Consulting” on a small scale initially, the ideal business structure is that of partnership, which most people who want to start a business on a small scale adopt. However, in a partnership business, there will be a lot of risk on the personal assets of each partner. As every partner in the present case owns a house or is looking to purchase one, it is ideal not to include the assets of each partner to the risk attached to partnership business of paying business debts with personal assets if the business assets are not sufficient to satisfy the debts.  However, with the introduction of Limited Liability Partnership (LLP), the said risk is safeguarded, as the partners in Limited Liability Partnership are liable for business debts and obligations only up to the amount they invest in it (Bird 2011). Therefore, for “Think Big Consulting” the Limited Liability Partnership will be an ideal business structure. Adopting a Company structure will prove to be expensive and will require hiring of multiple professionals to satisfy the compliance required by the Companies Act, 2006, such a burden of additional cost is not appropriate for a start-up business, which should eliminate the company structure from been considered to be adopted by “Think Big Consulting”. However, all the four partners namely Michael Flanagan, James Rattenbury, Tim Fanning and Anna Finning need to formulate a well-drafted Limited Liability Partnership Agreement specifying names of each partners outlining their business, investments and profit-sharing ratios of each partner and step to be taken if the said partnership needs to be dissolved. It is important to understand that a casual agreement is not enough and will not be supported by law if any dispute arises in future among the partners (Hall 2013).
Reference List
Ali, S.M., Salleh, N.M. and Hassan, M.S., 2010. Ownership Structure And Earnings Management in Malaysian listed companies: the size effect. Asian Journal of Business and Accounting, 1(2).
Asif, M., Searcy, C., Garvare, R. and Ahmad, N., 2011. Including sustainability in business excellence models. Total Quality Management & Business Excellence, 22(7), pp.773-786.
Barnes, S. and Hunt, B. eds., 2013. E-commerce and v-business. Routledge.
Bird, S.A., Intotality Phils Inc., 2011. Automated application discovery and analysis system and method. U.S. Patent 8,051,106.
Cavusgil, S.T., Knight, G., Riesenberger, J.R., Rammal, H.G. and Rose, E.L., 2014. International business. Pearson Australia.
Dowling, R., McGuirk, P. and Bulkeley, H., 2014. Retrofitting cities: local governance in Sydney, Australia. Cities, 38, pp.18-24.
Engau, C. and Hoffmann, V.H., 2011. Strategizing in an unpredictable climate: exploring corporate strategies to cope with regulatory uncertainty.Long Range Planning, 44(1), pp.42-63.
Fan, J.P., Titman, S. and Twite, G., 2010. An international comparison of capital structure and debt maturity choices.
Hall, K., 2013. The expansion of global law firms in Australia and Asia. ANU College of Law Research Paper, (13-12).
Hill, C.W., Cronk, T. and Wickramasekera, R., 2013. Global business today. McGraw-Hill Education (Australia).
Mehrani, S., Moradi, M. and Eskandar, H., 2011. Ownership structure and dividend policy: Evidence from Iran. African Journal of Business Management, 5(17), p.7516.
MeidutÄ”, I. and Paliulis, N.K., 2011. Feasibility study of public-private partnership. International Journal of Strategic Property Management, 15(3), pp.257-274.
Monem, R.M., 2013. Determinants of board structure: Evidence from Australia. Journal of Contemporary Accounting & Economics, 9(1), pp.33-49.
Simpson, D., Lefroy, K. and Tsarenko, Y., 2011. Together and apart: Exploring structure of the corporate–NPO relationship. Journal of Business Ethics, 101(2), pp.297-311.
Vom Brocke, J. and Rosemann, M., 2010. Handbook on business process management. Heidelberg: Springer.
Wheelen, T.L. and Hunger, J.D., 2011. Concepts in strategic management and business policy. Pearson Education India.

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