Introduction
Acme Fireworks is a sole proprietorship but the owner is considering changing the business entity. Business entities are organizations that are created by people in order to conduct business or trade. They involve the structure of the business rather than what the business does. Some of the main types of business entities are partnerships, corporations, limited liability partnerships, and companies. Due to the details that are involved in all the business entities, businesses such as Acme Fireworks may find it difficult to select the appropriate entity for their business. The contracts that business entities work with are governed by either the common law or the Uniform Commercial Code (UCC). The common law is used to govern contracts meant for services and they can be either bilateral or unilateral. Uniform Commercial Code contracts involve moveable goods with the exclusion of money and securities.
Every contract that a business writes must have elements that make it enforceable. Some of the elements that are contained in enforceable contracts are offer, acceptance, consideration, competence, mutual consent, and legality. While conducting their business, companies may be involved in personal liability cases when an accident occurs in the workplace. Personal liability claims may include legal fees and medical bills. Organizations should be careful when choosing the employment type to use as they all vary. There are a number of ways that organizations can employ their employees. Some of them are full-time, part-time, trainees, commission employees, casual employees, and contract employees. This paper will focus on differentiating between common law and Uniform Commercial Law, elements of contracts, personal liability, the different types of business entities and the employment types and relationships relevant to agency law. Additionally, I will provide my recommendation to Acme Fireworks to facilitate better decision making.
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Difference between Uniform Commercial Code and Common Law
Before determining the type of contractual law to govern the businesses' contracts, the owner must understand the differences between common law and uniform commercial code. Common law focuses on contracts that involve services, real estate, insurance, employment and other assets that cannot be moved. According to Rogers, (2012), common law originated from England during the 11 th century and was created through court rulings. Acme Fireworks would use common law as the business provides services that include putting on fireworks ground displays and aerial displays. Large businesses hire Acme Fireworks to deliver displays and performance shows thus making it a service provider.
Uniform Commercial Code deals with the sales and purchases of tangible property. Uniform Commercial Code was created by the National Conference of Commissioners on Uniform State Laws (NCCUSL). Additionally, the body is responsible for maintaining the law. The body created the law in order for business in different states to conduct business between them with ease. Acme Fireworks’ contracts would be governed by the Uniform Commercial Code as the business sells fireworks to individual customers. However, Acme Fireworks would have to assess every business contract on a case by case basis as the details may differ. The business would determine whether to use common law or UCC after analyzing factors such as the services being offered and whether it would be within or out of the state.
Elements of an Enforceable Contract
The owner of Acme Fireworks is responsible for creating, accepting and declining offers as the business is a sole proprietorship. Some of the common uses of contracts are to purchase goods, construct buildings and procure services (Palmer, 2010). Different states demand varying requirements for a contract to be enforceable but there are basic elements that any enforceable contract must contain. The basic requirements of contracts are very important as a contract may be voided if one of the elements is missing. In this scenario, businesses are requesting more firework displays, therefore, they are making an offer. Acme Fireworks accepted to deliver the services, therefore, entering a legally binding contract with the clients.
An offer is always the first element of a contract. In this stage, one party proposes an arrangement for another party. The initial proposal contains the definite terms of the contract. For example, if Acme Fireworks made an initial proposal, it would contain the quantity and price of the fireworks as well as the delivery date. Once one party proposes an arrangement, the other party has the opportunity to accept or decline. If the initial offer is rejected, the offer dies but if it is amended, the initial offer dies but the amendments are used as the counteroffer that can be rejected or accepted. After the offer is made, it can be accepted in writing, over the phone or in person. The acceptance must include a statement that the accepting party intends to honor the details of the contract. An offer is determined to have been accepted if the accepting party sends an email or a mail to the other party even if they do not receive it.
The third element that a contract must have is legal capacity. Legal capacity is a party’s competence to enter into a contract. To be competent to enter a contract, a party must be at least 18 years of age. Age is the most common reason that makes parties incompetent to enter a contract. Another factor that causes incompetence is mental illness. If a person who is incapacitated by a mental illness enters a contract which he does not understand its details, he has the right to withdraw his acceptance thus making the contract void. Additionally, sobriety is a requirement for parties to be considered competent. A party that is under the influence of drugs is considered incompetent as his judgment would be impaired. Apart from competence, consideration is another element that every contract should contain.
For a contract to be enforceable there must be mutual consent between both parties. A contract is voided if one of the parties gives consent under duress or undue influence. A contract can be enforceable only if both parties freely consent. Additionally, the contract is enforceable if the business that is conducted is legal. For example, a contract that involves crimes against other individuals or the state cannot be enforced. Contracts are usually in writing but not all contracts need to be written down. However, the Statute of Frauds demands that in order for some contracts to be enforceable, they must be in writing. The contracts that are required to be in writing are such as those that involve real estate and other properties.
Potential Personal Liability
Personal liability can be defined as the financial obligation that compels owners of sole proprietorships to take liability for accidents or damages that occur within their businesses. In this scenario, Acme Fireworks deals with fireworks which can cause damages to users and employees. If an employee or client got injured while working with the fireworks, the owner would be liable. In a liability lawsuit, the liability rules would consider the owner’s negligence and the loss incurred (Witting, 2013). Acme Fireworks can avoid personal liability by changing the business entity from a sole proprietorship into a corporation or a Limited Liability Company (LLC). By changing the business entity, the owner can acquire personal liability insurance. If a business has personal liability insurance, it can avoid paying for any damages or accidents that occur within the business premises. Personal liability insurance covers injuries to employees or clients, accidents that result in lawsuits and property damage caused by the business's negligence. If personal liability insurance is not enough, the business may consider acquiring more coverage through personal umbrella liability insurance. This coverage involves serious accidents that occur within the business premises.
Employment Types and Relationships Relevant to Agency Law
Employees
There are various employment types and relationships that an employer can use. Some of them are full-time, part-time, trainees, and contract employees. According to the Government of Western Australia Department of Mines, Industry Regulation and Safety, (2019), it is important for businesses to understand the employment types in order for employees to receive the appropriate compensation.
In this scenario, Acme Fireworks has 15 employees that work for the company. However, the employment type that they fall under is not clear. Different employment types have varying benefits that the employees enjoy. Some of them are an hourly or yearly wage, social security, deduction of federal and state taxes and health insurance. According to the Internal Revenue Service (IRS), (2018), a full-time employee is anyone that provides at least 130 hours of service every month. Acme Fireworks would face some disadvantages if they employed full-time employees as it is mandatory for full-time employees to receive benefits such as social security, unemployment insurance, minimum wage, worker's compensation, and overtime pay. Part-time employees are individuals that work on a reduced schedule compared to full-time employees. Unlike full-time employees, part-time employees are not awarded a lot of benefits. However, businesses are compelled to provide health insurance cover to their part-time employees if they have 50 or more full-time employees. Acme Fireworks would not be compelled to provide such benefits as the business has only 15 employees.
Contract employees are individuals that are hired by businesses to conduct specific tasks at specific rates for a predetermined period of time. A contractor has the ability to work for different companies and the employer cannot subject him to his policies. Acme Fireworks would benefit from hiring contract employees as the overhead would be reduced significantly. Additionally, the business would not have to provide benefits such as social security, and unemployment and medical insurance. However, the business would experience some disadvantages as the contractors’ jobs are flexible thus giving them the ability to deduct expenses to balance the taxes they would pay later.
Agency Law
Agency law can be defined as the relationship between the principal and the agent. According to Rogers, (2012), a principal is a person that hires an agent to represent him while an agent is a person that acts on behalf of another. A principal authorizes the agent to act on behalf of him. However, if the agent exceeds his authority, the principal is not responsible for his actions and the agent is held liable. If a third party is affected, he is protected by common law. Common law binds principals to third parties. Additionally, the principal can sue the agent for exceeding his authority.
Business Entities
Business entities are organizations that are created by people in order to conduct business or trade. They involve the structure of the business rather than what the business does. Some of the main types of business entities are partnerships, corporations, limited liability partnerships, and companies. In this scenario, the owner of the business registered it as a sole proprietorship. A sole proprietorship is a business that is owned and managed by one person. Although the owners enjoy sole control of the profits, they face challenges such as full liability for the businesses’ losses. According to the Intellectual Property and Transactional Law Clinic, n.d, liability is the largest disadvantage that sole proprietorships face. In this type of entity, the owner of Acme Fireworks is personally liable for any obligations or debts that the business incurs. If Acme Fireworks was involved in a lawsuit and the businesses’ accounts were unable to cover a debt, the plaintiffs or creditors would have access to the owner’s personal accounts. Sole ownership of the business may be advantageous to the owner but it is a liability as the owner would have to change the business entity if he would like to include another owner. The owner would have to change the entity from a sole proprietorship into a general partnership.
Recommendation
After conducting my analysis, I would recommend Acme Fireworks to change the business entity from a sole proprietorship into a Limited Liability Company (LLC). According to the Small Business Association, n.d, an L.L.C. is a legal structure that provided partnerships with limited liability features, efficiency, and operational flexibility. An L.L.C. can have one or more owners who are known as members. Acme Fireworks should transform into an L.L.C. as it reduces the personal liability that is imposed on sole proprietorships. LLC's are considered separate entities from the owners, therefore, protecting the owner's personal assets. Additionally, the owner would benefit as LLC’s have less paperwork. Unlike sole proprietorships, LLC’s are not compelled to keep extensive records. Another advantage of changing the entity would be increased ownership flexibility. LLC’s do not face any restrictions on the number of owners they can have.
Conclusion
When the owner started the business, sole proprietorship was the ideal entity. However, due to multiple requests for new and bigger displays, the owner of the business needed to expand it. The business enters contracts with its clients and therefore it needs to understand the appropriate contractual law to govern the business's contracts. The laws that are used are common law and the Uniform Commercial Code. For the contracts that the business engages in to be enforceable, they must observe elements such as a proposal, acceptance, legality, mutual consent, and competence. As the business is a sole proprietorship, the owner is bound by personal liability if an accident occurs within the business premises. After concluding my analysis, I recommend that the business should change its entity into an LLC. By changing the business into an LLC, the business would eliminate the liabilities imposed on sole proprietorships, and improve the businesses’ efficiency and operational flexibility. The recommendations I have made will enable the business owner to make an informed decision.
References
Bell, M. (2018). Disadvantages of a Sole Proprietorship. Retrieved from: https://www.delawareinc.com/blog/disadvantages-of-a-sole-proprietorship/
Government of Western Australia Department of Mines, Industry Regulation and Safety. Types of Employment Arrangements. Retrieved from: https://www.commerce.wa.gov.au/labour-relations/types-employment-arrangements-1
Intellectual Property and Transactional Law Clinic, n.d. Sole Proprietorships. The University of Richmond.
International Revenue Service, (2018). Identifying Full-time Employees. Retrieved from: https://www.irs.gov/affordable-care-act/employers/identifying-full-time-employees
Palmer, E. (2010). Contract Analysis. Internal Auditor, 67 (4), 19-21.
Rogers, S. (2012). Essentials of Business Law . San Diego, CA: Bridgepoint Education, Inc.
Small Business Association, n.d. Your Business Structure. Retrieved from: http://www.sbaguide.org/YourBusinessStructure.html
Witting, C. (2013). The Small Company: Directors’ Status and Liability in Negligence. King’s Law Journal, 24 (3), 343. doi: 10.5235/09615768.24.3.343
