When forming a business, there are many considerations that must be taken into account. In this paper, I will describe the basic elements of business formation and how they can affect the overall goal of forming a business. It is important to seek out legal assistance and advice in order to avoid issues. Business Formation
By focusing on its strengths, its prospective customers, and the underlying values they will need, Cybex, Inc will begin the manufacturing of new microchip within the next two years, and grow into a multi-million dollar corporation that provides a product that powers the next generation of personal computers for the small business and high-end home office users, in a national market. The initial costs for mass producing the microchip will be financed by venture capitalists, whom are content with not being directly involved in the business operations.
Upon obtaining initial success with the microchip market and all financial objectives have been achieved, it is the company’s expectation to go public, or be sold to investors, within five years. The cost for start-up and initial production of the microchip is being finance by venture capitalists. In order to best achieve the goals outlined in the vision for the business, all legal and regulatory issues need to be identified while creating the business. Since the company is being financed by an outside entity, a limited partnership would be the best business form to establish in this situation.
According to Reed et al (2002), a limited partnership basically has all the attributes of a partnership except that one or more of the partners are designated as limited partners. This type of partner is not personally responsible for the debts of the business organization. However, these limited partners are not permitted to be involved in the control or operations of the limited partnership. The management is left in the hands of one or more general partners who remain personally liable for the organization’s debts.
Death, disability, or withdrawal of a general partner dissolves the partnership unless the partnership agreement provides otherwise or all partners agree, in writing, to substitute a general partner. The death or incompetence of a limited partner has no effect on the partnership (Incorporation, 2004). Another important factor that will come into play in regards to dealing with the venture capitalists involves a prospectus, which must be furnished to any interested investor, and it must conform to the statutory requirements.
Like the registration statement, the prospectus contains financial information related to the issuer and controlling persons. The prospectus supplies the investor with sufficient facts (including financial information) so that he or she can make an intelligent investment decision (Reed et al, 2002). The venture capitalists do not want to interfere in the business operations and have agreed to allow the developers to control the operations, provided certain financial objectives are achieved.
Civil liability arises when responsible parties fail to prepare the required documentation or file or provide documents that contain untrue statements of material facts, omit material facts, or create misleading information. The basic civil remedy sought by wronged investors is the return of their investment. Typically, a plaintiff needs only to prove that an error exists in the required documentation. A plaintiff does not need to prove reliance under the 1933 Securities Act. This means that good faith (no intent to violate the law) is not a valid defense under the act (Reed et al, 2002).
The prospectus will cover the investors in case there is any fraudulent activity. When forming a business it is important to search for legal advice that is tailored to your company’s needs. Since the microchip is predicted to be a success on the market by analysts, the most important step is to seek guidance from a patent attorney. This will allow the business to successfully patent and develop ideas with assistance from an expert and will decrease the likelihood of being sued for infringement.
The next important step to take would involve hiring a contract lawyer to ensure that the paper work was fair and consistent with the venture capitalists. According to Reed et al (2002), contract law is a fundamental part of the environment in which people conduct business. Under the common law of contracts, contractual terms must be definite and specific. An offer to purchase a house at a “reasonable price” cannot be the basis for a contract because of indefiniteness.
Most advertisements and catalog price quotes are considered too indefinite to form the basis for a contract unless they are specific about the quality of goods being offered. This example shows the importance of having a legal professional for assistance. Since the microchip business involves three individuals whom had previously worked in the field and their funding comes primarily from external sources, the best approach would be to form the business as an S corporation.
According to Reed et al (2002), shareholders in the S corporation are responsible for accounting on their individual income tax returns for their respective shares of their organization’s profits or losses. In essence, these shareholders can elect to have their business organization treated, for tax purposes, as if it were a partnership. Through this election, the shareholders avoid having a tax assessed on the corporate income itself. Even though the S corporation does not pay any taxes, like a partnership, it must file an information return with the Internal Revenue Service.
This method of organization has distinct advantages for a business operating at a loss because the loss is shared and immediately deductible on the returns of the shareholders. It is also advantageous for businesses capable of paying out net profits as earned. In the latter case, the corporate tax is avoided. If net profits must be retained in the business, subchapter S tax treatment is disadvantageous because income tax is paid on earnings not received, and there is a danger of double taxation to the individual because undistributed earnings that have been taxed once are taxed again in the event of the death of a shareholder.