1. Advise three friends what they should take into consideration when making up their minds if they should set up their business as a general partnership (unincorporated) or as a limited liability company (incorporated)?
2. A business associate, who has taken on a new role as Operations Manager of a small business, has asked you to help her to explain the difference between an employee and an independent contractor to her Managing Director?
Partnership business between more than one parties are done by some mutual agreement. While setting up the business all the partners should decide about the structure of the business. In partnership business there are two structure that a business will have any one of that the first unincorporated partnership or joint venture and the second is the incorporated partnership or joint venture (Bassiouni, 2014).
General partnership business or unincorporated joint venture between three parties needs a mutual agreement to establish the joint venture with a particular purpose without a formal structure like a company. The advantage of an unincorporated joint venture is that they enjoy greater freedom of operation as compared to a company. Suppose for a unincorporated joint venture there is no requirement of submitting the annual report. The partners of a unincorporated joint venture are equally responsible for the operation of the firm and they should make a document that will justify that they are the agreed persons to make the business mutually. The unincorporated joint venture will be done by the partners and they will be responsible for the contract they have done individually. The responsibility of the organization will be more less same as it will be stated in the partnership firm. The firm will not have any legal entity but the individuals associated with unincorporated joint venture will be responsible equally for the operation of the organization (Bubb, 2014).
Unincorporated joint venture will be done between three friends with a mutual understanding to operate their business. There will be no legal entity of the firm but all the three members will be responsible for their activity that will be associated with the unincorporated joint venture. There are few consideration that should be addressed while setting up the association between them.
All three partners should enter a unincorporated joint venture agreement that will set the objective of the firm in operation, production allocation, risk, decision making process and other operational details that will be important for the operation of the unincorporated joint venture. There will be corporate form of operation that will be done in the agreement. Agreement will clearly describe about the contribution of money during the formation of the unincorporated joint venture (Campling, et al, 2014). Incorporation of contribution will help to decide the allocation of profit among three partners. Formation of the agreement is very important because it will set the culture of the organization and the responsibility of three partners will be distributed with their mutual understanding.
All the three parties will be proportionately liable for the activities of the unincorporated joint venture. The interest of the liability will depend on the investment they have made during the agreement. The proportion of the investment will decide the proposed liability to the partner. The liability of the partners to the public is joint several and unlimited. If there is any fault in the service to the public then full recovery can be taken from any one of them according to their availability (Cappelli, and Keller, 2013).
The unincorporated joint venture should have more flexibility as they will not have legal boundaries like a company. The flexibility of the firm will largely depend on the negotiated agreement between three parties. The structure and the operation of the firm is decided by the mutually agreed condition and the flexibility is integrated with the interest. There is no rule or definition of the flexibility of the firm. It solely depends on the mutual understanding of the partners and their activity. Decision should be taken with prior approval of all three partners and there should be an option to take individual decision when others are not available in the situation (Carcello, and Li, 2013).
An unincorporated joint venture does not make profit of itself. In a unincorporated joint venture each partner will share a amount of money for the production of the product that has a saleable value in the market. Then they will divide those products according to their contribution in the production. The sale of the products will depend on the individual choice. There will be no regulation for selling those products in the market. Profit of the saleable product will be taken by the individual sale credit. Little percentage of the profit will be taken by the company as the depreciation of the production unit. Every partner will be liable for the operation cost of the production unit that will be proportionate to their interest (Clauwaert, and Schomann, 2012).
Tax policy is not there for the unincorporated joint venture because it is not a legal entity. So if it is profitable organizations then partners are individually responsible for the payment of tax. When the partners will sale their own product in the market they will provide the tax to the government according to their individual sale quantity. If there is any loss in the sale of any partner then he or she has to compensate from other business (Cottini, and Lucifora, 2013).
All the three partners will enter in every dealings or any agent should be fixed. The agent will make every dealing with the interest of all three partners. All the three partner will be responsible for the tenants of the assets that will be shared commonly. There will be no rules and regulations in the operation.
incorporated joint venture will be done between three friends to operate a business. Whenever there is a incorporated joint venture legal issues becomes the most important aspect of the business. An incorporated joint venture will have share holders interest that will have to take in consideration while making any business decision. There will be specific board members and they are responsible for the decision process of the organization (Erhel et al, 2012).
In a incorporated joint venture there is a shareholders agreement that is decided with their respective interest in the joint venture. The incorporated joint venture forms a company or firm that will have a separate legal entity. The partners will not be responsible for the operation of the company. Board members will be the responsible person and liable to the every activity of the company.
The liabilities of the partners are limited in the organization. The partners will be liable for the assets of the company that was held at the time of the incorporated joint venture. The partner’s liability is less in the operation because the operation of the company is totally controlled by the board members of the company. So there is any issue in the market only board members will be solely responsible for that activity (George, Chattopadhyay, and Zhang, 2012).
In case of an incorporated joint venture flexibility is the biggest issue. The three partners will have no role in this matter neither the board members can do any thing. The incorporated joint venture is a legal entity and that will have bindings to the operation. The company have to maintain the corporation act made by the government. While maintaining this act during the operation of the company it becomes very difficult to make the organization flexible. Every operation of the company should maintain the act of the government and run in a legal way though there is no risk of the partners in this matter because they are not the deciding authority of the business. Company has to submit annual report at end of the financial year (Grandori, 2012).
In case of incorporated joint venture the cost and profit will come under the companies account. Here the company is a entity that will have a running cost. At the starting of the business partners as well as the venture capitalist will provide the operating and the production cost. As the organization will grow it will bear its own cost. The profit of the organization is the property of the company that will remain with the company account. Partners will get dividend according to their interest and the shareholders will also get dividend according to their amount of share. No profit sharing will be there by the company.
incorporated joint venture is a legal entity that will have its own account to run its business. Partners will have no responsibility to pay tax for the company neither they will compensate any money for any loss. The board members will be responsible for the payment of tax on time and legally. All the partners will have a influence to make ethical business of the company (Jost, 2011).
An incorporated joint venture can enter in any contract at its own right. There will be no relation with the partners of the company. In an incorporated joint venture there will be no liability of the assets by the partners of the company. All the assets will be owned by the incorporated joint venture. The incorporated joint ventures can lender money by the security of the assets. The incorporated joint venture will have a clear structure of the organization as it will be based on the board of directors and other management staff (Kanter, 2015).
There is a definite difference with the role of an employee and an independent contractor. The responsibility and the liability of the two people make the difference between them. An employee can behave or act like an employer with his or her job responsibility but an employer can never behave like a irresponsible employee. The difference between them is described below (Kim and Cho, 2014).
1. An employee is a staff of a company where he or she have to work according to the instruction or order by their senior or employer. The employee may get a oral or written instruction from the authority about the detail of the work. The employer has all the right to instruct the employee in any way.
An independent contractor is the sole entity who is hired to provide some product or services. There will be no one to instruct him or her about the job. The independent contractor has to deliver the goods or service as per the requirement of the client.
2. An employee gets the training from the employer. The acceptance of the training means that the employee is ready to serve by following the method of the employer. There will no space to provide his or her own method within the process (Magadan, and Rivas, 2015).
An independent contractor has their own method for performing their task. The method can be different for the same job to find out the best way to complete the job. The independent contractor is hired by the company to perform a particular task that will be done by their expertise and no one will interfere with the process.
3. An employee is usually integrated with the business operation and of any company. The direction of operation is mentioned by the organization. The success of the business operation is dependent on the employee’s performance. There is motivation and appreciation by the seniors for the success that drive the performance better.
An independent contractor may be in a service where he stands alone or he or she may not be integrated with the business operation. There is no one to motivate or appreciate their job. Self motivation is very important for better performance of the independent contractors (Robbins et al, 2013).
4. An employee has no control to hire other staff as his or her assistant for supporting the job. The employer usually keeps control on this part. Sometime employer provides the right to the employee to hire other staff then that employee can perform the function. The permeation of the staff hiring will have some instruction about the criteria of the hired employee.
An independent contractor will hire, supervise and pay to the workers at his own risk. There will be a contract to perform a certain job that is to be done within some criteria. The independent contractor will be responsible for the result given by the worker (Robertson et al, 2011).
5. An employee usually has relation with the employer in terms of part time or short time job. The employee can continue his or her job in a irregular interval if the relation is good with the employer.
6. An independent contractor has no relation with the party who is taking the service. The relation ends as soon as the job is done.
7. An employee will have a defined time to perform his or her job for the employer. The allocation of time is decided earlier at the time of the recruitment and both the parties will maintain the situation (Sherman, 2012).
An independent contractor has no fixed working hour. They have to provide service whenever their client require.
8. An employee has to perform their work in the premises of the employers. There is a fixed place provided by the employer where employees gather to perform their task.
An independent contractor performs their job whenever they wish. They generally do their job in that place where they are providing their service. It can be changed every time. Some contractor provides their service in their own place. The party who want their service went there and avail the service (Sørensen and Fassiotto, 2011).
9. An employee is paid by the employer who appoints him or her. There is a minimum amount of salary that is garneted for them. Employees get their salary on the basis of the working hours, weeks and months. Some fixed amount will be fixed and incentive will be there for them (Steingold, 2015).
An independent contractor will not get any salary from any one. The income of a independent contractor is not fixed in every month. They will earn on the basis of the contract they will have in a particular month.
10. An employee has to submit oral or written report to the employer everyday or after every job. This report is the description of the job done by the employee in a given period. Employer evaluates the productivity of the employee according to this report and provides benefit like increment and incentives (Van Grinsven et al, 2012).
An independent contractor has to send report to the party who is willing to take the service. There is no increment or incentive or the independent contractor. Only the profit is the only source of income for the independent contractor.
11. An employee gets the reimbursement from the employer for travelling and other expenses that he or she has done to complete a job. An independent contractor will include all the expenses in the costing of the service and charge to the party to whom he or she is providing the service (Zott, Amit and Massa, 2011).
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