Business Structures, Liability, and Hiring Law: Case Analysis

Bar Venture: Choosing the Right Business Structure

There are several ways a bar business could be structured. The bar could be run as a partnership, with Miriam as a silent partner. The partnership agreement can be used to determine the manner in which the proceeds of the business are divided. However, a partnership would also expose the principals to liability associated with the business. Given that they are opening a bar, there is high liability risk, and this type of business has a high failure rate. Thus, it is recommended that the three partners incorporate.

There are a few different types of corporations, including limited liability companies (LLCs), S-corporations, and standard corporations. An LLC limits the downside risk to the owner of the firm. The LLC structure also provides managerial flexibility and flow-through taxation. The LLC, however, is not recognized by the federal government as a separate tax entity, which means that taxes will still be handled as those of a corporation, partnership, or sole proprietor. An S-corporation passes income to the shareholders in the same way that a partnership would, and the ownership structure would allow Miriam to receive a weighted share of the profits. However, any flow-through structure makes it more difficult to reinvest earnings into the business, as it does not allow for retained earnings. A standard corporation is a separate tax-paying entity and carries limited liability risk for the owners, though it is a more complicated structure to establish.

In this case, the partners will need to decide which of these structures best fits their needs. An LLC taxed as a partnership would likely be best in this situation, as it provides downside liability protection while also allowing the partners to flow their income from the venture through individually. This way, all three parties would be taxed at the same rate on the income. The standard corporation structure carries cost disadvantages associated with set-up and double taxation, and it is unlikely that the three partners will need to utilize the benefits of that structure.

Regulatory Compliance and Risk Management for the Bar

The bar business will be subject to a wide range of laws. In addition to IRS tax policy, there are laws with respect to food handling, employees, and the service of alcohol. Some federal laws pertain to these topics, but many of the applicable laws exist at the state, county, or municipal level, and the parties would need to investigate these with their local authorities.

There are a number of risks associated with this business. The first is the risk to invested capital, as the bar business has a high failure rate. The second set of risks comprises those associated with food and alcohol service. Foodborne illness is a considerable risk, and improper alcohol service could result in harm to a customer and the loss of the bar's liquor license. There are also risks involved with hiring staff and risks related to fire and electrical hazards. This business can expect to carry a fairly high insurance bill to cover the wide range of risks to which it is subject. However, it would not be able to insure against the risk of the business failing due to lack of demand.

Miriam would also want to minimize her downside risk, since she is investing money but will not take an active role in management. This should be arranged in the contract with Lou and Jose, specifying the conditions under which she would withdraw from the business. Each of the partners should ensure that his or her interest is protected in the event that things do not work out as hoped.

Extermination Business: Corporate Structure and Regulatory Considerations

The extermination business should be structured as a corporation. Initially, a basic one-person extermination business could operate under a sole proprietorship, but Frank's ambitions demand the flexibility and professionalism of a corporate structure. The corporate structure will allow Frank to access capital markets and attract investors, while simultaneously allowing him to remain in control of the company. Only the corporation structure offers Frank this combination of flexibility and limited downside risk.

Corporations are subject to double taxation, but Frank can use the structure to pay his investors as needed. This business will be subject to EPA regulations with respect to the pesticides and insecticides used, and there may be city or state licensing requirements as well. Otherwise, only IRS regulations and the laws with respect to incorporation need be considered. There are significant financial risks for Frank, as the cost of building such a business will be substantial. There are also risks associated with the use of toxic chemicals, and these will need to be addressed through appropriate insurance and safety protocols.

Works Cited

IRS.gov. (2009). "Business Structures." Internal Revenue Service. Retrieved November 23, 2010, from