An important first step in any business decision is deciding the type of structure of the company.There are several business structures which may include sole proprietorship, partnership, corporations and unincorporated business structures (Bhushan 2008).The first section of this analysis is going to focus explicitly on unincorporated business structures; highlighting some of the benefits of establishing an unincorporated entity such as simplicity, low cost and flexibility and the risks of running unincorporated businesses.
The paper will also discuss the benefits as well as the drawbacks of incorporation. The second section will explore on the employment law, and the Equality Act 2010 in particular. It will examine some of the provisions of EA 2010 and discuss the potential consequences for managers and directors where provisions of the EA 2010 are ignored.
Defining incorporated and unincorporated organizations
Before exploring further, it is important to first define incorporated and unincorporated organizations. Incorporation is generally defined as the creation of an organization’s legal identity, separate from its members (Behrenfield et al. 1989). On the other hand, an unincorporated entity refers to a collection of individuals coming together for a specific purpose (Davis & Lawrence 1963). The main distinguishing feature is the lack of a separate legal personality for unincorporated forms.
Even though unincorporated entities may operate under a common name, they do not have a legal structure (Gansler 2013). Thus, the law does not distinguish between the organization and its members. Unincorporated business entity may take on three main forms: a sole proprietor, partnership, or unincorporated association (Oleck & Stewart 2002). To an entrepreneur seeking to start a business, understanding the benefits and the drawbacks of setting up unincorporated business structure as well as the challenges of incorporation is very important. Familiarity with the benefits and challenges encountered with each approach will help guide investment decisions. This will help in developing a better understanding of the various challenges, risks, and the concerns and conflict that the entrepreneur might face with each approach.
Benefits and the costs of incorporation versus the advantages and the risks of running unincorporated entities
The choice of whether to operate an unincorporated business entity or to incorporate the business is not an easy one. Each approach to business has its own advantages and disadvantages. This requires some form of analysis whereby one weighs the benefits and the costs of incorporation against the advantages and the risks of running unincorporated entities. One particular point that is worth noting is that, unlike unincorporated forms, incorporation limits personal liability. This particular factor sets corporation apart from all other forms of businesses. Unlike an unincorporated entity, a corporation is an independent legal entity which is separate from the members controlling, owning or managing it (Williams et al., 2000; Davies & Lawrence, 1963 & Lazier 2009). In other words, incorporation will shield the owner’s personal assets from business debts and claims.
This is not the case with an unincorporated business entity as the sole proprietor or partners are subjected to unlimited personal liability for the firm’s obligations (Williams et al., 2000; Davies & Lawrence, 1963 & Lazier 2009). That is, the owners or individuals carrying out the activities of the unincorporated entity will be personally liable for the acts and liabilities of the entity. For example, if for some reason, the firm becomes insolvent or runs into debts; then all of the firm’s assets as well as the personal estates of the business owners/partners will be applied in the satisfaction of the business debts.
However, the business assets will first be applied and any indebtedness due or rather not covered by the business assets will be recovered from the owners/partners personal estates (Carter 2014). This means that the personal assets for each individual running the entity will exposed to the creditors once the business has exhausted its assets and insurance.
Another point of divergence lies with the filing of tax. Owners of unincorporated business structures are required by law to pay income taxes on all net profits of the business regardless of the amount taken out by these owners (Lazier 2009 & Oleck & Stewart 2002). On the other hand, a corporation is taxed as a separate entity. It is subjected to special corporate tax rates, separate from an individual shareholders tax. However, if a portion of the corporation’s after-tax income is distribute to the shareholders in the form of dividends, then a separate tax will be charged dividend received by each shareholder (Laurence 2014). The separate level of taxation can be beneficial in some cases. The corporate owners are not required by law to pay personal income taxes on profits that they do not receive (Williams et al. 2000). And, given that corporations are subjected to a lower tax rate than most individuals for corporate income between $50,000 and $75,000, the owners of the corporation may benefit from a low combined tax bill compared to owners of unincorporated business earning the same profit (Laurence 2014).
Perhaps another advantage of incorporating a business lies in its ability to attract investment capital. Unlike most of the unincorporated business forms, incorporation allows the business to sell ownership shares through the company’s stock offerings (Gansler 2013). This can be of great benefit especially where the need for attracting more investment capital arises. This advantage also makes it easy to hire and retain key employees by allowing employees to purchase company’s stock through employee stock options. This is particularly beneficial to the firm as it helps in aligning employees interests with those of the shareholders (Bickley 2012). However, business that have no intention of “going public” or issuing stock options may not find this added expense worthy.
Yet another benefit that is worth mentioning is that the business will have an unlimited life in the event of death of the owners.
Corporations may last for centuries even in the absence of the original owners (Davies & Lawrence 1963). The business will continue to act a separate legal entity which can freely transfer ownership interest from one person to another (Carter 2014). But for unincorporated entities, the business may come to an end in the event of death of the owner.
It is clear that there are enormous benefits with incorporating a business compared to running an unincorporated business. However, there are several drawbacks to incorporating a business as well. One particular drawback relates to the high cost involved in incorporation. The corresponding filing fees charged for incorporation and the extra administration costs and the considerable organizational and overhead costs incurred by the corporation can be extremely high (Carter 2014). Besides the high cost involved, the process of incorporation is normally very lengthy due to the huge amount of paperwork which must comply with regulations. Unlike many other business forms, incorporated business forms have many formalities and regulations that they must comply with such as recording shareholder rights, establishing a board of directors, maintaining corporate minutes, corporate records and filings (Davies & Lawrence 1963).
On the other hand, unincorporated business forms benefit from simplicity, low cost and the flexibility associated with their structures. It is easy and less costly to set up an incorporated business entity compared to a corporation. Continuing maintenance costs are minimal and there is a greater flexibility in terms of conversion of the entity to other forms as the business grows (Bhushan 2008). Also, the length of time and the amount of paperwork involved in setting up an incorporated entity is very minimal compared to incorporating a business.
Another consequence of incorporating a business is that it is subject to greater regulation and supervision by government bodies. For example, financial corporations such as banks and trust banks, credit unions, investment and holding companies, insurance companies and many others are supervised by the Department of Financial Services (PWC 2008). Supervision include an examination of the licensing and registration requirements and chartering among many others. Regulations governing incorporations are also highly complex. Establishing a bank in the US requires one to conduct discussions with regulatory advisors, lawyers and federal and state supervisory officials due to the highly complex banking regulations (PWC 2008).
On the other hand, unincorporated entities are not subjected to greater supervision and extensive regulations as corporations. And since they are not governed by any statute, unincorporated business entities have more flexibility with regard to how the entity should be structured. The owners can take all the actions of an individual. However, this lack of regulation could be a problem when a dispute arises since there is no formal statute for addressing it (Lazier 2009).
The choice of whether to incorporate or run an unincorporated entity is clearly a complex decision which can only be made with consideration of a number of factors such as the projected business risks/liabilities, the need for attracting addition investment capital, need for regulations among many others. The choice of whether to set to incorporate the business or set up an incorporated business structure will most likely depend on the projected risk and liabilities of the business. For example, if the business is going to engage in high risk activities such as trading stocks, then it would be best to incorporate the business in order to provide for personal liability protection. However, where the risk is minimal, it is prudent to consider establishing an unincorporated business entity.
Nonetheless, I will advise the couple setting up the retail business to incorporate as the risks of running an unincorporated business may outweigh the risks of incorporating it due to many unforeseen costs arising especially where lawsuits are involved. Plus there are the benefits of attracting additional investment through company stock offerings and issuing of stock options to employees which will also have the effect of aligning employees’ interests with those of the shareholders. While incorporating may be time consuming and costly due to the high filing fees, the extra administration costs and the considerable organizational and overhead costs incurred by the corporation; the benefits are greater in the long run compared to running an unincorporated business entity.
Assessing potential consequences for managers and directors where the provisions of EA 2010 are ignored.
An important part of running a business is understanding the various employment legislations which may have significant consequences on managers and directors of the company if ignored. One particular employment legislation of great interest in this analysis is the Equality Act 2010. The Act requires employers to take reasonable steps to protect their employees from discrimination and harassment in various areas including age, disability, religion, belief, race, sexual orientation, gender reassignment and pregnancy or maternity (GOE 2010). For example, part 5 of the Act which covers provisions relating to equal pay create an implied sex equality clause in employment contracts (GOE 2012). These provisions require employers to ensure equal pay for both the male and female gender where the contractual nature of the work is the same (EHC 2011).
In general, the act places duty on employers to protect the rights of each employee by ensuring that they are not being discriminated against in the various areas highlighted above. It requires employers to make reasonable adjustments to working arrangements to prevent job applicants or employees from any form of discrimination (Jacobs and Jerald 2007). Ignoring the provisions of the EA 2010 will lead to severe repercussions. Managers and directors that choose to overlook some of these provisions will face severe court penalties.
In addition, the legal costs incurred may be extremely high. The legal bill for the employer starts right at the moment when the employee expresses grievance and files a claim of harassment, discrimination or victimization (Muyi-Opaleye 2014). It should be remembered that the cost of hiring employment lawyers is very high and the legal bill can easily run into tens of thousands of dollars. In fact, estimates put the current defense costs of a single claimant lawsuit at $250,000 and a jury verdict of $200,000 (Heathflieid 2014).
The settlement costs may fade in the face additional indirect costs that are often hard to quantify such as the losses resulting from damages to a firm’s reputation, the costs resulting from the loss of employee morale and distraction of organization’s staff as internal investigations are conducted (Heathfield 2014). There is also the loss resulting from the amount of time spent in defending against the claim.
The managers/directors may incur indirect costs such as the loss of reputation which can also affect the firm’s reputation. Where such cases attracts publicity, the managers and directors may suffer from reputational damage irrespective of whether the claim was found to be valid or not. It should be remembered that reputation is a matter of perception and that the firm’s reputation is a function of reputation of key stakeholders including managers and directors of the company (Shah 2013). A strong positive reputation among the managers and directors of the company will result in a firm’s strong positive reputation and vice-versa (Burns 2012).
If the managers and directors continue to allow for unfairness to go unchecked in the workplace, then this can cost them as well in terms of consumer demand. Consumers may react by choosing to do business elsewhere. This will have a significant adverse effect on the company’s bottom line as sales will significantly decrease thereby decreasing revenue and net returns. Companies cannot afford to lose a share of the market by allowing unfairness to go unchecked in the workplace (Burns 2012).
The other indirect additional costs may have severe repercussions on the firm as well. Employee morale may decline to levels that their productivity are significantly affected (Burns 2012). Employees will feel that their grievances are not being addressed by the managers and directors of the company, thereby creating disengaged employees. Eventually, this will have a negative effect on the company’s bottom line.
It is clear that the risk to the managers and directors for ignoring provisions of the EA 2010 are significant. From the very high costs of defending lawsuits to the hard-to-quantify indirect costs arising from reputational damage, loss of employee morale, and distraction of organization’s staff. It is imperative that the employer addresses employees concerns related to their employment contracts in order to avoid lawsuits and ensure a pro-active diversity workforce. If the employer fails to address employee concerns, proves evasive or provides unequivocal answers; it may lead to a tribunal drawing inferences which could be enough to establish a “prima facie” case of discrimination (Muyi-Opaleye 2014). Besides the lawsuits that may arise when a case of “prima facie” case of discrimination is established, the management may be ordered by the employment tribunal to undergo equality and diversity training. The Equality Act 2010 provides the employment tribunal with wider powers to order changes in workplace (GOE 2012).
There is no denying that the consequences of overlooking this employment legislation are enormous. The managers and directors may choose to ignore the provisions of EA 2010 at their own peril. The risk of ignoring these provisions is high from costly lawsuits to the hard-to-quantify indirect costs arising from reputational damage, loss of employee morale, and distraction of organization’s staff. The managers/directors of the company also run the risk suppressing overall job performance, forcing otherwise qualified and innovative individuals out of the labour force, and losing the lucrative consumer market to competitor firms.
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