Small businesses often face numerous challenges, which require navigation by the expert. These challenges are the primary contributors to the high mortality rate of small businesses. In fact, it is imperative for the managers of small businesses to make prudent business decisions to address inherent issues. Some of the decisions include ascertaining the type of contracts that govern the operations of the entity and interactions with other ventures, determining the potential personal liability, and the type of employment that suits the entity and provides profitable operation.
This paper considers Acme Fireworks case study to answer some of the questions that the owners of small businesses have while managing their ventures. While examining the case, the paper explores wide-ranging issues including the law of contracts, employment and its relation to the agency law, personal liability, and the implications of the legal status of a business entity in relation to the success of the business.
The analysis indicates that Acme Fireworks should change its legal status from a sole proprietorship to a limited liability company and appropriate the services of independent contractors during boom until there is a steady supply of orders in order to shield the owner from personal liability and enhance profitability.
Contracts with the Business
The contracts between Acme Fireworks and other business ventures will be governed by the common law as opposed to the Universal Commercial Code. Both of the types of contracts govern business transactions. However, the type of business transaction determines the type of contract under which the transactions of such type may be performed (Tepper, 2014). The common law, on the one hand, governs business transactions that involve intangible assets, services, real estate, employment contracts, insurance, and similar undertakings. The Universal Commercial Code (UCC), on the other hand, governs contracts that involve movable goods and tangible objects (Tepper, 2014).
Since the contract between Acme Fireworks and its clients does not involve the supply of goods but only the performance of a firework exhibition, thus, the contracts will be governed by the common law. Acme Fireworks is not contracted to supply firework material stock but to source the material and perform a display. If the company had to supply the material stock, the contractual agreements would be governed by the UCC.
The clients, who enter into the contract with Acme Fireworks, are purchasing the setup of fireworks, display, and performance. Thus, the clients are purchasing a collective service. The commodity sold by Acme Fireworks is neither a tangible nor a movable good that can necessitate the transaction to be governed by the UCC. The common law is the most appropriate law to govern most of the contractual agreements of Acme Fireworks.
The owner of Acme Fireworks has formed a legally-binding and enforceable contract with the clients regarding the setup and performance of a fireworks display. While exploring the case, it is evident that all the essentials of a valid and enforceable contract are present.
- Firstly, there is an explicit offer. In a contract context, an offer is defined as an explicit expression of readiness to do something, which has to be considered and accepted unconditionally by the other party (Marson, 2013). Actually, the owner has disclosed that Acme Fireworks had received inquiries from several large businesses previously. The businesses inquired whether Acme Fireworks was in a position to perform several fireworks display on a regular basis.
Thus, the inquiries constitute the expression to do something, which form an enforceable contract if complemented by an unconditional acceptance (Marson, 2013). The large businesses, hence, made a clear offer, which was noted and considered by the owner of Acme Fireworks. In fact, the owner even went ahead to inform that his business is able to fill such orders.
- Secondly, there was an acceptance on the part of the owner concerning the offer made by the prospective customers. If the owner of Acme Fireworks had refused the offer, then a critical part of an enforceable contract would have been absent. The owner of Acme Fireworks accepted the offer made by the prospective clients by agreeing on the price (Marson, 2013).
In fact, there would have been an element of dissent if the owner had made a counter-offer meaning that the contractors have only demonstrated a conditional or partial acceptance on their terms. However, Acme Fireworks did not propose any counter-offer that indicates full acceptance and the fact that the contract is enforceable.
- Thirdly, there was a consideration on the part of large businesses that received such services as the setup and display of fireworks from Acme Fireworks. In fact, consideration is a benefit conferred to the other party that can be measured in economic terms (Tepper, 2014).
The most common forms of consideration that are appropriate to enforce a contract represent money, goods, and services. In this instance, Acme Fireworks needed to receive monetary remuneration for the services it would offer including the setup and display of the fireworks when required. The promised receipt of money constitutes a legal and economic benefit, and, hence, a consideration.
- The fourth element of an enforceable contract represented the capacity to contract. All the parties privy to the contract had the capacity to enter into legal contracts. A contract can only be voided if any of the parties involved in the contractual transaction does not have the capacity to contract because of the following reasons: the party is a minor, is intoxicated, or is of unsound mind (Marson, 2013).
In this instance, there is no clear indication that either of the parties involved did not have the capacity to enter into the contract. All the signs point to a contractual transactions that involve adults in sound mind, who are running their businesses ably. The presence of the capacity to enter into the contract coupled with all the other elements of a contract makes the resultant contractual agreement legally enforceable.
Crucially, the parties involved had the intent to create legal relations in the contractual negotiations. In the law of contract, commercial transactions are presumed to signify an intention to create and enter into legally binding contracts (Marson, 2013). The fact that the activities under consideration are business-related infers that Acme Fireworks and its clients purposed to enter into legally binding contracts. Thus, the presumption of intent to create legally binding contract can only be rejected if the parties privy to the contract state explicitly that they do not wish to or are not creating a legally enforceable contract (Tepper, 2014)
In fact, the expressions such as subject to contract and without prejudice are used to indicate that the agreement formed during negotiations should not be taken to mean that they are part of the contract yet. The legally binding contract will be drafted later on. Hence, a party acting on the terms of the initial draft can withdraw without any legal ramifications because both parties know that the document does not constitute a contract (Marson, 2013). In this instance, such exclusionary words or phrases were not used and, therefore, it is presumed that Acme Fireworks and its clients entered into a legally-binding contract by undertaking business-related activities.
Finally, the contract is also legally-binding because there is a lawful purpose. In the majority of jurisdictions a fireworks display is a legal activity. In the majority of states there are laws that govern the way how the firework should be setup and displayed, but no state bans such displays. A contract that arises from a lawful activity and is a subject to the presence of all the other elements, constitutes a legally enforceable contract.
Potential Personal Liability
The owner of Acme Fireworks may be held personally liable if a spectator is injured by a firework from the display. Moreover, the owner is potentially liable for both civil and criminal charges. However, the potential personal liability will depend on the extent of an injury and the prevailing state laws. Acme Fireworks and the city council or any other legal body that regulates firework display can potentially be sued for negligence by the injured spectator (Martin, Bates, & McMyne, 2015).
The reason for such a situation is the fact that Acme Fireworks failed to supervise the setup and display properly that resulted in an injury to a spectator. An injury to a spectator implies that Acme Fireworks failed to exercise its duty with care that it must provide to bystanders and other people present in the vicinity of the firework display. Acme Fireworks has a duty to ensure that the workers and spectators are safe from the potential injuries that the firework display may cause. Failure to guarantee safety exposes the company to civil liability. The extent of liability is limited by the applicable state laws.
Apart from being sued for negligence, Acme Fireworks may also be liable for criminal prosecution. In fact, this is especially plausible if the extent of injuries is extreme. The individual actors may be held personally and severally responsible for the criminal acts that resulted in heavy injuries (Martin, Bates, & McMyne, 2015). In some states, the laws that govern the setup and display of fireworks establish that fireworks are inherently dangerous. Thus, the laws require the organizations and individuals, which set up such displays, to exercise a greater amount of care as opposed to primary level of safety. If Acme Fireworks fails to exercise the enhanced level of care, it will ignore the laws and its leadership may be held responsible.
Employment Types and Agency Relationship
Acme Fireworks will potentially experience a shortage of labor if it fills additional firework setup and display orders. In fact, Acme Fireworks has two main options to address the impending shortage of labor: to hire additional employees or to contract independent contractors when needed. Different employment types have different agency ramifications; some of them are advantageous while others are disadvantageous to Acme Fireworks.
The first option available to Acme Fireworks is to hire more employees to address the shortage in labor. The employees will work under implied contracts for the employer. The core advantage of such form of employment in relationship to the agency law is the fact that the owner of Acme Fireworks can control the actions of employees. The employees will act as the agents of the employer and will execute every order as instructed (Kozlowski, 2013). The control the owner has over the employees helps him to reduce the potential liability. Hiring employees is also advantageous to Acme Fireworks since the employees cannot sue the owner in case of injuries (Mellow, Niedbalski, & Wehmer, 2016).
If the employer takes all the employment regulations into consideration, the employees should be protected by the workers compensation insurance. Apart from the advantages that come from the agency relationship, there are also other advantages from hiring employees as opposed to independent contractors. Employees cost less, in both long- and short-term since they usually charge a lower hourly wage than independent contractors as they have a security of tenure (Kozlowski, 2013).
Independent contractors and other freelancers charge higher hourly wage because they do not enjoy job security. Lastly, if Acme Fireworks decides to hire additional employees, it will not have to search for independent contractors once there is work overload.
The core disadvantage of hiring employees is the fact that the owner will be held responsible for the actions of his employees under the tort of vicarious liability. The employees are the agents of the owner and their actions not only reflect the intentions but are also undertaken on behalf of the owner since the employer has control over the employees (Mellow, Niedbalski, & Wehmer, 2016). Apart from the inherent risks of vicarious liability, the owner of Acme Fireworks may also incur additional expenses by paying for the employees benefits. These costs would otherwise be avoided if the freelancers were hired to help with the setup and display of the fireworks when there is a shortage of labor.
In contrast to employees, independent contractors control the performance of the task they were engaged in to perform on behalf of the owner. The advantage of contracting independent contractors instead of hiring employees is the fact that the individual contractors are held liable in case of any injuries or accidents because they control the execution (Kozlowski, 2013). The owner of Acme Fireworks does not control the actions of the independent contractors; the owner can only influence the results of the work.
Since independent contractors control the way how the firework display is going to be executed, they take responsibility for any undesirable eventuality, not Acme Fireworks. The other benefits of contracting independent contractors include minimizing costs due to reduced salary costs and obtaining greater flexibility as there is great competition in the market of individual contractors in contrast to employees. The core disadvantage of engaging independent contractors to Acme Fireworks is the partial loss of control of the setup and display of the fireworks (Kozlowski, 2013).
As noted earlier, Acme Fireworks will only be able to direct the results and not the execution of the task. In fact, it is disadvantageous since any mistakes will bring bad reputation to Acme Fireworks. Thus, the owners reputation will be at stake in the event of injuries to spectators or any other mishap, not the reputation of independent contractors.
Business Entity Legal Status
Acme Fireworks should alter its legal status from a sole proprietorship and restructure into a limited liability company. A sole proprietorship poses unprecedented risks to the owner of the business since the proprietor does not enjoy limited liability (Mancuso, 2014). If the business fails to service its debts, personal assets of the owner may be sold to retrieve the amount of company's debt. Furthermore, the owner is also liable in the event of injuries and may be sued for damages in civil suits.
Moreover, the owner may be subjected to criminal proceedings if the injuries are severe. Additionally, as long as the business is a sole proprietorship, the owner will encounter hardships raising additional capital for the business (Mancuso, 2014). All the challenges threaten the existence of the entity. Given many constraints of a sole proprietorship as a form of business entity, it is evident that Acme Fireworks should not operate under such a business entity. Instead, the owner of Acme Fireworks should change the legal status of the business into a limited liability company.
Operating as a limited liability company, the owner of Acme Fireworks will enjoy many benefits. Actually, the business will be treated as a legal entity separate from the owner (Mancuso, 2014). The owners assets will be separate from the company's balance sheet. If the business fails to service its debts, the owners personal assets cannot be attracted to repay the debt of the business because of the limited liability. However, the companys assets will be sold and the proceedings appropriated to repay the amount of company's debt . The limited liability ensures there is a minimal threat to the business life of the entity (Mancuso, 2014).
Furthermore, restructuring into a limited liability company will enable Acme Fireworks to raise more capital through the issuance of shares. Currently, the owner has a dilemma whether he can fill extensive business orders due to labor constraints. Issuing shares will ensure that there is enough capital for the business to expand its operations and employ additional employees that can translate into increased profitability.
It is evident that the contractual agreements Acme Fireworks creates with its clients will be governed by the common law as opposed to the Uniform Commercial Code since the item sold is a service, not a tangible material stock. Moreover, such a statement is supported by the fact that the owner effectively formed a legally-binding contract with the businesses by listening to inquiries and agreeing on prices. All the core elements of a contract, including an offer, acceptance, consideration, the capacity to contract, and the intention to create legal relations were present.
What concerns potential personal liability, the owner may be sued for negligence if a spectator is injured by an object from the firework display. If the accident occurred due to the flouting of specific state laws that regulate firework display, criminal proceedings might be instituted. Acme Fireworks may choose to hire employees or enter into the contract with independent contractors to address the impending shortage of labor.
Since the company is still a sole proprietorship, it should just enter into the contract with independent contractors as opposed to hiring additional employees given the fact that there is no guarantee for continued availability of orders. Moreover, the engagement of independent contractors reduces the liability of business for the negligence in the event of any unfortunate occurrence as the independent contractors, in contrast to employees, are not considered to be the agents of Acme Fireworks.
Finally, the owner of Acme Fireworks needs to restructure the business from a sole proprietorship to a limited liability company in order to reduce personal liability. Such a restructuring will not only shield the owner from liability suits and consequent drainage of personal assets but will also empower the owner to raise more capital, expand the business, and realize more profits.