1. One of your students is the Chief Executive Officer of a local computer perip
ID: 444971 • Letter: 1
Question
1.One of your students is the Chief Executive Officer of a local computer peripheral manufacturing company. The company has been using a local charter service for much of its transportation throughout the region, but they are not happy with the service. Impressed with the professionalism of your operation, she urges you to add charter operations to transport her company’s executives, maintenance personnel and rush shipments. You do some additional market research and draft a business plan, which confirm the profit potential in the local market. If you expand your business to add this service, will you make changes in your insurance coverage? If so, describe.
2.You and your best friend are starting a new business venture. Through your family’s contacts in the business community, you have identified an opportunity to contract with one or more major local banks to transport canceled checks by air nightly to the regional Federal Reserve Bank in Dallas and return with computer equipment to be transported under contract. With a loan, you plan to purchase a Cessna Caravan. You will be the only pilot and you also plan to load and unload the plane yourself. Your friend will manage the business and handle all marketing. You will rely on the local Cessna dealer, an FAA certified repair station, to inspect and maintain the aircraft. You do not contemplate any commercial use of the airplane other than the specified cargo operations.
What form of business organization will you choose? Why?
Explanation / Answer
1. Yes, if I expand my business, I will have to make changes to my insurance coverage by adding professional Indemnity Insurance. Let us look at the meaning of Professional Indemnity Insurance.
Professional Indemnity Insurance: You will need this form of cover if you or your business offers professional advice to customers or clients.Professional indemnity cover can protect you in situations when a mistake is made on your behalf, resulting in incorrect advice being given to a client. If the client then suffers financial loss as a result of this information, you could be faced with a compensation claim.
Even if you feel you are not at fault, you could still be forced to pay for legal defence to fight your case, which could endanger the future of your business. Professional Indemnity insurance can cover the cost of necessary legal proceedings and any compensation you have to pay out to a client.
2. Since, only two people would be involoved in this business, the ideal form of organisation would be partnership. Let us look at the definition, types and advantages of partnership to understand this better.
Partnerships
In a Partnership, two or more people share ownership of a single business. Like proprietorships, the law does not distinguish between the business and its owners. The Partners should have a legal agreement that sets forth how decisions will be made, profits will be shared, disputes will be resolved, how future partners will be admitted to the partnership, how partners can be bought out, or what steps will be taken to dissolve the partnership when needed.
Advantages of a Partnership
• Partnerships are relatively easy to establish; however time should be invested in developing the partnership agreement.
• With more than one owner, the ability to raise funds may be increased.
• The profits from the business flow directly through to the partners’ personal tax return.
• Prospective employees may be attracted to the business if given the incentive to become a partner.
• The business usually will benefit from partners who have complementary skills.
Types of Partnerships that should be considered:
1. General Partnership
Partners divide responsibility for management and liability, as well as the shares of profit or loss according to their internal agreement. Equal shares are assumed unless there is a written agreement that states differently.
2. Limited Partnership and Partnership with limited liability
“Limited” means that most of the partners have limited liability (to the extent of their investment) as well as limited input regarding management decision, which generally encourages investors for short term projects, or for investing in capital assets. This form of ownership is not often used for operating retail or service businesses. Forming a limited partnership is more complex and formal than that of a general partnership.
3. Joint Venture
Acts like a general partnership, but is clearly for a limited period of time or a single project. If the partners in a joint venture repeat the activity, they will be recognized as an ongoing partnership and will have to file as such, and distribute accumulated partnership assets upon dissolution of the entity.
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