Author: Arend Pryor | Created: 09/14/2021
Details: Sharing content created as part of pursuing my MBA degree
Assignment Details: This reflection is comprised of the two sections below. Complete your reflection by responding to all prompts.
Types of Business Forms
Choosing the form of business to create is one of the most important decisions an enterprise makes. The extent of liability and control the owner will have depends on the form of the business.
Differentiate among the major forms of business organization and describe what you consider to be the top 2 advantages and disadvantages of each form. Address the regulatory and financial statement differences of each form of business.
Federal Trade Commission
Consumer laws were established to protect purchasers of goods and services. What purpose does the Federal Trade Commission serve and why must business owners be educated on Federal Trade Commission practices?
Consider one of the following sections of the Federal Trade Commission Act:
Deceptive Advertising
Labeling and Packaging Laws
Sales
Regarding the section you chose, provide an example of when a deceptive practice has been used in business and the consequence(s) for the deceptive practice.
Walt Disney once said, “The way to get started is to quit talking and begin doing” (Alaili, 2020). I would imagine that these would be the types of words that inspire entrepreneurs to start their own business. The question then becomes, what type of business should I start? What are the advantages and disadvantages between my choices, and how will this choice affect the regulatory and financial aspects of my business? These are all important questions, however, the first of them is the most important, as the type of business you start will determine the answers to the rest of these questions. Many businesses, once started, find themselves at a crossroads with how to best advertise their products and services. This is where the Federal Trade Commission comes in as their mission is to educate consumers and businesses on laws and legal actions that that protect the public from unfair business practices that look to mislead their customers and increase sales. As an example of this, we will review the issue of deceptive advertising in the weight loss industry and take a look at some of the penalties handed down as a result of these unfair practices.
There are several types of business organizations available for entrepreneurs to select from when starting a business. The type selected has plenty of implications for its future operations. The following is a summary of the most popular types of structures, their advantages and disadvantages, as well as details regarding the legal and financial reporting requirements for each:
Type: Sole Proprietorship
About: This is the choice for those looking to start a business where they alone are in control of every aspect of the company including profits, liabilities, and decision-making. As of 2015, the U.S. Census Bureau reported the existence of more than 21 million sole proprietorships in the United States. Easily more than any other type of business (Weedmark, 2020).
Advantages: These types of businesses are one of the easiest to start as they require little to no legal assistance. As mentioned above, the sole proprietor, or person who created the business, will have complete control of every facet of the business including how the business will conduct its operations, when it will do so, and where (Kubasek et al., 2019).
Disadvantages: In addition to having complete control of the business, sole proprietors are also responsible for legal actions taken against the company and are held liable for all financial obligations and losses. Owners of this business type are also responsible for covering the start-up costs associated with starting their business.
Liability and Legal Requirements: In addition to taking on the liability of the company, the sole proprietor can also be sued and have their assets used to cover the cost of any damages that are owed. Also important to note is that if the sole proprietor passes away, the business is dissolved (Kubasek et al., 2019).
Financial Requirements: In terms of finances, sole proprietors are responsible for providing their own funding to start the business. If this includes obtaining loans, they would also be legally and solely responsible for repayment of these loans (Kubasek et al., 2019). As you might imagine, when it comes to tax requirements for this type of business, owners are taxed at a personal level, with any earnings or losses taken into consideration on their own personal incomes taxes (Carbajo, 2018).
Type: General Partnership
About: A general partnership is a legally binding agreement between two or more people who have agreed to manage and operate a business as well as equally share in the profits and liabilities (Bloomenthal, 2020).
Advantages: Much like the sole proprietorship, the formation of a general partnership has been said to be an easy process that often does not require a written agreement between the partners, although, it is highly recommended. Another advantage of this structure is in the ability for partners to deduct any losses the business experiences, individually on their respective taxes.
Disadvantages: Disadvantages of the general partnership arrangement include each partner being personally liable for losses and debts the company incurs as a whole. Thus, if one partner steals from the business, or fails to cover their portion of the company’s debts, all of the partners would be held liable (Kubasek et al., 2019).
Liability and Legal Requirements: In a general partnership, each partner has the authority to enter into binding agreements, contracts, or business dealings on his or her own behalf, and the other partners are required to follow any conditions set forth in the contract (Bloomenthal, 2020).
Financial Requirements: As mentioned, each partner would be responsible for reporting their own tax liabilities and business earnings on their personal income taxes.
Type: Limited Liability Company
About: A limited liability company (LLC) is a business structure in which the owners are not individually responsible for the debts or liabilities of the organization. These companies are hybrid businesses that combine the advantages of a corporation with those of a partnership or a sole proprietorship (Fernando, 2021).
Advantages: Establishing an LLC is somewhat easier to form than a corporation, while providing additional flexibility and protections. These protections are provided by way of limited liability, meaning, its owners are not personally responsible for the debts and liabilities of the company (Fernando, 2021). In the case of real estate companies that form an LLC, this business type can provide the buyer with anonymity during the purchase process (Kubasek et al., 2019).
Disadvantages: One of the disadvantages of this type of company has to do with its structure being new and not yet being approved in all U.S. states. Regulations are also not consistent and can vary from state to state (Fernando, 2021).
Liability and Legal Requirements: Although requirements can vary from state to state for the formation of an LLC, some of the most consistently required include choosing a name for the company and drafting the articles of organization to identify the rights, obligations, and liabilities of all participating members (Fernando, 2021).
Financial Requirements: LLC’s have the option of not paying federal taxes and instead have profits and losses attributed to either tax returns for the owner or members of the LLC (Fernando, 2021).
Type: Corporation
About: The structure of a corporation is one that separates itself from its owners, in that it is recognized as a separate legal entity. Despite this separation, corporations can enter into contracts, borrow or loan money, purchase assets, and even be sued (Kenton, 2021). This type of company is funded via the selling of shares to investors in order to become incorporated. These investors then own a portion of the organization and elect board members who are responsible for managing the business (Kubasek et al., 2019).
Advantages: The ability to raise money via issuing stock for investors to purchase can be thought of as an advantage, since this saves an organization from coming up with needed capital on their own. A corporation’s ability to have profits taxed as income via their shareholders rather than to their partners could also be seen as an advantage for the company.
Disadvantages: The act of starting and maintaining a corporation can sometimes require legal assistance when the details become complex and add to the cost of starting. As previously mentioned, another disadvantage is that income generated by the corporation is taxed twice (Kubasek et al., 2019).
Liability and Legal Requirements: Corporations offer legal and liability protections for their owners and are managed based on input from their board of directors, who draft bylaws and conduct annual meetings (Fernando, 2021).
Financial Requirements: In this area, corporations are first taxed at the company level and then subsequently taxed again once company profits are dispersed to their shareholders. (Fernando, 2021). While the details can vary, corporations are also required to provide details of their current financial status to investors, customers and the SEC in the form of financial reports (Nguyen, 2017).
The Federal Trade Commission (FTC) was created as a result of the Federal Trade Commission Act of 1914 and is tasked with carrying out its goals of protecting consumers from fraud, deception, and unfair business practices. In order to meet these goals, the primary strategies of the FTC are to educate consumers on the laws and legal actions that exist in order to protect the public. These strategies are carried out by the FTC via educational campaigns that aim to provide helpful interpretations of laws to both consumers and businesses. This can include publishing industry guides, providing clarifications of consumer laws, and starting the process of taking legal action against companies who are in violation of these laws. The importance of educating businesses on these laws is to help them understand how they can better protect their customers as well as to help them avoid the monetary costs of violating consumer laws. This is true of individual companies as well as entire industries (Kubasek et al., 2019).
Section 5 of the Federal Trade Commission Act includes information on the prevention of deceptive advertising tactics that aim to take advantage of and mislead consumers. In order to violate the FTC’s definition of deceptive advertising practices, a misleading claim is one that includes a substantial falsification, omission, or approach that would deceive a reasonable consumer. As part of educating companies on avoiding these practices, the FTC mandates what’s called ad substantiation, which requires advertisers to back-up their claims using reasonable explanations, studies, or testimonies from certified experts. However, the FTC does allow the use of generalities and exaggerations, also known as puffing, which seems a bit contradictory in comparison.
If you are familiar with the weight loss industry, you may not be surprised by the use of misleading claims aimed at consumers looking for an easy weight loss solution. As an example of one such case, in 2016, the FTC won a legal battle against the ad agency Marketing Architects, for their part in creating radio ads that included a long list of misleading and very convincing weight loss claims. The agency helped create ads for a host of products, all with unsubstantiated claims and promises of rapid weight loss. The company was warned by the FTC and advised to include fact-based studies and results as well as input from credible sources in order to back up their claims. Instead, the company created advertisements disguised as news stories which served to mislead reasonable consumers and also neglected to inform them that they would be automatically enrolled in plans that auto-shipped products and charged consumers. As a result, the court banned the company from making specific types of weight loss claims, required them to include credible scientific research as evidence for their claims, and prohibited them from falsifying consumer testimonials and results (Federal Trade Commission, 2018).
Starting your own business can be a risky proposition. Even Walt Disney’s first animation studio went bankrupt less than a year after opening (Mayer, 2020). While this may not have been due to the type of business he started, the choice between the different structures available today is one of the most important that business owners will have to make. This all important choice dictates what will be required to start your company, your sole or shared decision-making abilities, advantages and disadvantages, as well as the regulatory and financial requirements the business will be required to follow. While the type selected will not determine your approach for marketing to customers, the campaigns and educational materials put out by the Federal Trade Commission will aim to provide guidance to you as a business owner as well as to your consumers. As shown above, these materials serve to educate, however, when not adhered to by businesses and even industries, they can potentially be followed by legal action and penalties. This was the case in the weight loss industry when repeated warnings from the FTC were ignored and ultimately led to drastic consequences. It all comes down to choices.
References
Alaili, A. (2020, November 16). The way to get started is to quit talking and begin
doing. – Walt
Disney. Entrepreneur Post. https://www.entrepreneurpost.com/2020/11/16/the-way-to-
Bloomenthal, A. (2020). Choose well: The risks of establishing general partnerships.
Carbajo, M. (2018). Choosing the right business structure: Three factors to consider.
U.S. Small Business Administration.
Federal Trade Commission. (2018, February 8). Advertising firm barred from assisting
in the marketing and sale of. https://www.ftc.gov/news-events/press-
Fernando, J. (2021). The truth about limited liability companies. Investopedia.
Kenton, W. (2021). What everyone should know about corporations. Investopedia.
Kubasek, N., Browne, N. M., Herron, D., Dhooge, L., & Barkacs, L. (2019). Dynamic
business law (5th ed.). McGraw-Hill Education.
Mayer, K. (2020, March 19). Fun facts about Walt Disney. POPSUGAR Smart Living.
Nguyen, T. (2017, November 21). How often do publicly traded companies prepare
financial statements for external reporting purposes? Small Business -
Weedmark, D. (2020, December 4). Why are sole proprietorships the most common
form of business ownership? Small Business - Chron.Com.
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