Business Law

Part 1

Type of business

 Clothing Boutique

 The type of business that I would like to start is a clothing boutique. In conducting my research, I have learned that the town lack decent shopping that offer basis clothing necessities. Thus, I want to operate a fashion boutique and meet the interest of women. My target market is women since they are the most likely to purchase clothing.  I will run the business as a single individual to enjoy the flexibility of management as well as the business profits.

 

 Form of business

Sole proprietorship

 I would like to select a sole proprietorship form of business.  In conducting the research, I have learned that there are various types of business entities such as sole proprietorship, Limited Liability Company, partnership, among others (Fontana & Trakin, 2010). Out of these options, I have chosen sole proprietorship since it's easy to set up, it’s easy to maintain, and I will have 100% control of the business.  In conducting the market research, I have researched about the competition in the clothing market and I have gained knowledge on how competitors conduct the business.  I have also gained an insight into what customers need, and their interest and preferences.  I have researched the legal status, sources of finance (capital), and business risks.  In  general,  the basis for my selection has been based on the  features of the sole proprietorship and from my research, I have  learned that  this is a business  that is run  by a sole trader,  the capital comes from personal sources,  it has unlimited liability,  the business owner is responsible for  all business management,  the business owner  accepts both profits and losses alone, and  there is no special  legislation (Fontana & Trakin, 2010). With this knowledge, I have a better understanding of this form of business and I will be in a position to meet customers’ wants.  

 

 The pros of a sole proprietorship

 Even though other forms of business such as partnerships and corporations have higher revenues and a great impact on the economy,   I would like to start a sole proprietorship business since it is easy to form and to dissolve (Fontana & Trakin, 2010). For example, my business plan is to start a clothing boutique and provide fashionable clothing to women.  Note that I have made this decision in a timely and quick manner without involving other people.  Thus, it will be easy to start this business since no one will bring counter-arguments or oppositions toward my decisions. Another important point is that if I feel I no longer need the business, I will just dissolve it since I have complete control of the business and freedom to terminate.  I also like the sole proprietorship business since I will have management flexibility, I will retain all profits, keep business secrets, and handle the risk (Fontana & Trakin, 2010).  Unlike corporations and partnerships, I will require a little amount of capital and I can raise the amount from friends and family, micro-loans, business grants, line of credit, among other sources.  Last but not least, I will be in a position to create direct contacts with my customers and this will enhance understanding with customers and better provision of services (Fontana & Trakin, 2010). Generally, I want a sole proprietorship to avoid legal formalities, enjoy the flexibility, pay personal income taxes only, and make decisions alone.

 

 The cons of a sole proprietorship

 In conducting the research, I have also found that sole proprietorship is associated with demerits since I will be responsible and accountable for all financial liabilities of the business (Fontana & Trakin, 2010).   At times the business may incur losses and liabilities and as a sole business owner, I will handle the unlimited liabilities.  Another challenge is that I may want to expand the business and provide men's clothing but since the financial resources are limited, I may not be in a position to expand the business.  I have also learned that the business may grow and as a sole proprietorship, I may be unable to perform all duties (Fontana & Trakin, 2010).  Lastly, unexpected life circumstances such as bankruptcy, illness, or death may lead to business termination and this is a big challenge.  Considering both sides, the benefits outweigh the disadvantages and thus, I would prefer starting this simplest form of a business. As  long as  I understand that  I  will be liable for all unlimited liabilities of the business, and  that  I will face challenges in raising capital,  I will protect the business by obtaining insurance,  and hire contractors.

 

 

Part 2

Enron scandal

 

 Clients who were part of the savings plan at Enron Corp were allowed to contribute 1 to 15% of their salary to the plan. Clients invested their contribution towards different investment options including stock funds and Oil and Gas Stock Fund and both were company stock (Sterling, 2002).  However, the clients filed a lawsuit against the officers and members of the Savings Plan for failure to show loyalty and to adhere to the rules of plan documents.  The plaintiffs argued that the entity responsible for the Savings plan failed to adhere to the duty of loyalty and as a result, they acted to their own interests to gain personal benefits (Sterling, 2002).  The officers mislead the participants and beneficiaries and ignored the interest to attain personal benefits. Initially, the fiduciaries offered investment advice to the clients and they had a positive statement that inspired the clients to purchase Enron stock. However, their investment turned sour when the Enron and the Board of Directors responsible for compensation and development breached their duty by failure to handle the matter carefully. The first breach of duty was based on appointing unqualified fiduciaries. Secondly, Enron and the board of directors failed to monitor the investment decisions that were raised by the appointed fiduciaries. Third, the Administrative Committee that was responsible for monitoring the Enron stock and evaluate whether the available stocks were the right stock breached the duty of prudence (Sterling, 2002). They neither assessed the Enron's investment option nor did they establish a processor plans to terminate the use of Company stock since it was not the right investment option.  Fourth, the Enron, the Board of Directors and the Enron officers very well knew about the precarious financial condition of the company but they failed to prevent the clients from buying and selling the stocks (Sterling, 2002).  Thus, the clients proceeded with the investment and during the lockdown, the company lost its value and clients lost hundreds of dollars.  Finally, the Administrative Committee and the Northern Trust Company failed to diversify the investments to minimize the risk of losses (Sterling, 2002).  The cause of the problem is that the unqualified fiduciaries failed to comply with the plan requirement and much of the investment was on the Enron stock.

 Every corporation including the Enron Corp has a standard of care derived from the tort law.  The law obligates the corporate officers to uphold the duty of prudence, exercise due care, monitor the corporation's business, and behave in a reasonable way (Wade, 2002). These standards of care play a significant role in protecting the corporate from governance failures. However, most corporations including Enron do not adhere to the duty of care. Note that all board members were aware of the fiduciary duties and they were responsible for the company's affairs.  According to the company's rule of conduct, they were expected to act in honesty, be competent, and provide reasonable care. In addition, they should support the corporation's strategies and more importantly, maintain the company's investment-credit rating and reduce the burden of debt (Wade, 2002).  However, the following corporate officials were aware of the criminal activities going on in the organization but they failed to act in according to the standard of care.

 

Kenneth Lay Enron CEO- Sherron Watkins, the Enron's Vice-President of Enron blew the whistle or rather he disclosed the illegal actions in Enron Corporation.  He communicated to Kenneth Law (CEO) through a memorandum to bring attention to the unethical actions that were going on in the organization.  In the memorandum, he said that the financial situation of the corporation will get worse and there would be accounting scandals.  Watkins was suspicious about the Enron accounting actions and he predicted that Enron does not comply with accounting rules and as a result, there would be accounting fraud (Wade, 2002). However, Kenneth Lay did not take the matter seriously but he remained silent to avoid diminishing his stature in the profession.  Despite the complaints from the Vice-President concerning the apparent improprieties, the CEO demoted Vice-President Watkins. In other words, he was demoted to human resources. In addition, she failed to handle the concerns that Watkins expressed.

 

Jeffrey Skilling- Note that Enron's ethics code stated that there should be no disrespectful treatment in the organization and people should treat each other with respect.  In addition, members should show integrity, communicate effectively with each other and be excellent in everything (Wade, 2002).  However, when the investigative reporter was Enron investigating Enron’s financial statements, she held a conversation with Skilling among other corporate officers.  Skilling was not happy with the investigator's inquiry and he argued that the questioning was unethical and he failed to answer the questions completely and accurately.

 Ben Glisan – he was a corporate treasurer who was involved in a criminal conspiracy that negatively affected the corporation.  He was involved in an illegal transaction of %938, 000 among other finance schemes that concealed losses (Wade, 2002).

 

 Andrew Fastow - Fastow was involved in an ethical act of failing to record the assets and liabilities of the company on the balance sheet.  He concealed the records containing the massive losses of the corporations and as a result, this led to the company's bankruptcy.  Fastow also concealed that Enron was involved in trade with other companies and that that it was partnering with related party transactions.

 

 

 

 

 

 

 

 

 

 

 

 

 

References

 

Fontana, P. K., & Trakin, J. C. (2010). Choosing the right legal form of business: The complete

guide to becoming a sole proprietor, partnership, LLC, or corporation. Ocala, Fla:

Atlantic Pub. Group.

 

Sterling, T. F. (2002). The Enron scandal. New York: Nova Science Pub.

 

Wade, C. L. (2002). Corporate Governance Failures and the Managerial Duty of Care. . John's L.

Rev., 76, 767. Retrieved from: https://scholarship.law.stjohns.edu/cgi/viewcontent.cgi?article=1365&context=lawreview

 

Huu Cuong, N. (2011). Factors Causing Enron's Collapse: An Investigation into Corporate

Governance and Company Culture. Corporate Ownership & Control Journal, 8(3). Retrieved from: http://www.virtusinterpress.org/IMG/pdf/10-22495cocv8i3c6p2.pdf