BUS 307- Case Study 1 PDF

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BUS 307: Case Study 1 Memo Emily Havel Southern New Hampshire University

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To: Fred and Sally From: Emily Havel Date: May 23, 2021 Subject: Formation of Homeopathic Cough Syrup Business The following memo is to aid in the starting of your homeopathic cough syrup business. Your cough syrup is very popular within your community, and I understand that you want to take it nationwide. Going nationwide is a great goal, and I am happy to help you in any way possible with that goal. In the following paragraphs, you will find all the answers to your questions and my recommendations. I look forward to working with you and your future business endeavors. There are three main types of business a corporation, a partnership, and a sole proprietorship. A corporation is "a legal entity formed by issuing stock to investors, who are the owners of the corporation." (Kubasek et al., 2016). A partnership is "a voluntary association between two or more people who co-own a business for profit." (Kubasek et al., 2016). A sole proprietorship is "A business in which one person (sole proprietor) controls the management and profits." (Kubasek et al., 2016). With any product, you have to consider product liability. Product Liability Law is "based primarily on tort law. There are three commonly used theories of recovery in product liability cases: negligence, strict product liability, and breach of warranty." (Kubasek et al., 2016). When it comes to product liability, if someone were to take the cough medicine and have an adverse reaction, you could have a product liability suit on your hands. In a product liability suit, "While a plaintiff must establish different elements under each of these theories, the plaintiff

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must generally show two common elements: (1) the product is defective, and (2) that the defect existed when the product left the defendant's control." (Kubasek et al., 2016). Since there is an ingredient that can cause a reaction when taken with aspirin, there needs to be a warning label on every bottle. If there is no warning label on the bottle, this could consider the product defective due to "failure to provide adequate warnings about potential dangers associated with the product." (Kubasek et al., 2016). To avoid a product liability suit, you need to make 100% sure that there is a short and easy read, easy to find label on the bottle stating, "due to an ingredient in the cough syrup there could be a severe reaction when this medicine is taken in conjunction with aspirin.". "An agency is generally defined as a relationship between a principal and an agent. In the agency relationship, the agent is authorized to act for and on behalf of the principal, who hires the agent to represent him or her." (Kubasek et al., 2016) In the cough syrup business, Sam talks about his father's product to the locals. Sam has also offered to speak to national chains about carrying his father's product, and he has also offered to deliver the product with his van. Fred would be defined as the principal in this situation, and Sam would be defined as the agent. Sam is speaking and doing things on Fred's behalf for his business, so technically, Sam is an agent, and this is an agency relationship. "Real property, commonly referred to as realty, is land and everything permanently attached to it." (Kubasek et al., 2016). There are always federal, state, and local laws that must be followed regardless of the ownership of real property. Due to the manufacturing of the cough syrup on the family farm, there could be zoning issues. Zoning is “the process in which government places restrictions on the use of the property to allow for the orderly growth and development of a community and to protect the health, safety, and welfare of its citizens.”

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(Kubasek et al., 2016). Although this presents an issue because it limits what you can do with private property. You may be able to have the property zoned to a commercial property. Which would eliminate any manufacturing issues. Manufacturing cough syrup on the family’s property can necessitate a transfer of ownership. Having a business within your home can cause certain liabilities. This is where liability insurance comes into play. Liability insurance is a need when you have a business on your property or within your home, covering accidents if they were to happen. In most cases, transferring ownership of the property to the company would eliminate liability issues. But transferring ownership is not an option for sole proprietorships. Which leaves these businesses more vulnerable to liability issues. Personal Property is defined as “any property that is not land or properly affixed to the land.” (Kubasek et al., 2016). Sam’s van is considered personal property because it is not land or properly affixed to the land. The use of Sam’s vehicle could create liability issues for the company. Such as if Sam is delivering cough syrup and gets into an accident. The company cannot insure a personal vehicle. So, if the car is still Sam’s personal property, the company would not be responsible for the accident or injuries obtained from the accident. This could create a liability issue considering if another party is in the accident, they could sue the cough syrup company for damages received in the accident. If Sam did not insurance his vehicle correctly, the same situation could occur. In the above paragraph, I stated that Sam’s vehicle could cause liability issues for the company if it were not adequately insured. There are lots of different scenarios we can cover in this situation that could cause liability issues. But an accident would be my main concern. If Sam were to get in an accident, the other party could sue the cough syrup company for damages

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obtained in the accident. One way to avoid this would be if Sam were to transfer ownership of his van to the cough syrup company. The company could then insure the van and insure Sam as a driver on their policy. This would eliminate liability issues. If an accident were to occur, the insurance would cover the damages done to both the company’s vehicle and the other party’s vehicle as well as any party or product damaged in the accident. Estate Planning “is the process by which an individual decides what to do with his or her real and personal property during and after life.” (Kubasek et al., 2016). There are a few issues that could arise with estate planning. I would assume that Fred and Sally’s real and personal property would be split between Sam and Lilly. That would mean that the family’s property and the business would have to be split down the middle. If Lilly doesn’t want to be a part of the cough syrup business, you would have to figure out how to divide the company between Sam and Lilly without Lilly taking part in the company. You would also have to figure out how to split the property and personal effects between the two children. While this shouldn’t cause issues, it cannot be easy to figure out which child gets what part of both the real and personal property. There are two different tools when it comes to estate planning. A will “is a legal document that outlines how a person wants his or her property distributed upon death.” (Kubasek et al., 2016). A trust “ allows a person to transfer property to another person, and this property is used for the benefit of a third person.” (Kubasek et al., 2016). Both a will and trust should be used. The will should be used to divide the family farm and personal belongings of Fred and Sally between Sam and Lilly. Kubasek et al. (2016) says:

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“Trusts usually have two components: income and trust corpus. The trust corpus is the property held in trust, while the income is generated by the trust through interest or appreciation. Often, income is paid to an income beneficiary, who may or may not have access to the trust corpus. When the trust corpus is terminated, a designated person called a remainderman gets the trust corpus.” The trust should be in the cough syrup business’s name, with Sam and Lilly being the income beneficiaries. That way, the company is still making money while Sam and Lilly are benefitting from the profit. After the business has run its course or after Sam and Lilly decided to close the business they could split the remainder of the trust between the two of them. Using both estate planning vehicles in this scenario provides equal amounts of both the family farm and personal property to both Sam and Lilly. The trust keeps the business running while Sam and Lilly equally receive profit from the company. The business entity I recommend for Fred’s Miracle Cough Syrup would be a Sole Proprietorship. This would give Fred the ability to control the management and profits of the cough syrup business. Fred would handle all of the business aspects, from making the cough syrup to managing the finances. The sole proprietorship is the best option in this situation. Sam would be an agent for Fred’s Miracle Cough Syrup, and he would be allowed to speak on behalf of Fred and his business. But, with a sole proprietorship, all of the business decisions would be left to Fred which is the best approach to starting a business of this sort in my opinion. I hope I have answered all of your questions to the best of my ability and given you all the information necessary to start Fred’s Miracle Cough Syrup.

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Kubasek, N., Browne, N. M., Barkacs, L., Herron, D., Williamson, C., & Dhooge, L. (2016). Dynamic Business Law (4th ed.). McGraw-Hill Education. https://playerui.mheducation.com/#/epub/sn_9cbd#epubcfi(%2F6%2F8%5Bdata-uuid7aa0280e440b4ffcbeec4dfc4f9739ed%5D!%2F4%2F4%5Bdata-uuidbee8c9dde5244da38403882e05e5633c%5D)...