Management Issues in Small Businesses Analysis Essay

Case:
Steve is a 52-year-old mechanical genius. He has just invented a device sure to make a million, a billion! It is an automatic laundry sorter that utilizes nano-technology to determine color, weight and size and will be every person's dream gift. This is not Steve's first invention, and he has become seriously wealthy with prior clever ideas. At this point in his life, he has a big income from prior projects, a huge house with no mortgage, a wife and five kids under the age of 18. Two of the kids are teenagers that seem to have inherited Steve's interest in technology. The problem with Steve is that he is pathologically shy, and has no clue how to get his product out there in the marketplace. He has decided he no longer wishes to use his prior partners, attorneys or contacts to market this new device.
Steve meets Ben. Ben is only 21 years old, single, rents a one-room apartment where he lives with his cat, and is fairly eccentric--his main passion in life is participating in dodgeball tournaments. He has already run through 3 different franchises and came close to being indicted for Internet stock fraud when he was only 16. He is, however, a marketing genius--he is the brains behind 3 of the great marketing ideas of the last 3 years. He has never saved a cent--his personality is such that he ends up alienating his employees or partners and because he does not trust attorneys, he has never gotten the ironclad legal agreement that would protect him when these partners throw him out of the business.
Steve and Ben meet at a cat show, and although they really don't know each other well, they recognize that each has what the other needs, and they decide to go into business together. Steve at first wanted to just hire Ben as a marketing consultant, but Ben does not want to just be Steve's employee. Ben wanted to take an option on Steve's invention, but that was not agreeable to Steve. Some sort of business formation is the key, but the question is what form of business?
You are an attorney/business consultant hired by Ben to represent him and counsel him. It is up to you to decide the best type of business for Ben and write a persuasive letter to your client discussing your decision. Your client will no doubt be astonished and pleased with your insight, and will thereafter authorize you to negotiate on his behalf with the other party to result in a memorandum of agreement.
You will no doubt want to consider the following, but you are certainly free to (and encouraged to) discuss any other issues you believe to be pertinent:
• management issues
• liability issues
• taxation issues
• inheritance issues
• nepotism
If you opt for a partnership form, you will need to discuss what law you are using and what provisions will be addressed in the partnership agreement.
If you opt for the corporate form, you will need to discuss what roles each individual will play, distribution of shares, etc.
let's look at the issues (among others) you might want to consider when starting your legal review:
• management issues. As the attorney for a particular party, you must assess the management skills (or lack thereafter) of your client and that of the other party. Does your client want to be involved in management? Does he want the other party to be involved? To what extent? What power will the manager be subject to control by either of the parties? What constraints on exercise of management power? If a third party is to have management power, who will hire, who will fire, who will control that third party?
• liability issues. Liability is the usually one of the main considerations when determining what kind of business organization is most appropriate. What does each party have to lose? Now or in the future? How to meet those goals of protecting assets, if that is a goal?
• taxation issues. Clearly, different business organizations have different repercussions for taxes. What are those repercussions? What is your client interested in protecting or growing?
• inheritance issues. This can be a very tricky issue for as we all know, blood is thicker than water BUT money can thicker than both! This might be an issue for one or both parties. And this does not involve just inheritance of wealth. What about the business itself? Now or in the future? What happens to the next generation?
Finally, you should produce a letter to Ben. The letter will allow you to go into some depth about your recommendation and the specific provisions involved, and most importantly, why those provisions are important for your client. Remember, this will be a letter that will be given to the other party--it should be specific enough to provide a starting point for negotiations. In real life, this would not be given to anyone other than your client--statutory "attorney-client privilege" prevents documents prepared by an attorney for her client from being disseminated to anyone else. In real life, once your client agreed with your recommendations, you would prepare a proposal for the other side which would probably ask for more than you really are willing to settle for and then negotiate toward what you really want. In this case, however, time constraints prevent us from playing those types of games--what you honestly think is best for your client is what will be given to the other side and you can negotiate from that. When the specifics are agreed to in the negotiation area, you will then be able to condense your letters into a one page memorandum of agreement that details what you have agreed to--they "why" will be reflected in your negotiation conversations. So the case study includes two parts, one is a letter to Ben, and the other is a one page memorandum of agreement.