Tom, Dick and Harry have been best friends since kindergarten. Tom is the busine
ID: 464890 • Letter: T
Question
Tom, Dick and Harry have been best friends since kindergarten. Tom is the business brain of the group. Dick is the mechanical one and Harry is the creative one. All grown-up, the boys decided that they should start making some serious money to provide for their expanding families. The boys decided that they salvage small scrap metal pieces, nuts and bolts from junkyards and salvage yards which Harry would design and Dick would cast and weld into decorative art pieces. Tom will raise money from friends and family and look for distribution channels. Dick has a step-daughter, Dorothy who is 16 and mechanically inclined as well. Dorothy could be Dick’s apprentice. Harry’s wife, Helen is a recent BBA graduate from Yorkville University specializing in marketing and she could be recruited to help with sales and marketing. Helen`s good friend, Fern is an award winning designer with a national home decor chain who the group might be able to induce to join them. Tom’s twin brother Tim recently won the lottery and is pursuing his dream to be a photographer. Dick’s wife is a real estate agent and she believes she has found an old warehouse in the industrial part of town that could be turned into their headquarters. The owner of the warehouse is retiring and is open to the idea of selling or renting the space.
How might the business be structured? What might be some of the legal issues that could arise in operating the business and selling the product? What are some of the agreements that might be needed?
Explanation / Answer
All the partners have a dependent family to provide financial support. It is in their best structure to ensure that any liabilities arising out of business operations, do not affect their personal assets. So business could be structured as Limited Liability Company (LLC), wherein business liabilities would not become personal liabilities of the owners. Each partner would invest money and complementing skills and capabilities.
One major legal issue related to forming the LLC could be related to securities laws. If the business has even one party who is not participating in management, but is an investor, then securities laws might be applicable and the company might be treated as a security. So the owners must ensure that they qualify for exemption from security law before taking any money from the investors.
Some of the other legal issues that could arise in operating the business and selling the product could be related to regulations for disposal of hazardous waste from the scrap material.
They might need some agreements in place before starting the business, such as operating agreement, which is used to establish rules regarding distribution of profits and losses among the owners, list their voting rights, resolve conflicts between partners, provide legitimacy to the business’ status and avoid the default rules that could be imposed by the state.
Other agreements would be needed such as Sales and distribution agreement, facilities lease agreement.