My brother’s lemonade stand business is at risk because he does not have any type of structure or legal protection. The friends that he has selling his lemonade and the customers buying the lemonade can put him in a very bad position. It is possible that the other vendors could change his recipe, misrepresent or overprice his product. A consumer could take the recipe and make it their own, or falsely accuse him of making them sick with his product.
There is a legally enforceable contract businesses and consumers due to the “intention to create legal relations”.
You sell something, they buy it. Once that agreement has been made, it is legally binding (Marson, 2011). While his business is quickly growing into a bigger franchise with multiple locations, his risk is increasing. The first step in mitigating this risk is to identify the critical risks related selling goods for consumption then deciding what risk management will work and how to implement it.
The best option for my brother would be to form a limited liability company. An LLC is a legal entity that, in the eyes of the law, exists separate and apart from its owners. The owners of the LLC are called ‘members’ as compared to a corporation, where the owners are referred to as ‘shareholders’. With the shield against personal liability, the shareholders of a corporation have only the money that they have invested into the company at risk – shareholders are generally not required to pay their own money to satisfy any debt of or judgment against the company (Marson, 2011).
A sole proprietorship will have unlimited liability and starting as a new business owner with a partner, would not be ideal for him and a corporation is too much of a complex structure for lemonade stands at this stage. Forming an LLC may help his business establish credibility with potential customers, employees, vendors and partners because they see you have made a formal commitment to your business.
With my brother as the CEO and his business partner Peter, the “Chief Operating Officer,” with five of their friends working for them there is sure to be arguments about profit shares. There should be an agreement between the partners on what their shares will be based on their investment into the business, otherwise, all profits are shared equally (Duboff,2004). Then they can decide how much to pay the employees.
As mentioned before, a Limited liability company protects it’s owners and shareholders from personal liabilities in case of any debt in the business. With just two partners that can quickly communicate, an LLC is more agile and easier to adopt changes if required. I believe the LLC reduces his liability tremendously and will avoid great loss if faced with a lawsuit.