Can A Big Ethical Mistake Lead To A Firm’s Bankruptcy?

Can A Big Ethical Mistake Lead To A Firm's Bankruptcy? 1

Can A Big Ethical Mistake Lead To A Firm's Bankruptcy? 2What does it mean to say that someone acts ethically? For most of us, it means that someone acts according to certain standards of behavior. But what are the standards of behavior for business? In conversation, when people use the term ethics, they mean a set of moral principles or values to guide behavior. Ethical behavior is, then, behavior that conforms to these values.

But ethics also has a more fundamental meaning. Ethics is the discipline that considers the justifications people offer for the principles and values they hold. The ethics of a company’s leadership consists of the set of values the leadership holds. But among these many values, business leaders must hold those particular values that are rooted in society’s purpose for business. These values are controlling, for they imply a kind of contract between business and society for managers to deliver the benefits for which society justifies the existence of the business system. These values identify economic performance as a good that society desires. And because they do, they impose requirements and set limits on leaders in their conduct of business.

Well a business ethics is the study of appropriate business policies and practices regarding potentially controversial subjects including corporate governance inside training, bribery, discrimination, corporate social responsibility, and fiduciary responsibilities. The success of a business organization depends on its ability to convert its plans into reality. This can be achieved by developing strong execution skills, along with ethics is most crucial. Business ethics ensure that a certain basic level of trust exists between consumers and various forms of market participants with businesses. For example, a portfolio manager must give the same consideration to the portfolios of family members and small individual investors. These kinds of practices ensure the public receives fair treatment.

Companies that adopt a disciplined and logical approach to getting things done, use several techniques to transform their strategies into the outcomes that they want. When it comes to preventing unethical behavior and repairing its negative side effects, companies often look to managers and employees to report any incidences they observe or experience. However, barriers within the company culture itself (such as fear of retaliation for reporting misconduct) can prevent this from happening. An organization that builds and strengthens its execution skills will be prepared to take advantage of the business opportunities that may arise while a company that lacks the ability to get things done is unlikely to make a success of itself.

A business firm is closely associated with commercial organization that operates on a for-profit basis and participates in selling goods or services to consumers. The management of a business firm will typically develop a set of organizational objectives and a strategy for meeting those goals to help employees understand where the company is headed and how it intends to get there. In microeconomics, the theory of the firm attempts to explain why firms exist, why they operate and produce as they do, and how they are structured. The theory of the firm asserts that firms exist to maximize profits; however, this theory changes as the economic marketplace changes. More modern theories would distinguish between firms that work toward long-term sustainability and those that aim to produce high levels of profit in a short time. The first requirement a business enterprise must fulfill is that it should ensure each employee has specific goals that are to be met within a stipulated time frame. It is important that every goal is aligned with corporate strategy. As far as possible, employees should be aware of how the goals allotted to them will help in achieving the firm’s objectives. This will give workers a sense of purpose.

Well-managed companies know that the key to launching a new product successfully or capturing an untapped market lies in executing strategy in a deliberate step-by-step manner. Senior management must demonstrate that it supports the initiatives that have been taken to execute the company’s strategy. In addition to this, employees should be provided with the training, support, and resources to allow them to fulfill their respective roles. Unlimited liability refers to the full legal responsibility that business owners and partners assume for all business debts. This liability is not capped, and obligations can be paid through the seizure and sale of owners’ personal assets, which is different than the popular limited liability business structure.

A firm’s business activities are typically conducted under the firm’s name, but the degree of legal protection—for employees or owners—depends on the type of ownership structure under which the firm was created. Some organization types, such as corporations, provide more legal protection than others. There exists the concept of the mature firm that has been firmly established. Firms can assume many different types based on their ownership structures:

  • sole proprietorship or sole trader is owned by one person, who is liable for all costs and obligations, and owns all assets. Although not common under the firm umbrella, there exists some sole proprietorship businesses that operate as firms.
  • partnership is a business owned by two or more people; there is no limit to the number of partners that can have a stake in ownership. A partnership’s owners each are liable for all business obligations, and together they own everything that belongs to the business.
  • In a corporation, the businesses’ financials are separate from the owners’ financials. Owners of a corporation are not liable for any costs, lawsuits, or other obligations of the business. A corporation may be owned by individuals or by a government. Though business entities, corporations can function similarly to individuals. For example, they may take out loans, enter into contract agreements, and pay taxes. A firm that is owned by multiple people is often called a company.
  • financial cooperative is similar to a corporation in that its owners have limited liability, with the difference that its investors have a say in the company’s operations.

 

Can A Big Ethical Mistake Lead To A Firm's Bankruptcy? 3 typically exists in general partnerships  and sole proprietorships. It indicates that whatever debt accrues within a business—whether the company is unable to repay or defaults on its debt—each business owner is equally responsible, and their personal wealth could reasonably be seized to cover the balance owed. For this reason, most companies opt to form limited partnerships, where one (or more) business partner is liable only up to the amount of money that a partner invested in the company.

  1. You snuck a few personal expenses through the business.
  2. You hired that person because you just liked him more.
  3. You shipped a product to a bigger customer ahead of a smaller one.
  4. You charged a customer a ton of money for only 15 minutes of work.
  5. You poached an employee from a friendly competitor.

The Biggest Ethical Mistakes in Businesses

 

  • Assuming that a business practice is acceptable because it’s common practice in the industry.
  • Confusing legal advice with ethical advice. 
  • Trusting the managers potentially implicated in an ethical issue to investigate the issue.
  • Fixing a problem going forward without owning the problem’s history.
  • Judging the information you receive by the person from whom you receive it. 

What Is Bankruptcy?

Bankruptcy is the legal proceeding involving a person or business that is unable to repay outstanding debts. The bankruptcy process begins with a petition filed by the debtor, which is most common, or on behalf of creditors which is less common. All of the debtor’s assets are measured and evaluated, and the assets may be used to repay a portion of outstanding debt.

When an organization is unable to honor its financial obligations or make payment to its creditors, it files for bankruptcy. A petition is filed in the court for the same where all the outstanding debts of the company are measured and paid out if not in full from the company’s assets. Bankruptcy law affects the financial decisions of corporations and its implications for firm dynamics.

Bankruptcy offers an individual or business a chance to start fresh by forgiving debts that simply cannot be paid while offering creditors a chance to obtain some measure of repayment based on the individual’s or business’s assets available for liquidation. In theory, the ability to file for bankruptcy can benefit an overall economy by giving persons and businesses a second chance to gain access to consumer credit and by providing creditors with a measure of debt repayment. Upon the successful completion of bankruptcy proceedings, the debtor is relieved of the debt obligations incurred prior to filing for bankruptcy. Bankruptcy filing is a legal course undertaken by the company to free itself from debt obligations. Debts which are not paid to creditors in full are forgiven for the owners. Bankruptcy filing varies in different countries.

In India if you file for bankruptcy it will not go down well with your credit rating, which means that it may be tough for you to get a new loan if you plan to start afresh. However, it would save you from any financial trouble.
In the United States there are three main chapters which are followed – Chapter 7, 11, and 13. Let’s understand each of them in detail.

A person or an organization files for Chapter 7 under the US bankruptcy law in which they liquidate their assets to repay their debt obligations. Filing Chapter 7 means that all collection efforts from all creditors should be stopped at once.

Chapter 11 under the US bankruptcy law means that a company will attempt to restructure their debts in order to pay the financial obligations. This particular bankruptcy code is for companies only and not for individuals. Chapter 11 shows the intent of the company to pay off its debts which is a good sign. It gives them the chances to remain in business, but at the same time try and work out methods to pay off its debts.

Chapter 13 says that individuals will attempt to restructure their resources or cash flow to pay off debt. Individuals or self-employed persons can file for Chapter 13 but corporations and partnership firms cannot.
In the United States there are three main chapters which are followed – Chapter 7, 11, and 13. Let’s understand each of them in detail.

Bankruptcy maintains a national practice with extensive experience in the representation of debtors, secured lenders, creditors’ committees, equity holder committees, trustees, and creditors in turnarounds, loan workouts, collections, and bankruptcy proceedings, as well as buyers pursuant to both Chapter 11 plans and bankruptcy Section 363 auction sales. The firm also regularly represents clients in restructurings and liquidations occurring outside of formal bankruptcy proceedings.

A person or an organization files for Chapter 7 under the US bankruptcy law in which they liquidate their assets to repay their debt obligations. Filing Chapter 7 means that all collection efforts from all creditors should be stopped at once.

Chapter 11 under the US bankruptcy law means that a company will attempt to restructure their debts in order to pay the financial obligations. This particular bankruptcy code is for companies only and not for individuals. Chapter 11 shows the intent of the company to pay off its debts which is a good sign. It gives them the chances to remain in business, but at the same time try and work out methods to pay off its debts.

A court-supervised negotiation among creditors leads to one of two possible forms of exit, liquidation or emergence. In a liquidation, the bankrupt firm’s assets are sold (piecemeal or in a going-concern sale). Alternatively, if creditors agree to restructure the firm’s liabilities, the firm emerges and continues operating. I estimate a structural model of the choice between emergence and liquidation. In my sample of large-firm bankruptcies, I estimate that creditor recovery was substantially reduced by inefficient decisions to liquidate.

Chapter 13 says that individuals will attempt to restructure their resources or cash flow to pay off debt. Individuals or self-employed persons can file for Chapter 13 but corporations and partnership firms cannot.

Bankruptcy law affects small firms’ access to credit. When a firm is unincorporated, its debts are personal liabilities of the firm’s owner, so that lending to the firm is legally equivalent to lending to its owner. If the firm fails, the owner has an incentive to file for personal bankruptcy, since the firm’s debts will be discharged and the owner is only obliged to use assets above an exemption level to repay creditors. The higher the exemption level, the greater is the incentive to file for bankruptcy.

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