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Business Associations
Elon University School of Law
Haile, Andrew J.

Business Associations Outline
Fall 2008


– What is the goal of business entities?
o Milton Friedman
§ Maximize profits so long as it is within the rules of the game. Profits are the only responsibility
o Joel Bakan (Similar to Ralph Nader)
§ One goal in mind – maximize profits: compelled to harm society when the benefits of doing so outweigh the costs. Very extreme -“destroying lives, damaging communities, and endangering the planet as a whole.”
– Making Money and Keeping Track of it
o Accounting
§ Need to be able to understand what a company is worth and where the money is going
§ Accounting is the language of business – need to understand what clients are talking about
§ Need to be able to figure out when clients don’t know what they’re talking about
o How do you get financial information
§ Public Companies – from SEC filings
§ Private Companies – shareholders/owners have rights to access information about the company’s financial performance
o Important Financial Statements
§ Balance Sheet – shows the company’s assets, liabilities and equity at a particular moment
§ Income Statement – shows profit or loss during a given period based on data about revenues and costs
§ Cash Flow Statement – shows the company’s incoming and outgoing cash for a given period
– Sarbanes-Oxley Act of 2002 and Fraud
o Ensuring a company’s financial statements are accurate
o Auditory tests (some of) the data that constitutes the basis of the financial statements
o Reports of Auditors confirms their belief that the financial statements are accurately staking their reputation
o Certification by CEO and CO that to the best of their knowledge the financial statements accurately reflect the company’s financial condition
– Consideration in Selecting Form of Entity
o Tax treatment of the business and its owners
o Extent to which principals and investors will be liable for obligation of the business
o Management structure
o Transferability of ownership interest
o Ease with which financing may be obtained

Sole Proprietorships

– Overview
o Most common and simplest form of business
§ No legal structure
o Business and owner are the same actual person and the same legal person
§ Only one owner
§ Conducts and holds assets personally in his name
§ Personally liable for all obligations of the business
– Formation
o Law imposes no formalities for forming a sole proprietorship.
o Proprietor simply owns and operates a business
– Agency (Governing Law)
o A sole proprietorship may have employees.
§ With employees, how is the proprietor liable for their actions?
o The resolution of this issue is a matter of agency law.
§ RSA for a summary of common law agency principles
§ RSA 1 – Agency is the fiduciary relation which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control and the consent by the other so to act.
· The one for whom action is to be taken is the principal
· The one who is to act is the agent
· Need an agreement and consent!
o Agency = delegation
§ RSA 7 – Authority is the power of the agent to affect the legal relationship of the principal by acts done in accordance with the principals’ manifestations of consent to him
§ RSA 26 – Actual authority to do an act can be created by written or spoken words or any other conduct of the principal which, reasonably interpreted, caused the agent to believe that the principal desires him to so act on the principal’s account.
§ RSA 27 – Apparent authority to do an act is created as to a third person by written or spoken words or any other conduct of the principal within, reasonably interpreted, caused the third person to believe that the princi

transfer of his interest by an agent, may be based upon the fact that
· The agent was authorized
· The agent was apparently authorized; or
· The agent had a power arising from the agency relation and not dependent upon authority or apparent authority
§ RSA 320 – unless otherwise agreed, a person making or purporting to make a contract with another as agent for a disclosed principal does not become a party to the contract
o Tort Liability
§ Respondeat Superior liability applies to master/servant relationships
· RSA 2
o Master is a principal who control or has the right to control an agent’s physical conduct in the performance of service.
§ Master is subcategory of principal
o A servant is an agent whose physical conduct is controlled or is subject to the right to control by the master.
§ Servant is subcategory of agent
o Independent contractor is a person who is not controlled, nor subject to a right to control with respect to his physical conduct.
§ No master, just a principal
· RSA 219
o A master is subject to liability for the torts of his servants committed while acting in the scope of their employment. With certain exceptions, a master is not liable for the torts of his servant when the servant is acting outside the scope of his employment.
· RSA 220
o Factors for distinguishing a servant from an independent contractor
§ Extent of master’s control over work
§ Whether the employee supplies the tools or not
§ Skill
§ Length of employment
§ Method of payment