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Business Organizations
Rutgers University, Camden School of Law
Laby, Arthur B.

Business Organizations

1. The Agency Relationship

Hypo: Rachel Ray decides to write movie scripts about the culinary world. She decides to do everything by herself (produce, write, manage, purchase equipment/supplies) and keep all the revenue. She is the sole proprietor.

What would be the breakdown of her compensation? Why?

The actual writing à she could sell her skill of writing scripts to a 3d party
Managing her business à she could use her managing skills elsewhere. This is evident b/c she can always hire someone else to manage her business
Accounting/Administrative à she could use her accounting skills elsewhere
Marketing à she could use her marketing skills elsewhere
She needs to be compensated for the money she has put up à she could have invested somewhere else. Her profit has to include some return of her investment.

Rachel decides to hire Michael Vick for an administrative position.

Who is at a greater risk? Rachel is at a greater risk.
Rachel could potentially fail and lose her business (her entire investment).
Michael hasn’t invested in anything. He is only at risk of losing his job; if he loses it, however, he can always find another administrative position.
Therefore, Rachel will exercise control over her business; she will never give any control to Michael.

What if Rachel doesn’t want to put up the money?

She can borrow money from the bank and agree to pay it back.

The bank’s compensation has at least 2 elements:

The risk involved – she may fail, go bankrupt, fail to repay lender. The larger the risk, the higher the interest rate.
The opportunity cost – time value of money (i.e., a dollar today is worth more than a dollar a year later). The money being lent can be used for other purposes and get some sort of rate of return.

Rachel would retain ownership of her business.

She can borrow money from Trump.

Why would Trump agree to it? He wants to get some share of the profit.
Trump will want some control over the company b/c he wants his money back and he is at a substantial risk (risk has shifted from Rachel to Trump)
Trump would receive shares, making him a shareholder or equity holder
Trump would own the company b/c he would have the most risk and would want control over the company. Trump would be a residual owner of the firm b/c he would get whatever’s left over after everyone else is paid. He has the most to lose, but also the most to gain.


Most investors don’t have the time or skills to manage the business, but they have money to invest. Managers have skills to manage the business, but they don’t have the capital.
This course will cover the

nt said that agency is more than mere passive permission. It involves request, instruction, and command. She was merely lending the car to the coach.
“A K b/t principal and agent isn’t necessary” means that it doesn’t have to be written down. Agency law is broader than K law; agency law broadens liability. As long as there is an agreement and acceptance, it will be acceptable in lieu of a K.
If this situation happened again, as Doty’s atty, I would tell her to obtain a waiver of liability, paper the deal that it is clearly a loan to use the car, don’t set a condition precedent (don’t say who can drive the car), and make sure she has insurance.
The P’s atty’s closing statement (D has insurance and would not have to pay any judgment the jury might render) was prejudicial b/c there was no evidence that Doty had insurance. If that’s true, then the final remark would be a judgment against her as a penalty for not having insurance. The majority opinion is using agency law for public policy reasons: to encourage ppl to buy insurance.

A creditor who controls its debtor’s business operations is liable for the debtor’s debts