Business Organizations
Spring 2005
Professor RYAN
Introductory Materials
a. The organization of businesses
i. Choices made in organizing business reveals different legal consequences
1. Law plays a significant role in organization
2. Historical development plays a significant role in organization
3. Clients play a significant role in organization
ii. Goals of business
1. Maximize operational efficiency of business
2. Minimize risks to investors
iii. Limited Liability v. Personal Liability
1. Limited liability: investor risks ONLY the assets that the investor agreed to invest in the business
2. Personal Liability: investor risks assets personal assets BEYOND those agreed to invest
iv. Third Party Creditor Reliance
1. INVESTORS: Absent notice to the contrary, one who deals with an individual in a business capacity can assume that the person stands by the business/product etc. and will defend against a claim (liable for wrongs against a third party)
a. Investors exercising control over the business raises a reasonable expectation in a third party that the investor will be personally liable
b. To avoid personal liability
i. Provide NOTICE
1. Notice cuts off 3rd party creditor reliance BUT
2. Notice costs money AND
ii. Refrain from exercising control over the operations of the business
2. MANAGERS: Vicarious Liability
a. Liability on one party (manager) for wrongs committed by another (employee)
i. Independent Contractors
1. Manager is not liable for the torts of an independent contractor BUT manager can exercise NO control over the independent contractor
a. Exception to liability for torts: Manager will be held liable for torts of the independent contractor if IC is engaged in inherently dangerous activities (strict liability theory)
ii. Nonservant Agents
1. Manager is liable for CONTRACTS entered into within the scope of the nonservant agent’s employment BUT not liable for torts outside of the scope of authority granted to the nonservant agent (ex: frolicking)
b. Government’s Impact on Business Organization
i. Government regulates business to protect consumers and investors
ii. Regulation is a business expense
1. Regulation effects the initial costs of business
a. Permit applications
b. Pro Forma Registration
c. Franchise fees
d. Certificate of Public Convenience (Utility Companies)
2. Ongoing Business Requirements
a. Inspections
b. Accreditation for schools
c. Securities
3. Changes in laws regulating liability
a. Federal securities law
b. Child advertisement prohibitions
c. Discrimination laws
4. TAXATION
a. The single most important consideration when organizing a business. CONSIDERATIONS:
i. Double Bite Example
1. C-Corporations’ Revenues are taxed AND
2. When revenues dispersed as dividends, the dividends are also taxed
ii. Sole Proprietorship avoids double bite
b. Avoiding tax liability: EXAMPLES
i. Zeroing Out: Once revenues enter the corporation, distribute all revenues to SALARY payments rather than dividends
1. Problems: Only Employees get salaries (Investors who are not employees get nothing) AND the IRS can step in and require a double bite
ii. Capital Gains
1. Allow revenues to be dispersed as stock rather than dividends per year to reduce the tax rate
iii. Basic Business Deductions to limit tax liability
iv. Conduit Taxa
e principle
2. As a matter of fact
a. The principal will owe fiduciary duties to the agent
i. Definition of a Fiduciary
1. The beneficiary
2. Reposes trust and confidence in the fiduciary
3. Under facts and circumstances such that the fiduciary
4. In equity and good faith
5. Must act with highest regard to the interest of the beneficiary
3. Principal will be vicariously liable for the agent’s act within the agent’s scope of authority
a. Scope of authority is a fact intensive analysis
4. Agency relationship does not require consideration
5. Agent CANNOT create any authority
6. Control and the Liability of Creditors—Jenson Farms v. Cargill—Warren stored 90% of Cargill’s grain, and Cargill also gave Warren lines of credit subject to information and reports by Warren to Cargill. Cargill is sued as principal for Warren’s default on other loans. Cargill was liable as principal:
a. Creditor Liability (Balancing Test)
i. Avoid liability by
1. Insisting on receiving information and reports
2. Providing business advice and counseling on discrete matter, not entire business plans
3. Recommend consultants
ii. Liability imposed on creditor IF
1. Veto power over important decisions
2. Coercing debtor to put person designated by creditor to control operations
3. Provide other creditors with assurance of payment
