Professor Hamill
Biz Orgs
Fall 2010
Introduction to the Firm
Constitutional Law
Basic fundamental rights; business cannot flourish without rights
Federal Law covers commerce through The Commerce Clause (crossing state lines)
Connection between contracts and business= contracts protects and honors simple business deals
Business organizations is a direct extension of contracts
Economic and Legal Aspects
Firm is a set or relations that arise when resources are allocated by the entrepreneur via commands to her employees rather than the set of relations that arise when an entrepreneur allocates resources via contract with outsiders”
— Resources are allocated pursuant to conscious orders or directions from the employer to her employees (Market – contrast with resources allocated to their highest and best use, not in response to governmental orders or other communicated commands, but, as if by an invisible hand, through the separate, self-interested choices of all producers and consumers)
Market – Each producer and consumer calculates her own self-interest and chooses what to make and what to buy based on price signals received.
Alternative view: Single person who owns business – sole owner and independent contractor. If independent owner hires an independent contractor or employees are considered firms. Law of contract governs relationship rather than employment.
Sole Proprietorship – one owner; alone has the authority to make and carry out business policies.
Business Association – partnership, corporation, or limited liability company
Risk and Return
Determination and comparison of “expected return”
The expected return for these investments is determined by first multiplying each possible return by its probability, and by then summing these products
“risk” – means the degree to which the various possible outcomes will differ from the expected return.
Transaction Costs and Choice of Organization Form
Factors:
Bounded Rationality – Cognitive limits, or bounds, on their ability to do so. (limits accuracy of judgments)
Opportunism – 1) Simple Self-Interest Seeking: Economic actors who prefer their own interests to those
of other economic actors.
2) Opportunism: Individual who act opportunistically to further their own ends by taking
advantage of the information deficits of those with whom they deal.
Team-Specific Investment: When a person or asset has a higher value in its current team use than its
value in its next best use, the person is said to have team-specific value.
Discrete Contracting – Parties have no pre-existing obligations to each other; they negotiate a contract that anticipates and provides a rule governing all contingencies
Relational Contracting – Attempt to build a governance structure that will allow them to solve problems when, and if, they arise. Goal is that cooperation and harmony will become ingrained norms of the relationship.
*Key organizational problem for all firms is how to optimally minimize the risk to which the employee is exposed
State-Provided Governance Structures
Default v. Immutable Rules
Both tailored and majoritarian rules can be described as designed to provide contracting parties with the rule that they could have bargained for in a cost-free environment.
NOTES
Continuum of Corporations
One-Person Corporations Closely-Held Corporations Widely-Held Corporations Publically traded Corporations
Sole Proprietorships General Partnerships Limited Partnerships
LLPs LLCs LLLPs (1990)
Market law is contract driven
Some states historically have different statutes regarding corporate law (NY, CA, DE)
When reading a corporate law statute, two types of provisions= default and immutable.
Default= applies if nothing else does to corporation: Have not addressed the question in the contract, the statute provides the answer, but if addressed in contract, statute does not apply. Statute also provides that losses shall be borne in the same ratio that they share profits. (losses usually not discussed during creation of agreement)
Immutable= Statutory provision that cannot be wiped out with a contract. Ex: duty of loyalty between general partners cannot be eliminated by the agreement of the contract; trumps the law of contract
Partnerships
Partnership Law – provides set of standard form rules for persons who wish jointly to own and operate a firm. “Uniform Partnership Act (UPA 1997)”
*UPA only applies to partnerships – Common law governs both Partnerships and Joint Ventures; State Law Governs Partnerships unless federal project that federal law would apply.
*General Partnerships is the oldest; business relationship becomes co-proprietorships who share expenses and profits.
r of contracts/corporations/partnerships
RUPA (revised uniform partnership act) less uniformity in partnership law now than earlier on. Different interpretations of RUPA has increased
LLC
Partnership-like or centralized management
Limited liability
Adaptability to changed circumstances
LLLP – governed by limited liability limited partnership statute
The Corporate Form
The Archetypical corporation separates ownership and management functions into three specialized roles:
*State corporation law governs – law recognizes the corporation as an entity separate from the directors, officers, and shareholders. Granted the same legal rights and responsibilities as would any person.
State statutes that govern corporations (like RUPA)(separate from partnerships; file with the sec. of st. to determine what relationship should be)
Roles:
1. Directors: Locus (center source) of all legal power and authority exercised by the corporation. Directors determine basic corporate policies, appoint and monitor the corporate officers, and determine when and if dividends – periodic distributions of profit – are to be paid to shareholders.
“Business Judgment Rule” – judicial presumption that directors acted properly.
2. Officers: connotes a corporate employee who ranks above other corporate employees in a corporation’s management hierarch.
3. Shareholders: Shareholder has no obligation or liability to the corporation or its creditors beyond the amount she paid for the shares.
I. General Partnerships
**Partnership law, both judicial and statutory, provides a set of standard form, off-the-rack rules for persons who wish jointly to own and operate a firm.
**ONLY REQUIREMENT: (No written agreement or government action) Statutorily specified mutual manifestation of consent; the association of two or more persons to carry on as co-owners a business for profit creates a partnership.
