Business Organizations
Hamill
Spring 2007
I. Spectrum of Business Organizations
a. Sole Proprietorship [SP]
i. Single person engaged in an activity to make profit
ii. Sole owner of profit-making activity
iii. Owner has not incorporated
b. General Partnership [GP]
i. The “granddaddy” of business forms
ii. Two or more people come together to form the proprietorship
iii. Not incorporated
iv. Very basic and has been around for a long time (the oldest business organization form)
v. Multiple people involved in the business (as opposed to one in a SP)
vi. Can’t treat your partner the same way you treat other parties to a contract – not similar to a contract relationship
vii. Fiduciary duty owed to partner (duties owed to each other)
viii. Requires dissolution/dissociation (breaking up)
c. Corporations (public companies)
i. 2 perspectives – shareholders & directors
1. shareholders – own the company/stock
2. Board of Directors [BOD] – control how wealth is invested, make major decisions
a. Appoint officers (handle day-to-day decisions)
b. What if the directors make a bad decision that results in loss?
i. Business Judgment Rule
c. Conflicts of interest
ii. Descendent of vertically integrated businesses (robber barons) [business conglomerate]
iii. General partnerships started to incorporate to gain limited liability
1. Sole proprietors are personally liable for business losses
2. before incorporation, each partner incurred joint and several liability for the business
3. Partners didn’t like the liability, so they started to incorporate to protect their personal assets. Debts now belong to the business entity, not the individuals [exception for piercing the corporate veil.]
4. Small businesses had problems with the corporate law because it was fashioned for big businesses
a. Resulted in closely-held corporation law
d. Limited Liability Company [LLC, LLP]
NOTE: Corporations are not treated or taxed as persons. LLC, sole proprietorship, etc are taxed as individuals [LLCs are an attempt to combine the personal tax status of partnerships with the corporate benefits of limited liability.]
II. Unit One – Introduction to the Firm
a. Contracts Overview
i. Four corners of the contract generally dictate the economic terms of the agreement. It’s very difficult to come in later and try to change the contract.
ii. If the relationship is more complex, then you need a more detailed and expansive contract.
1. long-term contracts have to think ahead and try to address contingencies
2. courts generally will not look ahead and change the contract for the parties
3. contracts are usually enforced as written
a. exceptions: fraud (one of the parties was lied to, intimidation, etc); one of the parties lacks capacity to contract (minor, idiot incompetent, etc); consideration must be more than a peppercorn (can’t be nominal, can’t be so one-sided)
b. otherwise contracts are pretty ironclad and less forgiving for people who make bad deals
c. NOTE: court will rarely go outside the bounds of the contract to satisfy the parties
iii. Simple/short relationships can have simpler contracts
iv. Long-term business ownership agreements need more than contract law, enter business organizations law
b. Basic Business Orgs law
i. Definition: economic relationship where the law actually supplies rights and duties outside a
ver the parties want
b. Immutable provisions
i. A statutory provision that cannot be changed by contract
ii. Bus Orgs provision applies without regard to the parties’ bargain; you are stuck with it and can’t bargain around it
iii. EX: Under RUPA, a partner has the power to withdraw from the partnership and get his capital out (can’t change this) [corporation is different – can be stuck]
1. reason: it’s a business marriage and you can get a business divorce
2. founded on the belief that the partnership is based on a decision to work together
3. Basic business relationship = Agency
a. Intro
i. Evolved over common law and has been codified in the Restatement of Agency
ii. Defines the relationship and responsibilities of principal and agent [owner and employee]
iii. Created by consent of the parties to enter into the relationship
1. EX: need to sell your house, so you enter into an agreement with an agent to sell your house for you; contract will define your business relationship but so will the law of agency because there is more than a contract between you (principal and agent is something more)
2. in the business world, agency is everywhere
iv. Agency comes into play with employees
1. all businesses of any size have agents (employees)
v. NOTE: all following cases involve corporations and people who work for the corporations
