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Business Associations/Corporations
University of Iowa School of Law
Sale, Hillary A.

Important Points:
Remember the little points: Institutional competence

Economic and Legal Aspects of the Firm

a. General info:
i. Three types of business organizations we’ll be studying:
1. Corporation (public and closely held)
2. Partnership
3. LLC
ii. Governing bodies of law:
1. State of incorporation governs the corporation
a. DE is the premier in corporate law
b. MBCA- states have to adopt it
2. Closely held corps
a. State by state corporate law
b. Some basic concepts and terminology
i. What is a “firm”?
1. Definitions:
a. Antithesis of the market
b. The set of 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.
2. The firm as a nexus of contracts
a. A nexus of contracts between the various claimants to a share of the gross profits generated by the business
ii. What is the difference between a sole proprietorship and a business association?
1. Sole proprietorship:
a. Only one owner, single authority making person
b. Can be a corporation
c. Organizing the firm: selecting a value maximizing governance structure
i. Business planning: the role of the corporate lawyer in organizing a firm
1. Transaction-cost engineer
2. Private ordering over court ordering (settling out of court)
3. Select and modify governance structures so as to optimally minimize the use of litigation
ii. The goal of informed rational choice between competing investment options… ASSUMPTION 1 & 2 of corporate law: Rational decision makers and rational investors
1. Comparative search for best investment
a. Human capital: a set of skills or an ability to render services
b. Money capital: cash, cash equivalents, or other investment property that can be valued in terms of money
c. Comparative perspective: determination of the best investment decision involves a weighting of plausible alternatives
d. Ex ante perspective: the goal is to predict which investment strategy will yield optimal results
2. Risk and return
a. Determination and comparison of “expected return”
b. A range of poss

law: Bounded rationality
1. While individuals intend to act rationally, there are cognitive limits, or bounds, on their ability to do so
2. These bounds limit accuracy of judgments made in business decisions
ii. Opportunism
1. Individuals pursue their own self interest in economic matters.
2. Simple self interest: prefer their own interests to those of other economic actors but are honest in their dealings.
3. Opportunism: self interest seeking with guile, take advantage of others deficits. Calculated efforts to mislead, distort, disguise etc.
iii. Term specific investment
1. Team production; when a person or asset has a higher value in its current team use than its value in the next best use, the person or asset is said to have team specific value
2. If a team stopped working together and they experienced drawbacks and deficits, then their partnership would have team specific value