Select Page

Business Associations/Corporations
University of Kansas School of Law
Hecker Jr., Edwin W.

Business Associations
Spring 2007
Professor Hecker

I. 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. Regula

enn Tire: dispute over ownership of tires—Penn Tire claims they have ownership over the tires; creditors of Fowler claim Fowler had ownership and thus the value of the tires are subject to liquidation and disbursement to creditors
ii. Possible Business organizations
1. Simple sales contract
a. Fowler pays capital up front
b. Title passes to Fowler
c. Penn Tire would not be liable because Fowler is an independent contractor
d. Risks v. Benefit
i. Low control over resale of Penn Tires BUT no liability
2. Consignment
a. Fowler pays no capital up front
b. Fowler gets no title, but only possession
c. Risk v. Benefit
i. Penn Tire risks being labeled as giving Fowler a loan
ii. IF Penn Tire insures the product rather than Fowler, a MORAL HAZARD
Economic agent does not have to bear consequences of their own conduct because another has insurance