Business Law Exam 1

Constitutional law, business organizations

State Constitutions

• Highest form of law for state

• Super specific, have special provisions

• Federal constitution > state constitution

Legislatures and Statutes

• Congress and state legislatures are sources of statutory laws

• Statues = laws

• All states/fed gov. (not Nebraska) have bicameral legislature (checks and balances)

• Some states let voters directly pass legislation via referendums or ballot initiatives

Zombie Laws — Stale Stautes

States are bad at getting rid of old laws, not still in effect, but would be thrown out in court

Common Law

• Disputes come to court in form of case — judges used earlier court decisions (“precedents”)

• Judges distinguish from earlier cases, “judge-made law”

Civil Law

• Only used in Louisiana

  • Instead of looking at precedents, judge looks at countries code of law and applies that

Precedent and Stare Decisis

• Significant weight to previous decisions, “let the decision stand”

• More precedents = stronger rule of law/stare decisis

Benefits of Stare Decisis

• Consistency in legal system

• Improves ability to plan business decisions

• Creates legal system that neutralizes prejudice of judges

When might stare decisis be overcome?

• Error in precedent, obsolete precedent

• Adhering to precedent would cause greater harm to community than following

• Prior precedent conflicts with new statutory law

Examples of overturning stare decisis

• Brown v. Board of Education overturning Plessy v. Ferguson (“separate but equal” = unconstitutional), 1896-1954

• Lawrence v. Texas overturning Bowers v. Hardwick (laws banning same-sex intimate relations = unconstitutional), 1986-2003

Sole Proprietor (SP)

• Doing business for yourself without a business entity (no filing with state)

• SP has total control and risk — business liabilities = personal liabilities

• If other people invest in the business → no longer SP

• Taxed through personal taxes

Why SP?

• Very small/unsophisticated businesses

• Made more sense long ago — local business, less litigious society

• Lawyers will not advise clients to be an SP

General Partnership

= association of two or more persons to carry on a business as co-owners for shared profits

• Intent to be a partnership is not required

Why are GP’s formed?

• Expands on capital pool $$

• Often by accident

• Division of labor

• Opportunities to scale up/expand

What indicates the creation of a GP?

• Profit sharing

• Expression of intent

• Participation/right to participate in control of business

• Agreement to share losses of business/liability

• Contributing money to business

Joint and Several Liability for GP

• Unlimited personal liability — for not only your own mistakes, but your partners

• “Joint” - both responsible, “several” - each can be liable for entire total

• Partnership liability extends only to actions within scope of partnerships

Control & Management of GP

• General rule = each partner has equal vote in management

  • Unless partnership agreement says otherwise

  • Size of ownership doesn’t matter

  • Majority rule decisions → disagreements and internal lawsuits with 2 people

Fiduciary Duties of GP

= act in good faith for best interest of partnership

• Duty of Loyalty - personal interest below partnership

• Duty of Reasonable Care - careful partner in situations

• Duty of Information - cannot omit/withhold info

• Duty of Candor - truthful with partners

Limited Partnership

• Formation — registered entities, must have one GP and LP

• Only GP has management authority and liability responsibility

• LP = not too involved, liable to extent of their investment (limited liability)

Why be a corporation?

• Ease of raising outside capital by selling shares (doesn’t sacrifice control)

• Large-scale enterprises

• Separation of ownership and control

How are they formed?

File articles of incorporation (SC, Secretary of State)

Downsides of corporations

Double taxation — earned income and shareholders pay tax on dividents

Shareholders — Corporations

• Not responsible for management and cannot exercise day-to-day control

• Provide capital, elect top management

• Have limited liability — risk is that shares go to $0

Board of Directors — Corporations

• Governing committee (elected by SHs)

• Sets policy, decides business, hires/fires lower management

• Are often also SHs

Executives & Officers — Corporations

• BoD appoints CEO, CFO

• Not in ultimate control → look at bylaws, may also be SHs

Duties of BoD and Officers

• Are “fiduciaries”

• Duty of Reasonable Care and The Business Judgement Rule

The Business Judgement Rule

Directors protected from personal liability for business decisions if there was a reasonable basis for the decision, even if time reveals the decision was the wrong choice

Nonprofits

• No SHs — still BoD, bylaws, and fiduciary duties

• Cannot distribute profits

Limited Liability Company (LLC)

• Limited liability protection of corporation and tax treatment of partnership

• 1+ members

• Operating agreement between members, not bylaws

• All members have LL

• Passthrough taxation — owners only have to pay income taxes

How are LLCs created?

• Registered entity

• Organized, not incorporated

• Organizer files articles of organization with the state of organization

• Never check liability box

Who runs the LLC?

• Member-managed: more like partnership, all members in decisions

• Manager-managed: more like corporation, managers elected

Exceptions to limited liability

1. When someone acts outside the scope of business

2. When someone has signed a contract for personal liability

3. When an injured party can “pierce the corporate veil”

Franchise

• Tradeoff of scope/expansion vs. control

• Common in fast food and hotels

• Most franchise disputes revolve around franchise agreement

Federal Judges

• Nominated by President, confirmed by Senate

• Lifetime appointment

• Only removed by Congress

  • Impeached by majority of House and convicted by 2/3 Senate

State Judges

• Chosen by partisan elections, non-partisan, appointed by governor

• SC: elected by general assembly

  • Fixed term

  • Nominated by Judicial Merit Selection Committee

Benefits and Risk of Legislative Appointment

Benefits: decentralized power, governor can’t just appoint anyone

Drawback: Judges and lawmakers doing favors

Missouri Plan (judge selection)

Applicants → appellate judicial commission chooses best 3 applicants → governor choses 1

Judicial Immunity

• Protects judges from personal lawsuits

• Covers judge and anyone appointed to help with case

• Must act within scope of role to be protected