Legal Final Study Guide

Sole Proprietorship

• Simple business entity: the owner is the business. The owner reports all business income on his or her personal tax return

• Small business: most sole proprietors are small enterprises– 99% do less than $1 million a year in revenue

• Popular: sole proprietors constitute ⅔ of U.S businesses. Typically it’s the earliest stage of a business,

Advantages of Sole Proprietorship

• Profit and losses: owns the entire business and receives all of the profits (consumes all risk)

• Flexibility: Fewer formalities than any other kind
  of business entity. No documents are required. The owner is free to make all decisions regarding how to
  run the business.

• Taxes: A sole proprietor pays only personal income
  taxes on the business’s profits (if there are profits).
  The business does not file a tax return.

Disadvantages of Sole Proprietorship

• Dissolution upon death

• Personal assets at risk 

• Limited ability to raise capital

Partnerships

• Governed by the Uniform Partnership Act. Under UPA, a partnership is an association of two or more persons to carry on as co-owners of a business for profit. The UPA governs partnerships in the absence of an agreement 

Partnership Agreements

identify the rights and obligations of partners under the partnership. A written
agreement is not necessary to form a general partnership

Fiduciary Ties

There is a fiduciary relationship between the partners, and each partner may act as an agent of the other. Partners agree to commit funds, or other assets, or labor in exchange for sharing of profits and losses

Three essential elements of general partnerships

sharing of profits or losses, joint ownership of the business, equal right in management of the business

Advantages of Partnerships

• tax status

• ease of formation

• shared management responsibility

Disadvantages of Partnerships

• liability

• limited ability to raise capital

• agency

Tax Treatment of Partnerships

“PASS-THROUGH ENTITY” – The business
itself has no tax liability. The entity’s income or losses are
passed directly to each partner, who reports the income or
losses on his or her tax returns

Partnership by Estoppel

• non partners– a third person who has reasonably and detrimental relied upon a representation that a nin-partner was a partner. A court concluded that a “partnership by estoppel” exists. 

Liability Imposed on Non-Partner

“Partnership by estoppel” may arise when a person who is not a partner holds
himself out as a partner and makes misrepresentations that others
detrimentally rely upon. The court may impose liability on the alleged
partner but not provide partnership rights

Liability Imposed on Partnership

“Partnership by estoppel” may be imposed when a partner represents, expressly or
impliedly, that a non-partner is a member of that partnership. The
non-partner is then regarded as an agent of the partnership (not a
partner) whose acts are binding.

Rights of Partners

• management rights

• interest in the partnership

• compensation

• inspection of books

• accounting of assets

• property rights

Duties of Partners

• fiduciary duties

• duty of care

• duty of loyalty

Duty of Care

Make decisions in good faith, reasonably prudent; financially, ethically, and legally sound.
• Examples: acting in the partnership’s best interest
interests, keeping accurate books and records

Duty of Loyalty

A partner must account to the firm for “any property, profit or
benefit” in the conduct of its business or from a use of its
property.
• A partner may pursue competing interests/but they must be
disclosed.

Joint Liability & Several Liability

Example: A&B Partners, which has two partners, is found liable in a $500,000 lawsuit. A&B Partners is unable to pay the $500,000. Partner A does not have sufficient personal assets. If Partner B does have sufficient personal assets, then the entire $500,000 will be paid from his or her personal assets.

Dissociation and Termination

A partner may decide to ceases being associated with the firm. He or she can have the interest bought by the firm, which otherwise continues to do business. That partner no longer has authority to act on behalf of the partnership.

Events that cause dissociation

• The partner gives notice of withdrawal

• The partner is expelled by the firm or a court

• partner files bankruptcy or dies, or becomes incapacitated.

Wrongful Dissociation

A partner violates the partnership agreement before expiration of the partnership or completion of undertaking. The partner is liable to the partnership and partners for damages caused by the wrongful disassociation.

Limited Liability Companies (LLCs)

Can shield personal assets from liability. Losses are limited to the amount of the investment, except under certain situations

LLCs Formation

ARTICLES OF ORGANIZATION – A form filed with the appropriate
state agency. Articles must be filed to create an LLC

Must have:

The name must have “Limited Liability Company” or “LLC.”
• The business’s principal address.
• The name and address of the registered agent.
• Names of managing member(s).

Limited Liability Companies – Advantages

• Members are not liable for losses beyond the amount of their
  investments.

• Fewer Formalities- offer more flexibility regarding management structure, record-keeping and meetings. Compare a corporation –
  requires board of directors, minutes, annual meetings, minutes

• Flexibility in taxation- LLCs with two or more members can receive “pass-
  through” tax status. The LLC itself pays no taxes

Limited Liability Companies – Disadvantages

• Inconsistency in the state law- Businesses may not receive consistent treatment. Less than 1/5 of states have adopted uniform laws on LLCs.

• Jurisdictional issues- Courts regard LLCs as citizens of every state of which their members are citizens.This makes a subject matter/diversity lawsuit in federal court very difficult

• Outside investors- Most investors prefer a corporation over an LLC – familiarity, restrictions on investment type, changing shareholders can be seamless.

Alter-ego theory

A court may hold members personally liable for an LLC’s debt; the court
looks past the LLC structure

Limited Liability Companies – Management

An LLC is assumed to be member-managed. All members
participate in the management, decisions made by majority vote. In manager-
managed LLCs, the members designate a group of persons to manage the firm.

Limited Liability Companies – Operation

Operating agreements can provide for management, profits, transfer of interests, death or departure of a member, meetings, and voting rights. The agreement is NOT required for an LLC to exist; articles are organization ARE required.

LLC- Disassociation

Once disassociated, the member’s right to participate
in the business ends. The duty of loyalty ends but the duty of care continues for
events before disassociation. The member’s interest must be bought out

LLC Dissolution

Members can vote to decide to dissolve the LLC. Upon dissolution, the
members will liquidate any assets, pay creditors and other debts, repay
contributions by members, and then distribute the remaining funds according to any existing agreement.

Limited Liability Partnerships (LLP)

A hybrid form of business organization that is used mainly by professionals

ex// dentists, lawyers, accountants

Liability of Professional Partners

An L L P allows professionals to avoid personal liability for the malpractice of other partners.
• A partner is still personally liable for her or his own wrongfulacts, such as negligence.
• A partner is personally liable if he or she was supervising an individual who committed malpractice

Limited Partnerships (LP)

a partnership consisting of one or more general partners and one or more limited partners.

Limited Partnerships – Formation

CERTIFICATE OF LIMITED PARTNERSHIP- Must be signed by at least one general partner and one limited partner

Role of General Partner (LP)

The general partner has complete control over decision- making and unlimited liability

Role of Limited Partner (LP)

receives ”passive” income but does not have any involvement in management. Liability is limited to capital contributed. Involvement in decisions may turn a limited partner into a general partner (and subject to liability).

Corporations

Structure: A legal entity recognized by state law that can have one or
more owners (shareholders). Corporation exists only by statute (long history)

Shareholders: People who hold an interest in a corporation are called
“shareholders.”

Legal Person: A corporation is recognized under U.S. law as a person –
an artificial person. As a “person,” a corporation enjoys many of the same
rights and privileges that “natural” U.S. citizens enjoy

Corporations Advantages

• outside investors

• limited liability

• selling shares/classes of stock

• ability to raise capital

Corporations Disadvantages

• double taxation

• more formality

• state law differences

Articles of Incorporation

• The name of the corporation – must include Corp., Co., Ltd.,
  Inc.

• The number of shares of stock the corporation is authorized to
  issue.

• Name and address of each incorporator

• Name of the registered office and agent for service of process

Pre-incorporation Contracts

Any contract entered into prior to the incorporation of a business
entity is a possible liability for the “promoter.”

Corporations – Directors

• Elected by shareholders

• Responsible for the overall management of the company. The board of
  directors makes policy decisions, hires officers and declares dividends.

Corporations – Officers

• hired by directors

• responsible for the day-to-day running of the business. They are employees

Director and Officers Duty of Care

Act as a reasonably prudent person. Act in good faith, make decisions in the best interests of corporation

Director and Officers Duty of Loyalty

subordinate self-interest to the corporation

Corporations – Shareholders - Responsibilities/Rights

• voting

• fiduciary duties

• pay taxes

• Right to sue the corporations

• books and records

Corporations – Shareholders – “Corporate Veil”

The court will disregard the corporate structure to avoid a great injustice that
would result from the individual’s use of the corporation to avoid liability

Doctrine of Respondeat Superior

• Corporations can be held liable for torts committed by their agents and/or employees when acting within the scope of their employment.

• Corporations can be liable for crimes committed by their officers and agents

Intentional torts

• Deliberate violation of a person or property.

• Fault with intent.

• a wrongful act knowingly committed

• Civil action, not criminal

transferred intent

• You are responsible just as if you meant to harm a different person or property.

• Your bad intent is transferred to the harmed person or property.

Defenses to Intentional Torts

Self-defense, Defense of Others, and Defense of Property, consent, statute of limitations

Torts- Assault

• Any words or actions intended to make another person fearful of immediate physical harm - a reasonably believable threat.

• Actual contact is not necessary.

• The interest being protected is the freedom from harmful or offensive contact.
  

Torts - Battery

• Unprivileged, intentional touching of another.

• Physical injury need not occur

• The contact can be harmful, or it can be merely “offensive”

Torts - False Imprisonment

intentional confinement or restraint of another person’s activities without justification

Torts - Intentional Infliction of Emotional Distress (IIED)

• An intentional act that amounts to extreme and outrageous conduct resulting in severe emotional distress to another.

• The act exceeds the bounds of decency accepted by society.

• A single annoyance may not be enough.

Tort - Fraudulent Misrepresentation

Any misrepresentation, either by misstatement or omission of a material
fact, knowingly made with the intention of deceiving another and on which a reasonable person would and does rely to his or her detriment.

Torts - Defamation

The law imposes a duty on all persons to refrain from making false, or defamatory statements of fact about others, in writing or verbally

Libel

Defamation in writing or in some other form (including digital) having the quality of permanence - publication.

Slander

Defamation (false statements) in oral form

Defamation- Elements to prove

• The defendant made a false statement asserting it’s a fact.

• This false statement was harmful to one’s reputation.

• The statement was not conditioned as an opinion; statements of opinion are protected under the First Amendment.

• The statement was understood as being about the plaintiff and harmed the plaintiff’s reputation

• The statement was published (libel) or told to (slander) at least one person other than the plaintiff

Defamation – Public Figures: Actual Malice

Defendant knew that the statement was false at the time or demonstrated “reckless disregard” as to its falsity.

Rules for Damages - Libel

• General damages: compensation for injured reputation,
  emotional distress.

• Special damages: specific, quantifiable financial losses (wages,
  business, license).

• Punitive damages: punish the wrongdoer; deter similar actions.Typically assessed in cases involving actual malice.

Defamation – Rules for Damages -Slander

• The plaintiff must show that the slanderous statement caused her or him to suffer special damages - actual economic or monetary losses.
  • If special damages cannot be proven, a plaintiff alleging slander cannot go forward with the suit – prove the elements for defamation

Defamation - Defenses

• truth

• opinion

• privileged communications

• public figure: actual malice has to be proven

Unintentional torts – negligence

• The failure to exercise the standard of care that a reasonable person would exercise in similar circumstances

• Civil action, not criminal.

• Bogenberger case

Unintentional Torts – Negligence - Elements

• A duty of care (A)

• Breach (B)

• Causation (C)

• Damages (D)

A Duty of Care (A)

• Individuals and entities must exercise reasonable care to prevent harm or injury to others.

• Determined by the “reasonable person standard.” (RPP)

• The defendant owes a duty to protect the plaintiff from foreseeable risks that the defendant knew or should have known about that were caused by his or her behavior

Breach (B)

• The failure to exercise the standard of reasonable care is established.

• Not based on an individual’s determination of how a reasonable person should act

Causation (C)

• An act or omission without (“but for”) which an event would not have occurred.

• Proximate cause – exists when the connection between an act
  and an injury is strong enough to justify imposing liability.

Damages (D)

Compensatory damages - special and/or general

Punitive damages – designed to punish the tortfeasor (the defendant and negligent party)

Negligence - Duties of Business Owners and Landowners

• Duty to Warn Business Invitees of Risks

• Obvious Risks Can Provide an Exception to Liability

Negligence - Duty of Professionals

Duty owed is same standard of care as well-qualified professionals in the same profession/practice area.

Compensatory Damages- Special

Quantifiable monetary losses.
- Examples: medical expenses, lost wages and benefits, damaged property

Compensatory Damages- General

Non-monetary harm; harder to calculate.
- Examples: pain, suffering, loss of companionship, and reputation (defamation cases)

Punitive Damages

Primarily designed to punish the wrongdoer to deter similar conduct in the future by others.

Affirmative Defenses to Negligence (Unintentional Torts)

The defendant can reduce or negate liability even if all of the elements of negligence have been proven by the plaintiff

Potential affirmative defenses:
• Assumption of risk.
• Superseding cause.
• Contributory and comparative negligence.
• An obvious risk