Business Law Final Exam

Employee at Will

An employee at will is someone who can be fired at any time, for any reason (good, bad, or no reason), as long as it’s not illegal (discrimination, retaliation)

• If you’re an employee at will, it means you don’t have a contract promising job security. Your employer doesn’t need to explain why they’re firing you, and you also might have the right to quit at any time, for any reason

• However, there are limits. Even though they can fire you for almost any reason, they can’t fire you for an illegal reason such as:

  • Discrimination (like firing you for your race, gender, religion, etc.)

  • Retaliation (like firing you because you reported harassment or unsafe working conditions)

Example:

Let’s say Alex works at a retail store and doesn’t have a contract. One day, his manager fires him because “he talks too much.” That might be unfair, but it’s not illegal — so it’s allowed under employment at will.

But if Alex was fired because he’s from a certain country, that would be illegal discrimination, and the employer could get sued.

Most employees are Employees at Will

How can an Employee at Will be fired? 🎀

• For a good reason (ex. poor performance or being late often)

• For a bad reason (ex. the boss just doesn’t like your haircut)

• For no reason at all (ex. “We’re letting you go — no explanation”)

BUT they cannot be fired for an illegal reason, like discrimination or retaliation

What is the NRLA?

The National Labor Relations Act (NRLA) is a federal law that protects employees’ right to join unions and requires employers to bargain fairly with them.

• The NRLA, also called the Wagner Act, was created to give workers the right to form or join unions, without fear of punishment from their employer. It also says that if workers are unionized, the employer must negotiate in good faith (meaning honestly and seriously) about things like pay, hours, and working conditions.

• To enforce this law, the National Labor Relations Board (NLRB) was created. They handle complaints when employers break these rules.

Example:

If a group of factory workers in Ohio decides to form a union, their boss can’t fire them just for doing that. And if the union asks to discuss a new safety policy, the boss has to meet with them and negotiate seriously — they can’t just ignore them.

“Right-to-Work” laws

“Right-to-Work” laws say that workers can’t be forced to join a union or pay union dues, even if there’s a union at their job. These laws vary by state.

⚠Common Misconception:

“Right-to-Work” does NOT mean everyone is guaranteed a job or has job security. It’s about union membership being optional.

Example:

Imagine Maria works at a factory in Virginia (a right-to-work state) where there’s a union. Even though the union negotiates her pay and benefits, Maria can choose not to join the union or pay dues, and still get those benefits.

In California (not a right-to-work state), workers might have to pay agency fees to cover union-negotiated benefits, even if they don’t join the union

What is the Family and Medical Leave Act (FMLA)? Who does it apply to?

The Family and Medical Leave Act (FMLA) is a federal law that gives eligible employees up to 12 weeks of unpaid, job-protected leave per year for certain family or medical reasons.

• The FMLA was created to help workers take time off for major life events without losing their job. The leave is unpaid, but it protects your job while you’re gone and ensures your health benefits continue.

• It covers situations like:

  • Having a baby or adopting a child

  • Caring for a seriously ill family member

  • Recovering from your own serious health condition

Example:

Let’s say Rosa works full-time for a large company and has worked there for over a year. If Rosa gives birth to a child, she can take up to 12 weeks off, unpaid, under the FMLA — and when she comes back, her employer has to give her the same job or an equivalent one.

Who Qualifies? (aka. who does it apply to?):

To be eligible, an employee must:

1. Work for a covered employer (usually private companies with 50+ employees within 75 miles, or public agencies/schools),

2. Have worked for the employer for at least 12 months, and

3. Have worked at least 1,250 hours during the past year.

Employment Law

The set of rules that govern the relationship between employers and employees, including things like wages, discrimination, and workplace rights.

Example:

Sarah works at a company where she’s paid minimum wage. If her employer fails to pay her for overtime hours, Sarah can file a complaint under employment law for violating wage laws.

Contract Law

The set of rules that determine how agreements are made, enforced, and what happens when a promise is broken.

Example:

John signs a contract with a marketing firm to work for 6 months at a set salary. If the marketing firm decides to fire him before the contract is up without any reason, John could sue for breach of contract under contract law because they didn’t fulfill the terms of the agreement

How does employment law apply to Contract Law?

Employment law applies to contract law when promises are made between an employer and employee (like job offers, handbooks, or policies) create a binding agreement — whether written, spoken, or implied — so both sides must follow the terms, or they could face legal consequences.

1. Truth in Hiring

   • If an employer makes a promise during hiring (ex. “You’ll be here at least a year”), that can be treated like a contract, even if it’s oral.

   • This is where contract law (and rules like the Parol Evidence Rule and Statute of Frauds) kick in — those rules decide which promises count in court.

2. Employers May Be Liable

   • If they promise something they can’t keep (ex. job security, promotion, benefits) or fail to disclose important facts (like a plant shutting down), they can be held legally responsible under contract principles.

3. Employee Handbooks = Contracts

   • If a handbook says things like “We only fire for cause” or outlines clear rules, courts might treat that handbook as a contract, especially if the employee relied on it.

4. Covenant of Good Faith and Fair Dealing

   • Even in at-will jobs, some courts add an implied promise that the employer won’t fire the worker in bad faith (ex. firing someone right before their retirement benefits kick in).

Example:

Let’s say Alex is told during hiring, “You’ll have the job for at least a year,” but gets fired after one month with no explanation. If Alex can prove that promise was made, contract law may allow him to sue for breach of contract, even if the job was “at-will.”

Tort Law

The area of law that deals with wrongs or injuries one person causes to another, either on purpose or by accident, that aren’t based on a contract

Example:

If a coworker intentionally spreads a false rumor that you stole money, damaging your reputation, that’s defamation, which is a type of intentional tort under tort law.

What are some examples of intentional torts in the workplace?

An intentional tort in the workplace is when someone deliberately causes harm to another person — not by accident, but on purpose

Examples of Intentional Torts in the Workplace:

1. Assault — a supervisor threatens to hit an employee with a clipboard

2. Battery — a coworker actually punches or pushes another employee

3. False Imprisonment — a manager locks an employee in a room to prevent them from leaving until they confess to something

4. Intentional Infliction of Emotional Distress — a boss yells, insults, and humiliates an employee repeatedly in front of others to cause emotional suffering

5. Defamation — a coworker spreads a false rumor that another employee stole from the company, harming their reputation

6. Invasion of Privacy — an employee reads private emails or records private conversations without permission

If someone at work purposely does something harmful, and it’s not part of a contract issue or accident, it might be an intentional tort.

What is an example of Administrative Law?

Administrative Law is the set of rules and decisions made by government agencies to carry out laws passed by Congress

Example:

The Occupational Safety and Health Administration (OSHA) creates workplace safety rules. If OSHA issues a rule that employers must provide safety goggles on construction sites, that’s administrative law in action.

Employee Privacy

Employee privacy means workers have some rights to keep their personal lives private, especially when they’re off the clock, but those rights can be limited depending on the situation and type of employer.

• Off-Duty Conduct: In many states, your boss can’t punish you for what you do in your personal time (like who you date or what you post online) — unless it affects your job or the company’s reputation

• Drug and Alcohol Testing:

  • Private employers (non-government) can usually test employees for drugs or alcohol

  • Government employers must have a good reason — like visible signs of use or a job where safety is critical (like a bus driver or construction worker)

• Lie Detector Tests:

  • Most employers cannot make you take one, not even suggest it

  • The only exception is if there’s a criminal investigation going on at work (like if money goes missing)

Example:

If you’re a delivery driver and your manager thinks you showed up high, they can require a drug test because your job affects public safety.

But if you post a picture drinking wine on a Saturday night, your employer in most states can’t punish you — unless it violates a company policy or harms the company’s image.

Yes, I see Kelsey and Mike on their cell phones googling either off of Virginia Tech's wifi or their own data. What could be the ramification (consequence) if done at work?

Possible ramifications at work might include:

• Loss of productivity — If they’re not working, the company could see it as slacking off

• Disciplinary action — an employer might give a warning, write-up, or in serious cases, termination — especially if there’s a policy against personal phone use

• Security risk — if they’re using work devices or unsecured wifi, they could accidentally expose sensitive data

Example:

If Kelsey is supposed to be helping customers, but is scrolling on her phone, her manager might give her a warning for not focusing on her duties

You are on a job interview. What can't your interviewer ask you?

During a job interview, there are certain questions an employer cannot legally ask because they violate anti-discrimination laws. These questions typically relate to your personal characteristics that are unrelated to the job or your ability to do it.

1. Your age — “How old are you?”

   Why? Age discrimination is illegal under the Age Discrimination in Employment Act (ADEA)

2. Your marital status or children — “Are you married?” or “Do you have children?”

   Why? These questions are related to family status, which cannot be used as a basis for discrimination

   • An employer may not fire or refuse to hire a woman just because she is pregnant

3. Your race, ethnicity, or national origin — “What is your race?” or “Where are you from?”

   Why? This violates laws against race and national original discrimination (ex. Title VII of the Civil Rights Act)

   • However, they are permitted to inquire if the person is authorized to work in the United States

4. Your religion — “What church do you go to?” or “Do you observe any religious holidays?”

   Why? Religious discrimination is illegal under Title VII of the Civil Rights Act

5. Your disability — “Do you have a disability?”

   Why? This violates the Americans with Disabilities Act (ADA)

6. Transgender and Sexual Preference

   Title VII of the Civil Rights Act says it’s illegal to not hire, fire, or to otherwise discriminate against individuals because of their sexual orientation or gender identity (SOGI)

Example:

If an interviewer asks, “Are you planning to have children soon?” this could be seen as discrimination based on family status, which is illegal. Instead, the employer can ask if you can meet the job requirements (ex. travel, schedule flexibility)

What is an Ethical Dilemma?

An ethical dilemma is a situation where a person or business has to choose between two or more options, and none of the choices clearly feels like the right or wrong thing to do

• It’s like being stuck between a rock and a hard place — you have to make a decision, but each option has pros and cons that affect people, fairness, or honesty. There’s no obvious “right” answer.

Example:

A manager finds out that their best employee has been stealing small amounts of money. The employee is struggling financially and has worked very hard

Dilemma:

• Do they report the theft (doing what’s right legally)?

• Or do they give the employee a second chance out of compassion?

Business entities usually fall within two types of ethics:

What is the purpose of a corporation/business? There are two theories:

1. Shareholder Theory

2. Stakeholder Theory

Shareholder Theory (Milton Friedman’s view)

“The one and only social responsibility of business is to create its profits.”

A business exists mainly to make money for its owners/shareholders

• The idea is: If a company stays profitable and follows the law, it’s doing its job

• Ethics? Don’t break laws or deceive people, but focus on profits

Example:

A company choosing cheaper materials to save money and boost profits = shareholder theory

Stakeholder Theory (Dayton Hudson’s view)

"The business of business is serving society, not just making money."

A business should help society, not just make money.

• That means caring about employees, customers, the environment, and the community.

• Ethics? Think about how your actions affect everyone, not just investors

Example:

A company choosing eco-friendly materials even if they cost more = stakeholder theory

What is ethics? Can an illegal act be ethical? Are some legal acts unethical?

Ethics is the study of what is right and wrong behavior — even if the law says something different (aka. how people ought to act)

• Law = what you’re legally required or allowed to do

• Ethics = what’s morally right or fair, based on society, values, or conscience

Sometimes:

• An illegal act can be ethical

  Example: A doctor breaks the law by sneaking medicine into a country to save lives. It’s illegal, but many would say it’s morally right

• A legal act can be unethical

  Example: A business legally avoids taxes using loopholes while their community struggles. It’s legal, but some would see it as wrong.

Why bother with ethics?

Even though ethical behavior doesn’t always lead to more profits, it’s still important because:

• Unethical companies can lose customers if people get angry and boycott.

• Fair competition helps everyone in society, including businesses.

• People feel better working for or supporting ethical businesses.

It’s about doing the right thing — not just because it might help you make money, but because it prevents harm, earns trust, and avoids backlash

Ethical behavior matters because it protects a company’s reputation, avoids public backlash, and supports a fair economy — even if it doesn’t always increase profits

Example: The CEO of Mylan skyrocketing the prices of the life-saving EpiPen was unethical and caused backlash and boycotting

Two Schools of Ethics:

1. Utilitarian Ethics

2. Deontological Ethics

Utilitarian Ethics

Utilitarian ethics is the idea that the best decision is the one that creates the most good (or happiness) for the most people and the least harm

• It’s like asking: “What choice helps the most people and hurts the fewest?” It doesn’t focus on intentions or rules — just the end result

Example:

A company decides to close one of its three factories to save money and avoid bankruptcy. That one factory’s workers will lose jobs, but keeping the company alive saves hundreds of other jobs and allows the business to keep serving customers. A utilitarian would say this is the right decision because it results in the most overall good.

Deontological Ethics

Deontological ethics says that actions are right or wrong based on intentions and duties, not on the consequences.

• Deontologists believe you should do the right thing because it’s the right thing, not just because it leads to good results. Even if a decision hurts profits or makes people unhappy, it’s still the right thing if it respects people’s dignity and follows moral rules

Example:

Imagine a company refuses to sell customer data to make extra money, even though doing so could boost profits. Why? Because it believes it’s wrong to violate privacy, regardless of how much money could be made.

What are the responsibilities of a business?

The responsibilities of a business refer to how a company is expected to act ethically and fairly toward its key stakeholders — employees, customers, investors, foreign communities, and even its own staff conduct. These responsibilities often create ethical questions with no easy answers, such as whether all employees should get equal benefits, or if a company should prioritize profits over helping others.

To employees:

Should employers be required to treat all employees the same in regard to benefits?

• Example: Should part-time workers get the same health insurance as full-time ones?

To customers:

Is a business responsible if its decisions create a financial hardship for someone else? What if a decision leaves someone homeless/injured?

• Example: Is it ethical for a company to raise rent prices knowing it could lead to evictions?

To shareholders/investors:

• Questions are often raised about uses of a company's profits — distributed to shareholders, raising executives' salaries, improving business?

• Should a company be allowed to intentionally lower profits to improve in other areas?

  • Example: Should profits go to bonuses or be reinvested to reduce pollution?

To foreign countries:

• Companies with operations in foreign countries are often criticized for deplorable working conditions and low wages

• Response to these criticisms is often that even low-wage jobs are better than destitution and that these jobs are the beginnings of economic growth

  • Example: Is it ethical to pay factory workers in another country $2/hour if it’s higher than their usual pay?

Employee Responsibility to the Company:

• How does an employee decide when it is fair to take a company's free "perks" such as meals on an expense account?

• Should an employee be made to account for every minute of paid time?"

  • Example: Is it okay to take home office supplies? What about long personal breaks while on the clock?

Factors in determining what business is right for you

No one form of organization is right for every business. The proper choice depends upon factors such as:

• Sources of financing

• Tax issues

• Liability concerns

• The entrepreneur's goals (to go public, for instance)

In choosing a form of organization, it is important for the entrepreneur to consider all of these issues

When choosing what kind of business to start, you need to think about things like where your money will come from, how much you’ll pay in taxes, how much personal risk you’re willing to take, and your long-term goals like growing or going public.

For example, if you want to keep things small and simple, a sole proprietorship might work. But if you want to raise a lot of money and protect yourself from personal liability, you might choose a corporation.

Sole Proprietorships

A sole proprietorship is a simple, unincorporated business owned and run by one person who receives all profits and is personally responsible for all debts.

Advantages:

• Easy and inexpensive to start

• Owner has full control

• Profits go directly to the owner

• Income is taxed once (personal tax return)

Disadvantages:

• Unlimited personal liability (your personal assets are at risk)

• Harder to raise money (no stock, limited loans)

• Business ends if the owner dies or becomes incapacitated

Example:

Imagine you start a cupcake business on your own, without forming a company — just baking and selling under your name. That’s a sole proprietorship. If someone sues you over food poisoning, they can go after your personal bank account and car.

Corporations

A corporation is a type of business that is treated as its own separate legal entity. It has three key parts:

1. Officers: Run the day-to-day business (ex. CEO, COO, Treasurer, Secretary)

2. Board of Directors: Make big decisions and protect shareholders. They’re listed in incorporation docs

3. Shareholders: Own the company (through stocks) and want to make money on their investment

Advantages of Corporations:

• Limited liability: Personal assets of managers/investors are protected (unless they commit negligence or crimes (torts))

• Easy to transfer ownership: You can buy/sell stock freely

• Perpetual existence: The company continues even if the owner dies

Disadvantages:

• Expensive and complicated to start and run

• Double taxation: The corporation pays taxes on profits, then shareholders pay taxes on dividends

De Jure Corporation

A business that has mostly complied with incorporation requirements, but made a small mistake (like a typo or mission form)

✅It is still legally recognized as a corporation

Example:

You filed all the necessary paperwork to start your company, but accidentally left off your zip code. The state accepts your filing anyway.

• Still counts as a legally formed (de jure) corporation

De Facto Corporation

You tried in good faith to incorporate (maybe mailed in your forms), but something went wrong, yet you’re still operating as a corporation.

⚠You’re not officially incorporated, but the law may still treat you as one to protect you and others

Example:

You mailed your incorporation documents to the state, but they never got processed. You don’t know that yet and start doing business as if you’re a corporation.

• You’re a de facto corporation because you acted in good faith and operated like one

Corporation by Estoppel

If someone treats your business like a corporation (such as singing a contract with it), they can’t later claim it wasn’t a real corporation to get out of the deal.

🙅‍♀They’re “estopped” (legally blocked) from denying it.

Example:

A customer signs a contract with “CoolTech Inc.” believing it’s a real corporation. Later they find out it wasn’t properly formed and try to sue the owner personally.

• The court says: Nope — you acted like it was a corporation, so you’re stuck with that

S Corporations

An S Corporation (or Subchapter S Corporation) is a special type of corporation that blends the advantages of both corporations and partnerships

Key Features:

1. Limited Liability

   Just like regular corporations (called C corporations), S corporations protect their owners (called shareholders) from being personally responsible for the company’s debts

   • If the business is sued or goes into debt, shareholders usually don’t lose personal assets

2. Pass-Through Taxation

   This is where it acts like a partnership. The corporation does not pay income taxes. Instead:

   • The profits and losses “pass through” to the shareholders

   • Shareholders report those profits or losses on their personal tax returns.

     • This avoids the “double taxation” that regular corporations face (where the corporation pays taxes and the shareholders pay taxes on dividends)

Disadvantages and Restrictions:

S corporations come with strict rules to keep pass-through tax status:

1. Only one class of stock is allowed

   • No preferred stock, just common stock

2. Limited to 100 shareholders or fewer

   • Keeps the business small and manageable for the IRS

3. All shareholders must be:

   • U.S. citizens or residents

   • Individuals (not partnerships or other corporations)

4. All shareholders must unanimously agree to S corporation status

Advantage	Disadvantage
Limited liability like a corporation	Only 1 class of stock
Avoids double taxation (pass-through)	Max 100 shareholders
Profits/losses go to individual tax returns	No corporate/partnership shareholders

Close Corporations

A close corporation (or closely held corporation) is a business that does not trade its stock on a public stock exchange. This usually means it’s owned by a small group of people — often family members, close friends, or a small team of founders

Key Features of Close Corporations:

✅Protection of Minority Shareholders

• In a small group, majority shareholders could abuse their power

• So close corporations often have special rules to protect minority shareholders from being unfairly treated

✅Transfer Restrictions

• Owners usually can’t just sell their shares to outsiders without first offering them to the other shareholders

• This keeps control within the original group

✅Flexibility

• Close corporations can skip some formalities that regular corporations must follow

• For example, they might not need a formal board of directors or annual meetings

✅Dispute Resolution

• Disagreements can get personal in a small group

• These corporations often have pre-agreed ways to settle disputes, like mediation or buyout clauses

A close corporation is like a private club — limited members, close control, and built-in rules to prevent conflicts and protect the group. It’s great for small teams that want to keep the business in trusted hands without outside interference.

Limited Liability Companies (LLCs)

An LLC (Limited Liability Company) is a type of business structure that combines the best features of both corporations and partnerships.

Advantages of an LLC:

1. Limited Liability:

   Members (owners) are not personally liable for the company’s debts or lawsuits. They only risk what they invested.

2. Pass-Through Taxation:

   Like partnerships, the company itself doesn’t pay federal income tax. Profits and losses are passed through to the members’ personal tax returns.

3. No Ownership Restrictions:

   Unlike an S corporation, LLCs can have:

   • Unlimited number of members

   • Members who are corporations, partnerships, or foreigners

4. Flexibility:

   Members can choose how to manage the LLC — either by themselves or through appointed managers

5. Perpetual Duration:

   LLCs can continue to exist even if a member leaves or dies (depending on the operating agreement and state law)

Disadvantages of LLCs:

• Legal Uncertainty:

  LLCs are relatively new (compared to corporations), so:

  • Fewer legal precedents

  • Rules vary a lot by state

  • Some complex legal situations may not have clear answers yet

There are several key advantages of Corporations to that of Partnerships 🎀

1. Transferability of Ownership

• Corporation: Ownership is divided into shares of stock. These shares can easily be sold, gifted, or inherited, making it simple to transfer ownership without disrupting the business.

• Partnership: Ownership is personal to the partners. You usually can’t transfer your ownership to someone else without the consent of the other partners. This makes transitions more complicated.

Why it matters: Corporations are more flexible when owners want to leave, retire, or bring in investors

2. Perpetual Existence

• Corporation: Continues to exist even if an owner (shareholder) dies or sells their shares. It’s own legal entity.

• Partnership: May dissolve if a partner dies, quits, or becomes incapacitated, unless there’s an agreement in place to continue.

Why it matters: Corporations offer stability and long-term planning — important for investors and employees

3. Easier to Raise Funds

• Corporation: Can issue stocks or bonds to raise large amounts of money. This helps fund growth, research, and operations.

• Partnership: Must rely on personal contributions or loans, which can limit how much capital they can get.

Why it matters: Corporations often have an easier time attracting investors and expanding quickly.

A partnership has to be for PROFIT 💵; it cannot be a charitable business. Other factors in determining whether it is a partnership:

• Sharing profits

• Sharing losses

• Management of the business

• An agreement, whether oral or in writing

Relationship Between Partners and Outsiders under the Uniform Partnership Act (UPA)

🔑Key Principles:

• Mandatory Rules: Partners cannot change how they are liable to outsiders — these are mandatory under the UPA.

• Internal Rules: Most rules among partners (like how to divide profits) are default and can be changed by agreement.

🤝Authority Types (based on agency law):

1. Actual Authority

• The partner has explicit permission in the partnership agreement or a majority decision

• Example: If the agreement says Partner A can sign leases, that’s actual authority

2. Implied Authority

• The authority reasonably understood from a partner’s role or the nature of the business

• Example: In a marketing firm, a partner signing a deal with an ad agency — even if not explicitly told to — is likely using implied authority

3. Apparent Authority

• The partner seems to outsiders to have authority, and the outsider has no reason to doubt it

• Example: If Partner B always orders inventory and vendors have no idea that authority was revoked, the firm is still bound

✅Ratification:

If a partner does something unauthorized, but the partnership:

• Accepts the benefits, or

• Fails to reject the act,

  → then the partnership has ratified it — it’s as if they authorized it in the first place

🎀📢Information:

• If one partner knows something, the whole partnership is deemed to know it

• Example: If Partner C learns about a pending lawsuit and doesn’t tell the others, the partnership is still considered to know about it

⚖Tort Liability

A partnership is liable for:

• Negligent or intentional torts by a partner

• If it happens during ordinary business or with actual authority

Example: If a partner accidentally injures a client while doing partnership work, the firm is liable — even if it wasn’t approved

Paying Partnership Debts

1. Personal Liability

Each partner in a general partnership is personally liable for the debts of the business for the debts of the business

• This means if the partnership itself doesn’t have enough money to pay a debt, creditors can go after the personal assets (like savings or a car) of any or all of the partners

2. Joint and Several Liability

This rule means that:

• A creditor can sue all the partners together (jointly) or just one partner (severally) to collect the entire debt

• That one partner who pays the full amount can later ask the other partners to pay their fair share

Example: If a partnership owes $100,000 and one partner is sued and pays the full amount, that partner can go after the others for reimbursement

3. Incoming Partners

New partners have limited liability for old debts:

• They are only personally liable for debts that happen after they become a partner

• For debts incurred before they joined, their risk is limited to the money they invested in the partnership

So creditors can’t take their personal property to cover old debts — only what they contributed to the partnership

Relationships Among Partners

🔁 Flexible (Default) Rules – Can Be Changed by Agreement

1. Financial Rights

• Profits: If partners don’t say otherwise in their agreement, everyone shares profits equally — even if someone puts in more work or money.

• Losses: Partners split losses the same way they split profits. So if profits are split 70/30, losses are too.

2. No Extra Pay

• Partners don’t get paid a salary or hourly wage for working. Their compensation comes from their share of the profits — unless they all agree to something different.

3. Property Belongs to the Partnership

• Assets (like buildings, equipment, or cash) bought for the partnership belong to the partnership, not to individual partners — even if one partner paid for it.

4. Transfer of Rights

• A partner can sell or give away their right to receive profits, but not their status as a partner (meaning they can't transfer decision-making or voting rights without consent from the other partners).

🗳 Management Rights (Default Rules — Can Also Be Changed)

• Equal say: Every partner gets an equal vote in business decisions, regardless of how much money they invested or how much they work.

• Authority: A partner with actual or apparent authority can bind the partnership to contracts.

  • Even partners without authority may accidentally bind the partnership if outsiders reasonably believe they had authority.

• Records & info: All partners can look at the books and are expected to keep each other informed about important matters.

🛡 Management Duties (Mandatory – Cannot Be Changed)

These are legal obligations every partner owes to the partnership and each other:

• Duty of Care: You can’t act recklessly or break the law when managing partnership affairs. Honest mistakes are okay, but serious negligence isn’t.

• Duty of Loyalty: You must:

  • Avoid competing with the partnership.

  • Give any profits you make (in connection with the partnership) to the partnership.

  • Avoid conflicts of interest (don’t use the business to benefit yourself unfairly).

• Duty of Good Faith & Fair Dealing: Always act honestly and fairly toward your partners and in partnership decisions.

T/F: A new partner can only be admitted to a partnership by unanimous consent of all the other partners 🎀

True

Dissociation

Dissociation happens when a partner leaves a partnership. It could be voluntary (they quit) or involuntary (they're expelled or pass away).

What Happens After Dissociation?:

Once a partner leaves, the partnership has two options:

1. Buy out the partner’s interest and keep the business running, or

2. Wind up (close) the business and dissolve the partnership.

Power vs. Right to Leave:

• A partner always has the power to leave (they physically can walk away).

• But they might not have the legal right to do so—especially if they leave in violation of the partnership agreement.

  • Example: If a partner agreed to stay for 5 years but leaves after 1 year, they still can leave (power), but it may be considered a wrongful dissociation (no right), and they might owe damages.

Example:

Let’s say Alice, Bob, and Carla run a bakery as partners.

• Alice decides to leave the partnership. That’s dissociation.

• Bob and Carla can:

  • Buy Alice out and keep the bakery running, or

  • Decide to close the bakery (wind up).

If Alice leaves early and breaks their agreement, she may have to pay for losses caused by leaving at the wrong time.

Rightful Dissociation

✅ Rightful Dissociation

This is when a partner leaves the partnership in a legally acceptable way.

Examples:

1. Partnership at will: A partner gives notice they want to leave—totally fine.

   • Example: No set end date for the business. Tom sends a notice and quits—rightful.

2. Pre-agreed event: The partners agreed ahead of time that a specific event will trigger dissociation.

   • Example: Leaving after a 3-year project wraps up.

3. Death or incompetence: If a partner dies or becomes mentally unable to continue—this is not their fault.

4. Expulsion by the other partners: As long as the expulsion follows the rules in the agreement.

Rightful = legal, expected, or not the partner’s fault

Wrongful Dissociation

This happens when a partner leaves in violation of the agreement or under bad circumstances.

Examples:

1. Violating the partnership agreement

   • Example: Partner promised to stay 5 years but quits after 1

2. Leaving early in a term partnership

   • Example: Partnership is supposed to last 3 years. A partner bails after 6 months

3. Court expulsion for harmful behavior

   • Example: A partner steals from the business or is abusive—court kicks them out

4. Bankruptcy during a term partnership

   • Being bankrupt can damage the business, so it’s treated as wrongful in a term partnership

Wrongful = breaking the rules or causing harm

Termination of a Partnership business

Ending a partnership business involves three steps:

1. Dissolution

This is the decision to end the business. It can happen in two ways:

• Voluntary: Partners decide to close the business, like agreeing to retire or sell the business.

• Automatic: This happens in certain situations, like if one of the partners dies or if an event happens that makes it impossible to continue the partnership.

Example:

• Alice, Bob, and Carla decide to dissolve their bakery business after 10 years of running it. That's a voluntary dissolution.

• If Bob dies, the partnership might automatically dissolve depending on the agreement.

2. Winding Up

This is the process of wrapping things up:

• All the debts of the business are paid off.

• Remaining assets (like cash or equipment) are distributed among the partners based on their ownership shares.

Example:

• After dissolving the bakery, Alice and Carla pay any outstanding bills, like rent and supplier payments. Then, they split the remaining money and equipment according to their share of ownership.

3. Termination

Termination is the final step—it happens once the winding up process is complete. This is when the partnership is officially closed, and the business no longer exists.

Example:

• Once Alice and Carla finish distributing the assets and settling debts, they have completed the termination, and their partnership ends.

• Dissolution = Decision to end

• Winding Up = Paying debts and distributing assets

• Termination = Official end of the partnership

General Partnership

This is the default kind of partnership. If two or more people start doing business together for profit, even without writing anything down, they might legally form a general partnership.

Key Features:

• All partners are general partners—they share management, profits/losses, and liability equally (unless agreed otherwise).

• Easy to form, even accidentally (like if a sole proprietor brings in a friend to help and share profits).

• Personal liability: Each partner can be held personally responsible for all of the business’s debts.

Example:
Emily and Jake start selling homemade candles together and split profits. They don’t file anything officially, but legally, they’ve formed a general partnership.

Limited Partnership (LP)

This type is more formal and must be registered with the state by filing a certificate of limited partnership.

Key Features:

• There are two types of partners:

  • General partners – manage the business and are personally liable.

  • Limited partners – invest money only, don’t manage, and aren’t personally liable beyond their investment.

• Only general partners have unlimited liability.

• Used when someone wants to fund a business without taking on risk or responsibility.

Example:
Lena invests $50,000 in a real estate project but doesn’t manage it. She’s a limited partner. Mark runs the project and is the general partner. If the business is sued or owes money, only Mark is personally liable—Lena can only lose her $50,000 investment.

General vs. Limited Partnership

Feature	General Partnership	Limited Partnership
Formation	Automatic, no filing needed	Requires certificate
Management	All partners manage	Only general partners manage
Liability	All partners personally liable	Only general partners are liable
Role of investors	No silent investors	Allows money-only partners

Professional Corporation (PC) 🎀

A Professional Corporation is a special type of corporation for licensed professionals like doctors, lawyers, accountants, or architects.

⚙ Key Features:

• Formed by licensed professionals who want to work together under a corporate structure.
  Example: A group of doctors opens a clinic and forms a PC.

• Offers liability protection beyond what a partnership offers.

• If one professional makes a mistake, like malpractice, the corporation may be sued—not the other members personally (as long as they were not involved).

🛡 Liability Protection:

• In a partnership, all partners might be liable for one partner’s actions.

• In a PC, only the person who made the mistake (and maybe the business itself) is liable.

• Innocent professionals are protected from being personally sued for someone else’s wrongdoing.

📌 Example:

Dr. A and Dr. B form a Professional Corporation to run a medical clinic.

• If Dr. A commits malpractice, the patient can sue Dr. A and the corporation.

• Dr. B is not personally liable, because they weren’t involved.

Summary:

• A PC is for licensed professionals.

• It offers better personal liability protection than partnerships.

• Innocent professionals in the corporation are usually not personally liable for another’s mistake.

Joint Venture

A joint venture is like a temporary partnership between two or more people or businesses that team up for a specific project or limited purpose.

⚙ Key Features:

• It’s not permanent—it ends when the project is done.

• The partners share profits, losses, and control, like in a general partnership.

• It’s for-profit—nonprofits can't form joint ventures under this definition.

🛠 Example:

Two construction companies join forces to build a bridge.

• They form a joint venture just for that project.

• Once the bridge is done, the joint venture ends.

🛑 Not a Joint Venture:

• If a group of volunteers team up to organize a charity event, that's not a joint venture—because it’s nonprofit

Summary:

• A joint venture = temporary partnership for one goal.

• It must be for profit.

• Ends when the project or purpose is complete.

Franchises

A franchise is a business setup where one person (the franchisee) runs a location of a larger, established brand (the franchisor).

It’s a middle ground between:

• Starting your own business (full freedom)

• Working as an employee (less risk, less freedom)

🧩 Key Points:

• A franchise is not a legal business form by itself—it can be a sole proprietorship, partnership, LLC, or corporation.

• The franchisee buys the right to use the brand name, sell its products, and follow its business system.

⚖ Freedom vs. Limits:

• Freedom: The franchisee runs the day-to-day operations and hires staff.

• Limits: The franchisor controls things like the logo, menu, uniforms, or store layout.

🍔 Example:

You open a McDonald's franchise:

• You run the restaurant.

• You hire the workers.

• But you must follow McDonald's rules—use their suppliers, sell only their menu, follow branding.

Summary:

• A franchise is a business model using an established brand.

• The franchisee has some independence but must follow the franchisor's rules.

• It’s a blend of independence and structure—not fully your own, not someone else’s job.

Judge: Sarah will you mow my yard this Saturday for $25.00?

Sarah:  Yes, Judge, I will mow your yard this Saturday for $25.00.

Who is the agent and who is the principle?

In this scenario:

• Principal: The Judge. The Judge is the one who is hiring Sarah to mow the yard, making him the principal (the person who authorizes the agent to act on their behalf).

• Agent: Sarah. Sarah is the one agreeing to mow the yard for the Judge, making her the agent (the person who is hired to act on behalf of the principal).

In an agency relationship, the principal authorizes the agent to carry out specific tasks or duties.

What Are the 5 Elements to Create an Agency Relationship?

An agency relationship is when one person (the agent) agrees to act on behalf of another (the principal), usually in a business or legal context.

Here are the five key elements needed to form this relationship:

1. Principal

   The person who is in charge and gives authority.

   
   Example: A business owner who hires a real estate agent.

2. Agent

   The person who agrees to act on behalf of the principal.

   
   Example: The real estate agent who sells the house.

3. Mutual Consent
   Both sides agree to the arrangement. No agency exists unless both parties say “yes.”

   
   Example: The owner says, “Sell my house,” and the agent says, “Okay.”

4. Control by the Principal
   The principal must have some control over how the agent does the task.

   
   Example: The owner can say, “Don’t sell for less than $500,000.”

5. Fiduciary Relationship
   The agent agrees to act in the best interest of the principal—this creates trust and loyalty.

   
   Example: The agent must not secretly work for a competitor.

Equal Dignity Rule

If a contract must be in writing to be legally enforceable, then the agent’s authority to sign that contract must also be in writing.

💡 Why it matters:

It protects principals from being legally bound by an agent unless the agent had proper, written authority.

🧾 Example:

Let’s say you're selling your house (which must be done in writing).
You tell your friend to sign the contract on your behalf:

• ❌ If you only tell them verbally, that’s not enough.

• ✅ Their authority must be in writing because the contract must be in writing.

📌 Summary:

• If a contract requires writing, the agent's authority to sign must also be in writing.

• No written authority = no enforceable deal.

Duties of an Agent to a Principal

1. Duty of Loyalty

The agent must always put the principal’s interests first.

This means:

• No secret deals or side benefits (unless the principal says it’s okay)

  • Example: A real estate agent can’t secretly get a referral fee from a contractor.

• No sharing or using confidential info

  • Example: An agent can’t tell competitors the principal’s pricing strategy.

• No competing with the principal

  • Example: A sales agent can’t start their own company selling the same product.

• No working for two conflicting principals

  • Example: An agent can’t represent both the buyer and seller in a deal unless both agree.

• No secret involvement in deals

  • Example: The agent can’t buy something on behalf of the principal, then resell it for personal profit.

• No bad behavior that reflects poorly on the principal

  • Example: Posting offensive content online while representing the principal’s brand.

2. Duty to Obey Instructions

The agent must follow lawful and ethical orders from the principal.

• If the principal tells the agent to do something illegal or unethical, the agent should not obey.

3. Duty of Care

The agent must act reasonably and carefully.

• If the agent has special skills, they’re expected to act like a professional in that area.

  • Example: A CPA agent must meet accounting standards.

4. Duty to Provide Information

The agent must tell the principal everything relevant they know.

• Example: If a supplier is about to raise prices, the agent must inform the principal.

What are the principal’s remedies if the agent breaches a duty

💥 1. Recover Damages

If the agent’s breach caused the principal to lose money, the principal can sue to get that money back.

• Example: An agent fails to tell the principal about a key contract change, and it costs the principal $10,000 — the principal can sue for that loss.

💰 2. Refund of Profits

If the agent violates the duty of loyalty (like making secret profits), the principal can force the agent to give those profits back.

• Example: An agent gets a secret $5,000 commission from a supplier — the principal can demand that $5,000.

❌ 3. Rescission (Cancel the Deal)

If the agent acted disloyally, the principal may cancel or undo the transaction.

• Example: An agent buys property from a friend without disclosing the conflict — the principal can cancel the deal.

How do you terminate the Agency Relationship?

There are five basic ways an agency relationship is terminated by the parties:

1. Completion of Term – The agreed time period ends

   • Example: Agent hired for 6 months. At the end, it’s over.

2. Completion of Purpose – The job is done

   • Example: Agent hired to sell a house — once sold, agency ends.

3. Mutual Agreement – Both sides agree to end it, even if they had a longer-term deal

4. Agency at Will – Either side can quit at any time, for any reason

5. Wrongful Termination – One party ends it when they’re not supposed to

   • Example: Firing an agent mid-contract without good reason may require paying damages.

🎀 Termination by Law / Circumstances

• Loss of Qualification – e.g., agent loses license.

• Bankruptcy – Especially of the principal.

• Death or Incapacity – Of either party.

• Disloyalty – The agent breaches loyalty — relationship ends.

• Change in Circumstances – Subject of agency is lost or law changes.

  • Example: The product the agent was selling becomes illegal.

What is the effect of the termination of the Agency Relationship?

📌 1. The Agent Loses All Power to Act for the Principal

Once the agency ends, the agent can no longer make decisions, sign contracts, or act on the principal’s behalf — they have no authority anymore.

• Example: If an agent tries to buy supplies using the principal’s name after termination — that’s not valid.

💸 2. No More Reimbursement

The principal doesn’t have to repay the agent for any new expenses made after the agency ends.

• Example: If the agent books a hotel for a business trip after being fired, the principal doesn’t have to pay for it.

🤐 3. Confidentiality Continues

Even though the agency ends, the agent still has a duty to keep confidential info secret — forever.

• Example: An agent can’t go work for a competitor and reveal their old principal’s trade secrets.

What are the liabilities of the Principal to a contract made by the Agent?

The principal is legally responsible (or "bound") for a contract the agent makes if any of the following are true:

1. The Agent Had Authority

There are two kinds of authority:

• Express Authority – The principal directly told the agent, “You can do this.”

  • Example: A store manager tells an employee, “Go order more supplies.”

• Apparent Authority – It looks like the agent has authority because of the principal’s actions.

  • Example: The principal lets someone act like a manager, so third parties believe they can sign deals.

2. Estoppel

Even if the agent didn’t have authority, the principal might be stopped (estopped) from denying it if:

• The principal’s conduct misled a third party into thinking the agent had authority, and

• It would be unfair to let the principal deny that.

Example: The principal silently watches the agent make deals and doesn’t correct the misunderstanding — so they’re “estopped” from denying liability later.

3. Ratification

Even if the agent had no authority, the principal can accept (ratify) the contract after the fact, which makes them liable.

• Example: An agent signs a contract without permission. The principal later says, “Actually, that’s fine — I’ll go through with it.” Now they’re bound.

2 types of Actual Authority

Express Authority

• This is clearly stated by the principal.

  Example: The principal says, “You are authorized to sign this contract.”

Implied Authority

• This is not directly stated but is reasonably assumed to carry out the express authority.

  Example: If you're hired as a manager, it's implied you can schedule employees—even if no one said it out loud.

Estoppel

No one can deny that someone was their agent if they knew others thought that person was acting for them and didn’t correct it.

Key idea: The principal stayed silent while a third party was misled, and now they’re "estopped" (legally blocked) from denying the agent’s authority.

Example:
If a store owner sees an ex-employee still selling items in their name and says nothing, they might be bound by that person’s actions through estoppel.

Ratification 🎀

If a person accepts the benefit of a contract made by someone without authority, or doesn’t reject it in time, it’s as if they authorized it from the start.

Key idea: The principal didn't give permission at first but later accepts or benefits from the deal.

Example:
An assistant signs a supply order without permission. If the boss uses the supplies or doesn’t cancel the order, they’ve ratified the assistant’s action.

What is the AGENT’S liability to a contract? It depends on how much information the AGENT is allowed to divulge to the 3rd party.

Exceptions to the Rule on Undisclosed Principals

Agent’s Liability Depends on Disclosure:

🔹 Fully Disclosed Principal

• The third party knows who the principal is.

• ➤ Agent is NOT liable.

• Example: Sarah signs a contract for "Judge's Lawn Service, LLC" and makes it clear she's just the agent → only Judge’s company is responsible.

🔹 Partially Disclosed Principal

• The third party knows there is a principal, but not who it is.

• ➤ Agent AND principal can be held liable.

• Example: Sarah signs “on behalf of a client” but doesn’t say who. The third party can go after either.

🔹 Undisclosed Principal

• The third party doesn’t even know there is a principal.

• ➤ Agent AND principal can be held liable.

• Example: Sarah signs a deal acting like it’s her own business, but she’s really working for someone else. The third party can sue Sarah or the real boss (once revealed).

🔹 Unauthorized Agent

• The agent had no authority to make the deal.

• ➤ Only the agent is liable.

• Example: Sarah signs a deal pretending to represent Judge, but Judge never gave her permission → only Sarah is responsible.

🎀 Exceptions to the Rule on Undisclosed Principals:

Even though an undisclosed principal can usually be held liable, here are 2 times they can't:

1. Third party insisted they would only deal with the agent (and said so in the contract).
   ➤ So the principal can't swoop in later and say, “I’m part of this deal too!”

2. The agent lies about who they represent because they know the third party would never agree if they knew the truth.
   ➤ The law protects the third party from being tricked.

What are the liabilities of the Principal to a tort done by the Agent?

1. Scope of Employment

If an agent (or employee) causes physical harm while doing their job (within their scope of employment), the principal is liable.

Example:
If a pizza delivery driver (agent) hits someone while making a delivery, the pizza company (principal) could be liable.

2. Independent Contractors

A principal is generally NOT liable for torts committed by independent contractors, unless:

• The principal was negligent in hiring or supervising the contractor

  
  Example:
  If you hire an unlicensed roofer who injures someone, and you knew they weren’t qualified, you could be liable.

Key Term – "Scope of Employment"

This means the agent was doing something related to their job at the time of the tort.
If they were on a frolic (doing something totally unrelated), the principal likely won’t be liable.

How to determine if someone is an agent (employee) or an independent contractor

Key Differences:

You're looking for how much control the principal (boss) has over the worker (agent/contractor). The more control = more likely an agent/employee.

If the answer is “YES” to these questions, it leans toward an AGENT/EMPLOYEE:

1. Does the principal control the details of the work?
   → Ex: Telling them how to do it, when to come in, etc.

2. Does the principal provide the tools and workplace?
   → Ex: Providing a desk, laptop, company truck, etc.

3. Does the worker work full-time for the principal?
   → Full-time work usually = employee.

4. Is the worker paid by the hour (or on salary)?
   → Independent contractors are usually paid per project.

5. Is the work part of the regular business of the principal?
   → Ex: If the principal owns a bakery and hires someone to bake = likely an employee.

6. Do both sides treat the relationship as employer-employee?
   → Contracts, benefits, company policies, etc.

❌ Independent Contractor Indicators:

• Controls how and when they do the job.

• Uses their own tools/equipment.

• Paid per project or job.

• Works for multiple clients.

• Not part of the core business.

• No benefits, taxes, or supervision from principal.

Example:

A plumber hired to fix a sink in a bakery = independent contractor (brings their own tools, paid for the job, not part of daily business).

A cashier at that same bakery = employee/agent (works regular hours, uses company tools, takes instructions).

Negligent Hiring

Normally, a principal is not liable for what an independent contractor does wrong. But there’s an exception:

• If the principal was careless in hiring or watching over that contractor, they can be held liable.

Example:

A daycare center hires a contractor to fix their playground equipment but fails to check that he has a history of reckless work. The contractor installs a faulty slide, and a child gets injured.

• Even though he’s an independent contractor, the daycare could be liable because they were negligent in hiring someone unqualified or dangerous.

Negligent vs. Intentional Torts

1. Negligent Torts (Carelessness, accidents):

• The principal is liable if:

  • The agent was acting within the scope of employment when the negligent act occurred.

  • Example: A delivery driver (agent) crashes into a mailbox while delivering packages. The employer (principal) is likely liable because it happened during work duties.

2. Intentional Torts (Deliberate acts):

• The principal is not usually liable if the agent intentionally harms someone for personal reasons.

• But the principal can be liable if:

  • The agent acted with intent to benefit the principal, or

  • The conduct was reasonably foreseeable given the agent's role.

Examples:

• NOT liable: A security guard punches someone during a personal argument. (Unrelated to job)

• Possibly liable: A bouncer (agent) uses excessive force ejecting a guest. Since it’s part of the job and foreseeable, the club (principal) might be liable.

Physical vs. Non-Physical Harm

🛠 Physical Harm

• The principal is liable for the agent’s negligence that causes physical harm (e.g., injury, property damage)

• Only if it happened within the scope of employment

💬 Non-Physical Harm

• Examples: Defamation, financial loss

• The principal is liable only if the agent acted with actual or apparent authority
  (i.e., the agent had permission or looked like they had permission)

Scope of Employment 🎀 + Frolic (abandonment) vs. Detour

🎀 Scope of Employment:

Determines whether a principal is liable for the agent’s actions.

Authorization:

• An agent’s act can be within scope even if the principal explicitly forbade it, as long as the act is of the same general nature or reasonably related to what was authorized.

Abandonment (Frolic vs. Detour):

• Frolic = The agent completely leaves the employer’s business for personal reasons → Principal is not liable.

• Detour = A minor deviation from job duties that’s still connected to the work → Principal is liable.

Examples:

Frolic (Principal is not liable):
Instead of completing deliveries, the same driver decides to take a 2-hour detour to visit a friend across town. On the way there, they hit another car.

• This is a significant deviation (frolic) for personal reasons. The principal is not liable for the accident.

Detour (Principal is liable):
A delivery driver stops at a gas station for fuel while on their delivery route. While pulling out of the station, they hit a parked car.

• This is a minor deviation (detour) and still related to their job. The principal is liable for the accident.

Agent’s Liability for Torts

Agents Are Always Liable for Their Own Torts:

If an agent commits a tort (like negligence, assault, or defamation), they are personally responsible, even if they were acting for the principal. That means if they harm someone, they can't hide behind the principal and avoid liability.

Joint and Several Liability:

This means that both the agent and the principal can be held legally responsible for the harm caused. The injured party (victim) can:

• Sue just the agent,

• Sue just the principal,

• Or sue both of them.

Whichever route the injured party takes, they can only collect once for the full amount of the damages — they cannot double dip.

What Happens if the Principal Pays?

If the principal ends up paying the injured party (even if it was the agent’s fault), the principal can later sue the agent to recover that money. This is a way to hold the agent accountable for their own wrongdoing, even if the principal had to cover it upfront.

Misrepresentation of the Agent to a 3rd party and the liability of the Principal

Misrepresentation by the Agent & Principal’s Liability:

A principal can be held liable when their agent lies or gives false information to a third party if all of the following are true:

1. The agent made the misrepresentation – meaning they said or implied something that wasn’t true.

2. The agent had authority – this could be:

   • Express (clearly stated),

   • Implied (based on the nature of the job),

   • Or Apparent (the third party reasonably believed the agent had authority).

3. The third party relied on the false information – they believed it and acted based on it.

4. The third party suffered harm – financially or otherwise, as a result of that reliance.

👉 If all four elements are present, then the principal is liable, even though it was the agent who actually made the misrepresentation.

Defamation statement by Agent to a 3rd party and the liability of the Principal

If an agent says something defamatory (a false statement that harms someone's reputation) to a third party, the principal can be held liable — but only if:

1. The statement is actually defamatory (false and damaging to reputation),

2. The agent was acting with express, implied, or apparent authority when they said it, and

3. The third party suffered harm because of that statement.

So just like in misrepresentation, authority and harm are key to holding the principal liable.