MIE 305: Exam 2

sole proprietorship

—> owner is the business

• easier to start (no registration/filing)

• pass through taxation

• all profit is personal income

*doesn’t have limited liability

sole proprietorship advantages

• owns the entire business/right to receive all profits

• easier/less costly — allows flexibility

• no meeting requirements, no filing

sole proprietorships disadvantages

• owner is personally liable for all loses/liabilities

• most likely form of business to be audited by IRS

• lacks continuity on the death of proprietor

partnership

—> two or more people agree to carry on a business for profit

*doesn’t have limited liability

corporation

—> separate legal entity from its directors, officers, shareholders, others with a stake in the success of the business, given “personhood”, created by filing articles of incorporation with state

• “top of the food chain”

• maximum personal liability protection

• most complex to establish/maintain

• raises massive capital through issuance of shares

• double taxation dilemma

• publicly traded and for-profit

• filing of an application for incorporation and corporate charter

Limited Liability Corporation (LLC)

—>provide the flexibility of partnerships with the legal protection of corporations

• over 2/3 of new businesses

• creatures of statutes — registration with articles of organization

• should have an operating agreement/bylaws in writing

LLC advantages

• strong limited liability protection

• pass through taxation

• may elect to be be taxed as a corporation (5 year period)

• easier to form/structure

• shares and profits draws may be unequal

• perpetual existence like a corporation

*many states allow single-member

LLC disadvantages

• case/common law is not as well-formed or stable

• little statutory laws in most states — mainly governed by contracts

• taxation/profit distribution issues

• can’t sell shares

• shares are difficult/impossible to change without unanimous consent of members

• sing-member can raise additional tax, regulatory burdens depending on the state

limited liability

—> losses and/or judgements against the business

• provides some protection from having to pay debts/obligations of the business for their own personal funds

pass-through taxation

—> ability of a business to pass through all of its profits to its owners, partners, members

• pass through the profits that the business makes from operations directly to the owner without the money stopping and being subjected to taxation

fiduciary duty

—> an obligation to act in a business best interest, even if and when they conflict with one’s own best interests

*doctors/lawyers give you pros/cons but can’t make the decision for you

incorporation

—> to register a business entity in a legally recognized form

general partnership

• partnership agreement may be oral, but best written

• new partners require approval from all existing partners

general partnership advantages

• may be at will (indefinite) or fixed term

• offers pass through taxation to partners

• easy to start — no registration/filing

• equally voiced among partners in management and profit sharing

general partnership disadvantages

• no limited liability for partners

• joint/several liability — 2+ parties are responsible for a harm cause, can both be fully held responsible

• profits are income for partners — normally re-invested in the business

limited partnerships

• creatures of statute modify partnerships rules

• some notification or registry is necessary with appropriate state authorities

• registration required but not the partnership agreement

main purpose of a limited partnership

have a partnership with others — limit the liability of partnerships losses for certain partners

general partner

• active management

• agent of partnership

• full fiduciary duties

• unlimited liability for losses w/ joint and several

limited partner

• limited liability for losses (up to the amount of their investment)

• no fiduciary duties/agency responsibilities

• may not take part in management

*some states recognize, but restrict to certain professions (law, medicine, accounting)

domestic corporation

incorporated in that state

foreign corporation

not incorporated in the state

• required to register to do business through acquisition of a certificate of authority

registered agent

required for any entity that registers to do business in a given state

• physically present in the same state

• identified by the business registration on file at the states corporations authority

c-corp

traditional corporation covered in subchapter C of IRS regulations

s-corp

newer, covered in subchapter S

• may elect pass-through taxation

• may only be formed if:

1. no more than 100 shareholders

2. all individuals

3. who are citizens or resident aliens of the US

4. all hold only 1 class of stock

closely held corporations

more than 50% of company owned by 5 or less people

• can’t be personal services corporation (law firm)

ex: chick fil a, hobby lobby

private corporation

usually, not necessarily closely held

ex: Koch industries, Deloitte, Kohler Industries

nonprofit corporation

• oldest and most established

*not allowed to issue shares

model nonprofit corporation act

only form eligible for tax-exempt status, but can’t distribute profits to members/officers, no stock issuance

benefit corporation

required to pursue general public benefit in all aspects of business operations

*must put your social benefit in your corporate charter

social purpose corporation

more flexible than benefit corporations

• may contribute to social causes, doesn’t have to consider public benefits

*3 states (Washington, Florida, California)

differences of nonprofit

• organized for a specific public benefit

• not to make a profit

• can apply for tax-exempt status

• cannot issue stock

• cannot distribute profits to members/officers

differences of benefit

• for-profit entity

• required to pursue the general public benefit in all aspects of their business

• cannot receive tax-exempt status

• can issue stock

• can distribute profit to shareholders

differences of social purpose

• for-profit entity

• contributes to social or environmental cause, but it is obligated to consider the public benefit in all aspects of the business

• cannot receive tax-exempt status

• can issue stock

• can distribute profits to shareholders

enumerated power

written down

*Art. 1, S. 8

implied powers

(“elastic clause”) derived from necessary and proper clause

• to make all laws which shall be necessary and proper for carrying into the execution the foregoing powers, all other powers vested by this constitution in the government, or in any department or officer thereof

• if the end is legitimate, within the scope of the constitution, all the means which are appropriate, are plainly adopted to that end, which are not prohibited, may constitutionally be employed to carry it into effect

elements of implied power

1. subject of the law is reasonably related to the execution of an enumerated power

• congress will write: “in furthermore of our powers to regulate interstate commerce, we hereby give you the following bill”

2. congress has determined that it is necessary and proper to facilitate execution of that power in the manner of the new law.

enforcement clause power

post civil war creations

• stop the argument that it did not have the ability under implied powers to enforce those amendment against the states

ex: civil rights act, voting rights act

federal commerce power

—> comes from the commerce clause (Art. 1, S. 8, Cl.3)

• congress shall have the power “to regulate commerce with foreign nations and among the several states, and with the Indian tribes.”

commerce

not a physical exchange of things of value but includes transportation of goods — any thing that facilitates the transaction

• congress’ power over interstate is plenary

plenary power

powers granted to a body in absolute terms, with no review of, or limitations upon, the exercise of those powers

Dormant commerce clause

—> constitution principle that the commerce clause prevents state regulation of interstate commercial activity where congress has not acted under its interstate commerce powers to regulate that activity.

• is a state or local government using its police power in such a way as to punish, discriminate, or “un-level” the commercial playing field against out-of-state parties just because they are not from that state?

elements of the dormant commerce clause

1. state has used its regulatory power to discriminate against articles in interstate commerce to an “appreciable extent”

2. the discrimination is based primarily or exclusively on the origin of the articles

3. the discrimination favors in-state interests to determine or exclusion of out-of-state articles

4. congress has not acted either to sanction or to prohibit the discrimination using its commerce powers

expectations of the dormant commerce clause

1. congress has authorized the discrimination by law

2. balancing test

3. market participation

balancing tests

how do we make sense of discrimination to an appreciable extent?

• if incidental: legitimate state interest must be demonstrated and impact on IC must be reasonably slight

• if purposeful: state must show a compelling interest and demonstrate no other reasonable way of advancing that interest

market participantion

does the state action merely put the state in fair competition on the open market for goods or services — if so, it may as any owner/operator prefer some customers over others

tort

—> a non-contractual civil wrong

• when somebody is suing somebody else … unless there is a contract involved … the cause of action for the lawsuit is a tort civil wrong

*does not require a contract — any civil wrong can be intentionally or accidentally

purpose of a tort

provide a way to hold those who cause harm responsible

• more flexible to new claims

*shifts the risk of bad behavior onto the party that commits the act

tortfeasor

one who commits a tort

intentional torts

require a showing of intent to cause the act which produces the harm

torts of negligence

hold parties responsible for harm their unintentional acts cause to others

assualt

intentional creation of the reasonable apprehension of immediate harm or offensive touching in another person

battery

the actual harm or touching to take place — often present in the same tortious transaction but are not required to be

*can have assault without batter, assault with battery, and battery without assault (being snuck up on)

intentional torts example:

• assault

• battery

• trespass to land

• infliction of emotional/mental distress

• invasion of privacy

• false imprisonment

• trespass to chattels

• defamatory tort

trespass to chattels

main offenses of interference with another’s property rights in a chattel

• less serious and doesn’t deprive the owner of meaningful economic value of the chattel

• conversion: intentional misappropriation of property which results in total loss to the owner

defamatory tort

slander (spoken), libel (written), injurious falsehood (aka trade libel)

1. a false statement purporting to be fact

2. publication/communication to a 3rd party

3. fault at least rising to negligence (if requires malice with intent to harm or recklessness)

4. damages

interference with contractual relationships

• existence of a valid contract between the plaintiff and a 3rd party

• the defendant has knowledge of the contract

• the defendant intentionally and unjustifiably induces the 3rd party to breach the contract

• breach occurs as a result of the defendants conduct, incurring damages to plaintiff

interference with prospective economic advantage

unfair business practice that occurs when someone intentionally interferes with an established business relationship through unlawful/wrongful means

• the defendant’s knowledge of the relationship

• intentional acts on the part of the defendant designed to disrupt the relationship

• actual disruption of the relationship, incurring damages to plaintiff

negligence

—>unintentional causing of harm to another’s person or property through the breach of a duty of care to them that a reasonably prudent person would otherwise have used in carrying out the duty

duties

to others can arise from special relationships or they may exist generically

ex: doctors, lawyer

elements of negligence

1. duty

2. breach of duty (not living up for the standard of care in executing the duty that a reasonable person would have executed)

3. causation (cause in fact and proximate) — the breach of duty was the cause of my injury

4. damages

cause in fact

is the “but for” cause of an injury — but for the defendant’s conduct, would the injury have occurred?

*at common law — no duty to act, someone in peril — no duty to rescue

*nonfeasance cannot be used to support a finding of cause in fact unless a statute imposes the duty

proximate clause

“legal clause” — even if one’s conduct is technically the cause in fact of injury, the injury must be a harm within the risk of the behavior

• must be reasonably foreseeable or direct (not likely or probable) injury of which the actor had the opportunity to be aware

*sometimes called “zone of danger” — given the negligence, whats the geographical area?

contributory negligence

• any fault cannot recover damages

• must be completely free of fault to win

• used by 4 states (AL, NC, VA, MD)

comparative negligence

• damages reduced by % of fault

• can recover if your fault is below a certain threshold

• used by most states

rules for plaintiff damages

• important in negligence cases in which the plaintiff may be partially responsible for the incident which created the injury or damages

• most states use the comparative fault rule in which plaintiffs damages may be reduced by a percentage to which they were found at fault by a jury

• four states use an old english rule of contributory negligence in which any contribution or finding of negligence completely bars plaintiffs ability to recover damages

• major impacts for business include those using delivery or fleet services, premises liability, workplace accidents and workers compensation claims

joint and several liability

a responsibility that is shared by 2 or more parties to a lawsuit

• a wronged party may sue any or all of them, and collect the total damages awarded by a court from any or all of them

key takeaways

• makes all parties in a suit responsible for damages up to the entire amount awarded

• if one party is unable to pay, the others harmed must pay more than their share

• comparative fault loss limit an individual’s payment to a proportion based on the extent of their fault

direct liability

for the torts of their employees or agents when the business negligently hires/trains, gives faulty instructions, or fails to supervise property the agent in the conduct of agent’s work

indirect(vicarious liability)

respondent superior — “let the superior (master) answer (for the wrongs of the servant)

*we are going to hold somebody responsible vicariously — through the actions/deeds of another party that they were supposed to be able to control

elements of tort liability

• was the act committed within the time and space limits of the employment/agency?

• was the offense incidental to/similar to the responsibilities the employee/agent is authorized to perform?

• was the employee/agent motivated to benefit the employer/principle by committing the act?

• was the employee/agent on a frolic (own purpose) or a detour (still within the scope of a business purpose)?

strict liability

liability that does not depend on proof of negligence or intent to do harm, but that is based instead on a duty to compensate (for all harms caused by a covered activity)

• imposed upon a small number of inherently dangerous activities

ex: handling wild animals, handling hazardous materials

applied to products liability

a seller is liable for harm caused by a product sold in a defective condition that is “unreasonably dangerous” to the user or consumer, even if the seller exercised all possible care in preparing and selling the product

elements of strict liability

1. the product as shipped and sold had an “unreasonably dangerous” defect (design, manufacturing, warnings, instructions)

2. the defect caused the injury or damage during intended or ordinary use

major assumptions of strict liability

1. assumption of risk with known defects

2. owner modification or unintended use

3. modification or misuse by 3rd party

special negligence doctrine

modify the duty — breach — causation — damages, burden of proof on plaintiffs by alleviating the plaintiff’s burden to prove breach

• courts/juries may infer breach of duty by circumstances present in factors

negligence per se

defendant violates a statute or ordinance that gives rise to the injury of plaintiff suffers

• the plaintiff must be in the class of persons designed to be protected by the statute and the harm suffered must be of the type the statute was intended to prevent

res ipsa loquitur

“the thing speaks for itself”

• presumption of negligence against a defendant where harm occurs as the result of obvious negligence and harm could not have occurred by any other means than defendants negligence

compensatory damages

• most common

• aim to compensate injured parties for losses they’ve suffered

economic damages

“special damages”

• quantifiable losses that a plaintiff has suffered by the wrongful act of the defendant

non economic damages

“general damages”

• compensate the injured party of non-monetary losses that are more subjective and difficult to quantify

ex: pain/suffering, emotional distress, loss of enjoyment of life, loss of consortium

nominal damages

symbolic or token damages awarded when a plaintiff has not suffered significant harm or financial loss — their rights have been violated

• minimal

punitive damages

“exemplary damages”

• intentional bad faith or fraud

• awarded when defendants conduct is deemed malicious

• purpose is to punish the defendant and deter others for engaging in similar conduct

*sends a message