Decision Making and Business Law Fundamentals

Decision-Making Models

• Decision-making involves dealing with alternatives, uncertainty, high risks, interpersonal complexity, consequences, and various issues.

Lecture 6: Decision-Making and Legal Aspects

• Focuses on decision-making related to the form of business organization and legal aspects of business law fundamentals.

Learning Objectives

• Describe the advantages and disadvantages of the sole proprietorship.
• Describe the two types of business partnership and their advantages and disadvantages.
• Describe the corporate form of organization and its advantages and disadvantages.
• Assess the advantages and disadvantages of mergers, acquisitions, and leveraged buyouts.
• Propose an appropriate organizational form for a startup business.

Various Forms of Business Ownership Structure

• Table 1 outlines ownership, taxation, liability, and use cases for various business structures.
• Sole Proprietorship
  • Ownership: One owner.
  • Taxation: Individual income taxed.
  • Liability: Unlimited.
  • Use: Owned by a single individual; easiest way to conduct business.
• Partnership
  • Ownership: Two or more owners.
  • Taxation: Individual owners’ income taxed.
  • Liability: Somewhat limited.
  • Use: Easy way for two individuals to conduct business.
• Corporation
  • Ownership: Any number of shareholders.
  • Taxation: Corporation and shareholder taxed.
  • Liability: Limited.
  • Use: A legal entity with shareholders or stockholders.
• S Corporation
  • Ownership: Up to 100 shareholders.
  • Taxation: Taxed as a partnership.
  • Liability: Limited.
  • Use: A legal entity with tax advantages for restricted number of shareholders.
• Limited Liability Company
  • Ownership: Unlimited number of shareholders.
  • Taxation: Taxed as a partnership, often with pass-through taxation.
  • Liability: Limited.
  • Use: Avoidance of personal lawsuits.

Business Ownership Structures by Country

• Various countries and their equivalents for business ownership structures are:
  • France: Entreprise Individuelle (EI), Société en Nom Collectif (SNC), Société Anonyme (SA), Société à Responsabilité Limitée (SARL).
  • Croatia: Obrt, Javno trgovačko društvo (JTD), Dioničko društvo (d.d.), Društvo s ograničenom odgovornošću (d.o.o.).
  • Slovakia: Živnostník, Verejná obchodná spoločnosť (v.o.s.), Akciová spoločnosť (a.s.), Spoločnosť s ručením obmedzeným (s.r.o.).
  • Czech Republic: Živnostník (OSVČ), Veřejná obchodní společnost (v.o.s.), Akciová společnost (a.s.), Společnost s ručením omezeným (s.r.o.).
  • Spain: Autónomo, Sociedad Colectiva (S.C.), Sociedad Anónima (S.A.), Sociedad de Responsabilidad Limitada (S.L. / S.R.L.).
  • United States: Sole Proprietorship, General Partnership / Limited Partnership, C Corporation, Limited Liability Company (LLC).
  • Cyprus: Self-employed (Ελεύθερος Επαγγελματίας), General Partnership (Ομόρρυθμη Εταιρεία - OE), Public Limited Company (PLC) / Private Limited Company (LTD), Limited Liability Company (LTD).

Sole Proprietorships

• Businesses owned and operated by one individual.
• Most common form of business organization.
• Typically employ fewer than 50 people.
• Comprise nearly three-quarters of all businesses.

Advantages of Sole Proprietorships

• Ease and cost of formation.
• Secrecy.
• Distribution and use of profits.
• Flexibility and control of the business.
• Minimal government regulation.
• Direct taxation.
• Ease of closing the business.

Disadvantages of Sole Proprietorships

• Unlimited liability.
• Limited sources of funds.
• Limited skills.
• Lack of continuity.
• Lack of qualified employees.

Polling Question 1

• Sarah wants to start an Etsy shop selling homemade goods and is considering forming her business as a Sole Proprietorship. What disadvantages should she be most concerned about?
  • A. Unlimited liability
  • B. Limited sources of funds
  • C. Lack of continuity
  • D. Lack of qualified employees

Partnerships

• A form of business organization defined as “an association of two or more persons who carry on as co-owners of a business for profit”.
• Least used form of business.
• Typically larger than sole proprietorships but smaller than corporations.

Types of Partnerships

• General partnership: Involves a complete sharing in the management of a business.
• Limited partnership: Has at least one general partner, who assumes unlimited liability, and at least one limited partner, whose liability is limited to their investment in the business.
• Master limited partnership (MLP): a limited partnership traded on securities exchanges.
• Articles of Partnership: Legal documents that set forth the basic agreement between partners.

Advantages of Partnerships

• Ease of organization.
• Availability of capital and credit.
• Combined knowledge and skills.
• More flexible decision making than corporations.
• Fewer regulatory controls compared to corporations.

Disadvantages of Partnerships

• Unlimited liability (for general partners).
• Potential for responsibilities and conflicts among partners.
• Limited life of the partnership.
• Challenges in distribution of profits.
• Limited sources of funds.
• Taxation of Partnerships: Partnerships are quasi-taxable organizations, meaning they do not pay taxes directly. Instead, profits and losses are passed through to the partners, who report them on their individual tax returns.

Corporations

• A legal entity, created by the state, whose assets and liabilities are separate from its owners.
• Has many of the rights, duties, and powers of a person.
• Can own and transfer property.
• Can enter into contracts.
• Can sue and be sued in court.

Stock Dividends

Creating a Corporation

• Incorporators create corporation.
• Each state has a specific procedure called chartering the corporation.
• Articles of incorporation are the legal documents.
• State issues a corporate charter to the company.
• Owners establish by laws and elect a board of directors.
• Spain: "Escritura de constitución" (Deed of Incorporation).
• France: "Statuts de la société" (Company Statutes).
• Czech Republic and Slovakia: Zakladatelská listina, Společenská smlouva, Stanovy.
• Cyprus: Καταστατικό if 1 Founder, Ιδρυτικό Έγγραφο και Καταστατικό if Multiple Founders.

Types of Corporations

• Private corporation
  • Owned by just one or a few people closely involved in managing the business.
  • No stock is sold to public.
  • Not required to disclose financial information publicly.
  • May become public via initial public offering (IPO).
  • Going public allows companies to raise capital from a wider range of investors, which is a key motivation for many firms.

Stock Markets

• Euronext: Operates in multiple countries including France, Portugal, Belgium, and the Netherlands.
• London Stock Exchange (LSE): One of the largest and most prominent exchanges in Europe.
• Frankfurt Stock Exchange: Operated by Deutsche Börse in Germany.
• SIX Swiss Exchange: In Switzerland.
• Madrid Stock Exchange (BME): In Spain.
• Amsterdam Stock Exchange: Part of Euronext.

America’s Largest Private Companies

• Koch Industries: Revenue $115.0$ billion, 100,000 employees.
• Cargill: Revenue $114.6$ billion, 155,000 employees.
• Deloitte: Revenue $47.6$ billion, 330,000 employees.
• PricewaterhouseCoopers: Revenue $43.0$ billion, 276,000 employees.
• Publix Super Markets: Revenue $38.1$ billion, 207,000 employees.
• Ernst & Young: Revenue $37.2$ billion, 289,965 employees.
• Mars: Revenue $37.0$ billion, 130,000 employees.
• Reyes Holdings: Revenue $35.0$ billion, 29,000 employees.
• H-E-B: Revenue $31.2$ billion, 135,500 employees.
• Pilot Flying J: Revenue $29.5$ billion, 26,696 employees.

Types of Corporations (Continued)

• Public corporation
  • A corporation whose stock anyone may buy, sell, or trade.
  • May be taken private when all firm’s stock is purchased and can no longer be sold publicly.
  • Two types of public corporations:
    • Quasi-public corporations are owned and operated by the federal, state, or local government.
    • Nonprofit corporations.
  • To become public they have to go through an entire process by filing with the Securities and Exchange Commission (SEC), which makes sure that the company meets all the requirements needed to be public.

Elements of a Corporation

• Board of directors
  • Elected by stockholders.
  • Sets long-range objectives of the corporation.
  • Ensures objectives are met on schedule.
  • Hires corporate officers.
  • Outside directors; Inside directors.

Elements of a Corporation (Continued)

• Stock ownership
  • Preferred stock
    • Do not have say in running the company but have a claim to profits before other stockholders.
  • Common stock
    • Do not get preferential treatment regarding dividends but have voting rights.
    • May vote by proxy.
    • Have preemptive rights (Common stockholders have the first right, called a preemptive right, to purchase new shares of the stock from the corporation).

Advantages of Corporations

• Limited liability.
• Ease of transfer of ownership.
• Perpetual life.
• External sources of funds.
• Expansion potential.

Disadvantages of Corporations

• Double taxation.
• Complexity in forming a corporation.
• Disclosure of information.
• Employee-owner separation.

Other Types of Ownership

• Joint Ventures: A partnership established for a specific project or for a limited time.
• S Corporations: Corporation taxed as though it were a partnership with restrictions on shareholders.

Other Types of Ownership

• Limited Liability Companies (LLCs): Form of ownership that provides limited liability and taxation like a partnership but places fewer restrictions on members.
• LLCs naturally have a more free and flexible management structure, with owners, or members, being the sole decision-makers.
• No need for board of directors.
• Cooperatives (co-ops): Organizations composed of individuals or small businesses that band together to reap the benefits of belonging to a larger organization.
• Many cooperatives exist in small farming communities.
• A co-op can purchase supplies in large quantities and pass the savings on to its members.

Trends in Business Ownership: Mergers and Acquisitions

• Mergers: The combination of two companies to form a new company.
  • Horizontal merger: Firms that make and sell similar products to the same customers merge.
  • Vertical merger: Companies operating at different but related levels of an industry merge.
  • Conglomerate merger: Two firms in unrelated industries merge.
• Acquisitions: The purchase of one company by another, usually by buying its stock.

Largest Mergers of All Time

• Vodafone & Mannesmann AG: $180$ billion.
• America Online (AOL) & Time Warner: $165$ billion.
• Verizon Communications & Vodafone: $130$ billion.
• Dow Chemical & DuPont: $130$ billion.
• AB InBev & SABMiller: $104$ billion.

Trends in Business Ownership: Mergers and Acquisitions

• When a company (or an individual), sometimes called a corporate raider, wants to acquire or take over another company, it first offers to buy some or all of the other company’s stock at a premium over its current price in a tender offer.
• Techniques to head off hostile takeover
  • Ask stockholders not to sell.
  • File a lawsuit.
  • Poison pill: The firm allows stockholders to buy more shares of stock at prices lower than the current market value.
  • Shark repellant: Management requires a large majority of stockholders to approve the takeover.
  • White knight: A more acceptable firm that is willing to acquire the threatened company.
• Leveraged buyout (LBO): A group of investors borrows money to acquire a company, using the assets of the purchased company to guarantee repayment of the loan.

Polling Question 3

• Which technique(s) for heading off a hostile takeover can diminish shareholder value?
  • A. White knight.
  • B. White knight and poison pill.
  • C. Shark repellant and poison pill.
  • D. Corporate raider.

Business Law

• Refers to the guidelines, rules, and regulations that govern the conduct of business.
• Problems arise from conflicts, false claims, misunderstandings, and disputes over contracts or agreements.
• The regulatory environment attempts to create a fair playing field.

Sources of Law

• Criminal Law
  • Prohibits a specific kind of action.
  • Imposes a fine or imprisonment.
  • Violation of criminal law is called a crime.
  • Enforced by the state or nation.
• Civil Law
  • All laws not classified as criminal.
  • Specifies rights and duties of individuals and organizations.
  • May result in fines or other punishments but not imprisonment.
  • Enforced through the court system by individuals or organizations.

Sources of Law

• Sources of criminal and civil laws include:
  1. The Constitution (constitutional law).
  2. Precedents established by judges (common law).
  3. Federal and state statutes (statutory law).
  4. Federal and state administrative agencies (administrative law).

Courts and the Resolution of Disputes

• Lawsuits
  • One individual or organization takes another to court using civil laws.
  • Primary method of resolving conflicts and business disputes.
  • Courts decide if harm or damage has occurred.
  • Business lawsuits occur frequently.
  • Most business lawsuits involve a request for a sum of money.

Courts and the Resolution of Disputes

• The Court System
  • Jurisdiction: The legal power of a court, through a judge, to interpret and apply the law and make a binding decision in a particular case.
  • Trial court: Determines the facts of the case, decides which law is pertinent, and applies those laws to resolve the dispute.
  • Appellate court: Deals solely with appeals relating to the interpretation of the law.

Courts and the Resolution of Disputes

• Alternative Dispute Resolution Methods
  • Mediation: A form of negotiation to resolve a dispute by bringing in one or more third- party mediators to help reach a settlement.
  • Arbitration: Settlement of a labor/management dispute by a third party whose solution is legally binding and enforceable.

Courts and the Resolution of Disputes

• Alternative Dispute Resolution Methods (Continued)
  • Mini-trial: Both parties agree to present a summarized version of their case to an independent third party, who advises the probable outcome if the case were to be tried.
  • Private court system: An independent third party resolves the case after hearing both sides of the story.

Polling Question 1

• You believe your boss declined your promotion because of your race. Instead of suing, you are looking for an alternative way to solve the issue. What would you select?
  • A. Mediation.
  • B. Arbitration.
  • C. Mini-trial.
  • D. Private court system.

Regulatory Administrative Agencies

• Federal and state administrative agencies also have some judicial powers.
• Federal regulatory agencies influence many business activities.
• Federal Trade Commission (FTC)
  • Regulatory agency unit that most influences business activities related to questionable practices that create disputes between businesses and their customers.
  • When it has reason to believe a firm is violating a law, FTC issues a complaint.
  • Can seek civil penalties.

Regulatory Administrative Agencies, Examples

• Food and Drug Administration (FDA): Enforces regulations prohibiting the sale and distribution of adulterated, misbranded, or hazardous food and drug products.
• Environmental Protection Agency (EPA): Develops and enforces environmental protection standards and conducts research into the adverse effects of pollution.
• Consumer Product Safety Commission (CPSC): Recalls hundreds of products year, ranging from small toys to major appliances.

Important Elements of Business Law

• The Uniform Commercial Code (UCC): Set of statutory laws covering several business law topics.
• Article II of the UCC
  • Sales agreements.
  • Warranties
    • Express warranty.
    • Implied warranty.

Important Elements of Business Law

• The Law of Torts and Fraud
  • Tort: A private or civil wrong other than breach of contract.
  • Fraud: A purposefully unlawful act to deceive or manipulate in order to damage others.
  • Product liability: Businesses’ legal responsibility for any negligence in design, production, sale, and consumption of products.
  • Consumer has to prove:
    • The product was defective.
    • The defect caused the injury.
    • The defect made the product unreasonably dangerous.

Important Elements of Business Law

• The Law of Contracts
  • Contract: A mutual agreement between two or more parties that can be enforced in court if one party chooses not to comply with the terms of the contract.
  • Contracts that most states say must be in writing are:
    • Contracts involving sale of land or an interest in land.
    • Contracts to pay someone else’s debt.
    • Contracts that cannot be fulfilled within one year.
    • Contracts for sale of goods that cost more than $500$ (required by UCC).

Important Elements of Business Law

• The Law of Contracts (Continued)
  • To be enforceable a contract must contain the following elements:
    • Voluntary agreement.
    • Consideration.
    • Contractual capacity of the parties.
    • Legality.
  • Breach of contract: The failure or refusal of a party to contract to live up to promises.
  • Breaching party may be liable for monetary damages.

Important Elements of Business Law

• The Law of Agency
  • Agency: A common business relationship created when one person acts on behalf of another and under that person’s control.
    • Principal.
    • Agent.
  • Created by mutual agreement.
  • Can be terminated under certain conditions.
  • Authority is through power of attorney; Legal document authorizing a person to act as someone else’s agent.

Important Elements of Business Law

• The Law of Property
  • Property law covers the ownership and transfer of real, personal, and intellectual property.
    • Real property; Real estate and everything permanently attached to it.
    • Personal property; All other property that is not real property.
      • Tangible property.
      • Intangible property.

Important Elements of Business Law

• The Law of Property (Continued)
  • Intellectual property
    • Property that is generated by a person’s creative activities such as musical works, artwork, books, and computer software.
      • Copyrights.
      • Patents.
      • Trademark.
      • Trade dress.

Important Elements of Business Law

• The Law of Bankruptcy
  • Sometimes businesses cannot fulfill their financial obligations.
  • Individuals or companies may ask a bankruptcy court to declare them unable to pay their debts.
  • Releases them from the obligation of repaying those debts.

Types of Bankruptcy in US

• Chapter 7: Requires that the business be dissolved and its assets liquidated to pay off the debts.
• Chapter 11: Temporarily frees a business from its financial obligations while it reorganizes and works out a payment plan with its creditors.
• Chapter 13: Similar to Chapter 11 but limited to individuals. This proceeding allows an individual to establish a three- to five-year plan for repaying debt.

Laws Affecting Business Practices

• Sherman Antitrust Act: Passed in 1890 to prevent businesses from restraining trade and monopolizing markets.
• Clayton Act: Prohibits price discrimination, tying and exclusive agreements, and the acquisition of stock in another corporation where the effect may be to substantially lessen competition or tend to create a monopoly.

The Internet: Legal and Regulatory Issues

• Personal privacy: Few regulations on use of information by businesses.
• U.S. does not have comprehensive data privacy laws.
• California Consumer Privacy Act (CCPA): Gives consumers more control over how their data is collected and used.
• California Privacy Rights Act (CPRA): Created additional business requirements.
• EU General Data Protection Regulation (GDPR).
• Children’s Online Privacy Protection Act (COPPA).

The Internet: Legal and Regulatory Issues

• The FTC has rules for online advertising and marketing
  • To avoid deception, all online communication:
    • Must tell the truth.
    • Cannot mislead consumers.
    • Claims must be substantiated.
  • Influencer marketing: Influencers must clearly disclose any connection with the brands they promote.

Legal Pressure for Responsible Business Conduct

• Organizational accountability
  • Federal Sentencing Guidelines for Organizations (FSGO)
    • Responsible employees and the firms that employ them are held accountable for violations of federal law.
    • Misconduct rests on top management.
    • Employees to be trained and monitored to deter unethical acts.
    • Top management must cultivate high ethical standards.

Seven Steps to Compliance

1. Develop standards and procedures to reduce the propensity for criminal conduct.
2. Designate a high-level compliance manager or ethics officer to oversee the compliance program.
3. Avoid delegating authority to people known to have a propensity to engage in misconduct.
4. Communicate standards and procedures to employees, other agents, and independent contractors through training programs and publications.
5. Establish systems to monitor and audit misconduct and to allow employees and agents to report criminal activity.
6. Enforce standards and punishments consistently across all employees in the organization.
7. Respond immediately to misconduct and take reasonable steps to prevent further criminal conduct.