Introduction

Business law encompasses a whole variety of legal topics that impacts the daily
operation of a business venture. In this week’s lecture, we will begin with a general
introduction into what is business law and how it relates to the formation of business
organizations. Attention will be given to the general types of activities such
organizations participate in and what fiduciary duties are required within each. An
overview of civil litigation will be presented to familiarize students with the
consequences of questionable business behavior.
Even before an entrepreneurial venture can realistically open its doors, there must be a
pre-organizational phase that identifies what steps need to be taken to establish the
enterprise in question.
For example, have you done research into the lucrativeness of the product and/or
service you intend to provide to the public? Have you conducted market research to
determine how your business venture will compete against others, especially in your
region? How will you create brand awareness? Will your venture be localized,
nationwide or global?
Have you determined your start-up costs? Have you estimated costs and expenses for
your first year of operation? Do you have sufficient capital to fund your enterprise? Do
you need to apply for a business loan? Do you intend to finance your venture by
seeking out investors or launching an initial public offering of shares? Does the type of
business structure trigger different tax consequences?
What does local, state and federal law have to say about the product and/or services
you intend on providing? Are there certain documents and fees that need to be filed to
establish the enterprise? Are there certain licenses or approvals that need to be first
procured before dealing with the public?
This is just a sampling of relevant things to consider. As such, establishing a business
enterprise encompasses working knowledge of the entire structure of a business
venture, plus each element of its operation may have its own legal compliance
requirements.
As we begin to evaluate the various aspects of business law, take a look at this 5:42
minute video on What is Business Law: Definition and Overview by Study.com. While
watching the video, keep in mind the following points:
What is Business Law: Definition and Overview

 Consider what encompasses business law

BUSS213 Week 2 Lecture – Business Organization 2

 Reflect on how business law includes knowledge of federal and regulations

 Assess the value of drafting enforceable agreements
This video provides an excellent summary of how business law encompasses a wide
array of activities and interactions that includes attracting investors, forming alliances
with other businesses to create strategic partnerships, and envisioning a marketing plan
to establish brand awareness. One of the more challenging interactions is meeting the
regulatory demands that federal and state law can impose on a business. This might
require procuring operating permits that evidence business compliance with health or
safety laws, waste emission standards, or financial disclosure statements. In addition,
daily operation of business will involve the formation of business relationships. This is
primarily accomplished through the creation of contractual agreements. The key point
is that contracts should be written as a win-win opportunity for all involved parties.
With this in mind, we can consider how business law encompasses many different
types of interactions with both government actor and private entities.

Entity Formation

A major part of your preliminary investigation in establishing a business is determining

the right structure for the type of products and/or services you plan on providing to the
public. An easy way to conceptualize a business structure is to think of a business as a
building. Do you want to have a simple structure like a small store front that is easy to
manage, or do you envision something bigger as a skyscraper that has multiple floors?

Sole Proprietorships

At its most simple form of structure, a business may choose to be a sole proprietorship.
Conceptually, you can think of a sole proprietorship as a small one-story structure. A
sole proprietorship has the least amount of paperwork requirements to start-up and is
the most manageable of any type of business entity.
For most new entrepreneurs, there is great enthusiasm over the prospective of starting a
their own business where they are the boss and not working for someone else. Creating
a name brand for their goods or services that reflects the individualism of the
entrepreneur is an empowering motivator for anyone wishing to break away from the
constraints that a large business structure often times imposes. The feeling of
independence from having to meet quotas or commission sales goals can offer a more
fulfilling career because there is less stress.
That is not to say that being a sole proprietor is an easy endeavor. To the contrary, a sole
proprietor wears many hats from CEO to janitor. The job satisfaction comes from
knowing that at the end of the day, your hard work was for yourself and not for
someone else.
BUSS213 Week 2 Lecture – Business Organization 3

In a sole proprietorship, an entrepreneur will commonly provide goods or services that

are localized in scope and usually, the goods and/or services provided do not expose
the entrepreneur to personal liability. To avoid incurring personalized business debts,
proper financial planning can help to allocate money in the right direction. For example,
rather than renting expense office suites, executive business centers offer affordable day
offices for an hourly rate.
Any potential liability can be addressed through general liability insurance. For
instance, in some cases, a small store front operation, like a stationary store, can run as a
sole proprietorship that has premise liability insurance to cover any slip and falls that
might happen in the store.
Another factor attractive to entrepreneurs is that start-up costs and operational
expenses can be minimal especially when starting a home based business.
So, for example, someone, who has a home-based operation of doing graphic designing
of brochures for local real estate agents, can function as a sole proprietorship with little
out-of-pocket expense. A person, who is a foreign language interpreter that provides
translation services to businesses, works independently and can hold themselves out as
a sole proprietor.
As such, a sole proprietorship can take many forms. Administrative work to begin
operations might simply consist of getting a required business license and possibly the
purchase of insurance. Federal and state tax filing are likewise simple and consist of an
additional form filed with personal income tax returns.
After evaluating sole proprietorships, take a look at this 5:55 minute video, Sole
Proprietorship by Jeff Short. While watching the video, remember the following points:
Sole Proprietorship

 Compare and contrast the pros and cons of sole proprietorships.

 Reflect on how the sole proprietor is responsible for all debts incurred
 Consider the deductions that can be made to taxable income
This video provides an excellent summary of how sole proprietorships function
including identification of its advantages and disadvantages. On the positive end, there
is great self-satisfaction in being your own boss and being the final decision-maker.
Paperwork in creating this business structure is minimal. On the negative side, the
business is only as successful as one’s talents. Long work hours can take away from the
flexibility once that that sole proprietorships could offer. Another key factor for
reflection is that sole proprietor is responsible for all incurred business debts. As a
result, the sole proprietor’s personal assets, such as bank accounts and residential
property can be attached by creditors. However, if the sole proprietor is careful in
conducting business and procures general liability insurance for all transacted business
BUSS213 Week 2 Lecture – Business Organization 4

activities, there should be no issue with incurred liability. In fact, revenue streams can
be quite lucrative because deductions on business related expenses can lower taxable
income. Such deductions can include renting occasional office space as in day offices to
meet clients. Cell phone and computer purchases also provide IRS-recognized business
expenses.

Now that we have covered sole proprietorships, let us take a quick break and review
the material with an ungraded knowledge check.
Check Your Knowledge
True or False: A sole proprietorship involves one or more people who have entered
together into a business venture

Answer: False. Only one person operates a sole proprietorship

Fill-In The Gap: From a legal liability perspective, the sole proprietor is responsible for
.

A. only bank loans

B. all incurred business debts.
C. only for court awarded judgments against the business
D. None of the above

Answer: B. A sole proprietor takes on the personal responsibility for repaying all
business debts incurred.

True or False: A sole proprietor has certain tax deductions that an employed person
does not

Answer: True. A sole proprietor can take itemized deductions that will lower taxable
income.

Partnerships

Now, let say you wish to have a step-up in your venture to make it a little bigger
because it will involve not just you but others who wish to join you in providing goods
and/or services.
BUSS213 Week 2 Lecture – Business Organization 5

Early partnerships in world history can be found amongst farmers or merchants who
found it resourceful to band together to increase their trading power and marketing
presence. In this regard, it makes sense that if one works with others in a joint effort,
there will be a Now, let say you wish to have a step-up in your venture to make it a little bigger
because it will involve not just you but others who wish to join you in providing goods and/or
services.
Early partnerships in world history can be found amongst farmers or merchants who
found it resourceful to band together to increase their trading power and marketing
presence. In this regard, it makes sense that if one works with others in a joint effort,
there will be a greater likelihood of success. No one person can be everywhere or do
everything at once.
Maybe you recognized that if you had the talents and skills of other individuals, you
could be making more money by expanding the degree of goods and/or services being
offered to the public. When a business operation has the potential to expand and offer
more to customers, an entrepreneur realizes that micromanagement is not an effective
way to operate an enterprise.
A partnership form of entity structure consists of more than one person who is working
in conjunction with others (generally between individuals but partnerships can also be
between companies) in providing goods and/or services to the public. As opposed to a
sole proprietorship, where one person has the responsibility to do everything, a
partnership can do a division of labor such that the best talents of each person can be
effectively used.
So, for example, maybe in a two-person partnership, one may be very talented at
marketing while another is more of a numbers person who is good at accounting and
financial management.
There are two types of partnerships (ReferenceforBusiness.com, 2019):
GENERAL PARTNERSHIPS: In this standard form of partnership, all of the
partners are equally responsible for the business's debts and liabilities. In
addition, all partners are allowed to be involved in the management of the
company as each partner has equal rights to control and manage the business.
LIMITED PARTNERSHIPS: In a limited partnership, one or more partners are
general partners, and one or more are limited partners. General partners are
personally liable for the business's debts and judgments against the business;
they can also be directly involved in the management. Limited partners are
essentially investors (silent partners, so to speak) who do not participate in the
company's management and who are also not liable beyond their investment in
the business.
BUSS213 Week 2 Lecture – Business Organization 6

Moreover, in an effort to ensure agreement amongst the partners as to the duties and
responsibilities of each, a partnership agreement is created, usually with the assistance
of legal counsel. Other items to be addressed include identification of the monetary
amounts each partner is contributing to the venture, identification of the triggering
events that can result in the partnership closing down and the process for how one
partner can buyout the other’s interest in the partnership.
Tax filings are similar to that of a sole proprietorship in that each partner submits an
additional form on their tax returns that lists the profits and losses individually
incurred in the running of the partnership.
Liability of the partnership extends to each partner in what is legally termed Joint and
Several Liability. This means that anyone who suffers a harm from the goods and/or
services provided by the partnership can sue either one or both partners and thereafter
recover their financial loss from the partnership assets (including a partner’s personal
assets) which is usually money in the partnership bank account. Here too, depending
on the nature of the loss, insurance coverage can be a huge advantage.
In total, you can see that a partnership has more internal happenings as an entrepreneur
must learn to work with another like-minded entrepreneur with the aid of a written
legal agreement that functions as a guide and reminder of the partners expect from each
other.
Conceptually, you can think of a partnership as a two-story structure.
As we review partnerships, take a look at this 4:43 minute video, What is
PARTNERSHIP? What does PARTNERSHIP mean? PARTNERSHIP meaning,
definition & explanation by The Audiopedia. While watching the video, remember the
following points:
What is PARTNERSHIP? What does PARTNERSHIP mean? PARTNERSHIP meaning,
definition & explanation

 Consider how multiple parties and entities can be partners in a business venture
 Reflect on how a partnership may result in holding equity
 Assess how business partnerships are often favored for tax purposes.
This video provides an example that business partnerships can consist of two or more
individuals, an individual and a company, or a multiple grouping of corporations
working together on a project. An excellent example of this is in a motion picture
production, when you see the opening credits, notice how many different production
companies are identified as the partners who brought you the film. The next time you
see a community-related construction project, notice how many entities (both people
and businesses) that are identified as the partners on the project. Partnerships can be
formed to hold equity interests in real estate, boats, antique cars, or even race horses. In
BUSS213 Week 2 Lecture – Business Organization 7

this regard, the equity held by a partnership can be more than just a business venture.
Another factor to consider is profits and losses incurred in support of the partnership
venture or held equity can be itemized on personal income tax returns so as to lower
taxable income. As such, itemized deductions will allow for many expenses that are not
achievable through a standard deduction.
Now that we have reviewed partnerships, let us take a quick break and review the
material with an ungraded knowledge check.
Check Your Knowledge
True or False: The partners in a partnership may be individuals, businesses, interest-
based organizations, schools, governments or combinations.
Answer: True. A partnership can consist of multiple parties that includes both
individuals and other business entities.

True or False: The partnership is typically enforceable by civil law

Answer: True. A partnership is generally established by written agreement, the breach
of which is a civil lawsuit.

Fill-In The Gap: Liability of the partnership extends to each partner in what is legally
termed .

A. Vicarious Liability
B. Strict Liability
C. Joint and Several Liability
D. None of the above

Answer: C. Liability of the partnership extends to each partner in what is legally termed
Joint and Several Liability such that liability can be applied to either one or more of the
partners.

Limited Liability Companies

Continuing on with our analogy to entity selection and physical business structures,
limited liability companies are more akin to a mid-size building. Here, we see a greater
legal demand placed upon entrepreneurs.
To begin with, limited liability companies are more of a recent creation in time and they
are established by state law. They began to be popularly used in the 1990s. Specifically,
Wyoming was the first state to authorize LLCs, and after an IRS ruling in 1988 that
Wyoming LLCs could be taxed as partnerships, other states began enacting LLC
BUSS213 Week 2 Lecture – Business Organization 8

statutes (Hamill, 2005). Such that by the mid-1990s, all 50 states had enacted legislation
authorizing the creation of LLCs.
The advantages are that all business transactions and acts are conducted in the name of
the limited liability company or as they are more commonly referred to as an LLC.
Thus, unlike a sole proprietorship or partnership, liability extends only to the LLC
assets and not to the individual parties who formed the LLC.
Those who formed the LLC are referred to as members and they can consist of either
one individual or more. Sometimes, an LLC might be made up of several other LLCs
and a corporation and/or other individual. Those who are members receive a
percentage of ownership known as a unit.
Unlike a sole proprietorship or partnership, an LLC requires registration with the state
within which it operates. The initial documents forming the LLC are known as the
Articles of Organization which are filed with the Secretary of State along with a
monetary fee.
The information that needs to be provided in the Articles of Organization is very basic.
The Secretary of State needs to know the name of the LLC, its business address, who is
named of the agent for service of process (i.e., the person representing the LLC who is
to receive official legal papers such as subpoenas and lawsuits), identification of how
many managers will operate the LLC, and finally, a signature is required of the person
who is organizing the LLC. The Articles are generally a single form. See the example
(screenshot) below of the Articles of Organization from California:
BUSS213 Week 2 Lecture – Business Organization 9
BUSS213 Week 2 Lecture – Business Organization 10

Once this registration process has been completed, then the LLC must create a set of
guidelines and rules by which the LLC is to be governed. This is known as the
Operating Agreement (in the corporate arena, this is known as by-laws).
Operating Agreements can be either very lengthy in page count or they can be written
so as to identify some very basic rules on how the LLC is to be governed. It all depends
on how detailed the members wish to be.
A typical LLC Operating Agreement would have a table of contents that at a minimum
would identify the following provisions in the document:
ARTICLE I Organizational Information
ARTICLE II Management of the Company
ARTICLE III Units; Membership
ARTICLE IV Capital Contributions and Distributions
ARTICLE V Dissolution and Liquidation
ARTICLE VI Miscellaneous Provisions
EXHIBITS:
SCHEDULES:

An initial meeting is routinely held that identifies the names of the LLC members and
the record of this meeting along with the official Articles of Organization is required to
open a bank account in the name of the LLC.
At this point, one can see that there is a greater degree of legal paper work involved in
forming an LLC and the assistance of legal counsel is generally sought. Yet, unlike
corporations, the amount of paper work that an LLC needs to contend with is much less
than that of a corporation which for many entrepreneurs makes it a more attractive
entity structure than a corporation. Also, unlike a corporation, an LLC is not required to
hold annual meetings of its members.
At the end of the year, profits and losses are noted on the individual members’ personal
tax return.
The drawback with an LLC is in its capitalization. As with a sole proprietorship and
partnership, investment comes from the LLC members and not like a corporation that
can sell interest in the company to the public through the sale of shares.
As we evaluate limited liability companies, take a look at this 3:57 minute video, What
is an LLC – Form an LLC by LLC University. While watching the video, keep in mind
the following points:
What is an LLC – Form an LLC
BUSS213 Week 2 Lecture – Business Organization 11

 Assess how by forming an LLC you create a “protective wall” between your
business and your personal assets.
 Consider that LLCs do not have to elect a board of directors.
 Reflect on how LLCs do not have to keep records of all their meetings.
This video provides an overview of how LLC’s are structured as an entity separate from
its members such that all incurred debts and liabilities are the sole responsibility of the
LLC. Creditors and debtors therefore can only go after LLC assets and not the personal
assets of the LLC members. This creates a “protective wall” between your business and
your personal assets Unlike a corporation, an LLC does not have a board of directors as
decision-makers. Rather, the LLC is owned and managed by the people who started the
LLC and they are referred to as members. If it happens that the members would rather
have a third-party do the managing of the LLC, this is likewise permitted. Moreover,
annual meetings of the LLC members are optional and when those meetings do happen,
there is no need for a record of the meeting to be kept. However, for purposes of smart
management, it is always a good idea to have a record of LLC decision-making.
Now that we have analyzed limited liability companies, let us take a quick break and
review the material with an ungraded knowledge check.
Check Your Knowledge
The initial documents forming the LLC are known as the Articles of Organization
Fill-In The Gap: The initial documents forming the LLC are known as the .

A. Bylaws
B. Minutes
C. Articles of Organization
D. Checklist

Answer: C. The initial documents forming the LLC are known as the Articles of
Organization which are filed with the Secretary of State where the business is located.

True or False: An LLC is a legal entity that protects your personal assets if your business
is sued.
Answer: True. An LLC offers protection of personal assets if the LLC is sued. Only LLC
assets are reachable in a lawsuit.

True or False: The owners of an LLC are called "members".

Answer: True. LLC Owners Are Called "Members".
BUSS213 Week 2 Lecture – Business Organization 12

Corporations

This is where we can conceptualize a large skyscraper as the physical form of our
business entity. Corporations have been in existence as a recognized business structure
for quite some time.
As you may recall from lecture one, in ancient Rome, the concept of corporations was
conceived as the word "corporation" as it derives from corpus, the Latin word for body,
or a "body of people" (Holton, 2013). Such bodies commonly had the right to own
property and make contracts, to receive gifts and legacies, to sue and be sued, and, in
general, to perform legal acts through representatives.
We also touched upon the landmark case of Santa Clara County v. Southern Pacific
Railroad Company, 118 U.S. 394 (1886) which held that that corporations were granted
Equal Protection under the 14th Amendment such that constitutional protections were
given to corporations ---this would become known as Corporate Personhood (Winkler,
2018).
As such, a corporation is empowered in its own name to enter into contracts, own
property, loan and borrow money, hire employees, own assets and pay taxes. This is
very similar to what existed in ancient Rome.
Like an LLC, a corporation must register with the office of the Secretary of State within
which it operates. This is accomplished by filing a document known as the Articles of
Incorporation along with the appropriate filing fee which is usually more than what is
required when filing for the LLC.
The information that needs to be provided in the Articles of Incorporation is very
similar to that of the LLC that we discussed above. The Secretary of State needs to know
the name of the corporation, its business address, who is named of the agent for service
of process (i.e., the person representing the corporation who is to receive official legal
papers such as subpoenas and lawsuits), and a signature is required of the person who
is doing the incorporating. The difference between a corporation and LLC is that there
needs to be identification of the number of shares the corporation is issuing. The
Articles are generally a single form. See the example (screenshot) below of the Articles
of Incorporation from California:
BUSS213 Week 2 Lecture – Business Organization 13
BUSS213 Week 2 Lecture – Business Organization 14

Once this step has been completed, a document known as the Bylaws must be written.
Bylaws can be thought of as the rules of the corporation’s operation. This includes
identifying the requirement of annual meetings and identifying how many board
members will be making the decisions that direct the path that the corporation is to
take. Those effectuating the orders of the board are known as the officers of the
corporation as they consist of a President, Vice-President, Treasurer, Secretary, and in
our modern cyber day word, a Chief Information Officer.
An initial meeting of the corporation wherein board directors are nominated and voted
on, and the percentage of investor ownership is identified. Ownership interests (also
known as stockholders) are referred to as shares of stock. In this regard, it is common
practice that the majority shares holders sit on the board of directors.
Note that annual meetings that identify decisions made during the year are required for
a corporation to maintain its legal status.
Corporations do file their own separate tax returns. There are hybrids of the corporate
structure known as the S-Corporation (limited in number to less than 100 shareholders)
and the Close Corporation (limited in number to less than 35 shareholders). The
advantage of the S-Corporation and Close Corporation is that tax returns can be filed on
the individual shareholders personal tax return.
Liability for corporate acts is placed solely on the corporation and not the individual
shareholders. The exception to this rule is when the corporation has lost its corporate
status such as in not having its annual meetings or failing to pay its annual corporate
fee to the state.
One of the main reasons why entrepreneurs create corporations is the ability it has to
raise capital. As noted above, other business entity structures are financed by the
entrepreneurs who start the business.
In a corporation, the entrepreneurs might make an initial financial investment but they
can also sell interests in the corporation (shares of stock) on public stock exchanges, like
the Ney York Stock Exchange NASDEQ. This beginning step in selling shares happen in
the form of what is called an Initial Public Offering (IPO).
Note that once a corporation offers its shares to the general public, the government
wishes to ensure that there is no fraud or misleading information being communicated
to the public that would unfairly entice them to purchase shares. The government body
entrusted to policing the conduct of corporations who sell on the exchanges is the US
Securities and Exchange Commission.
BUSS213 Week 2 Lecture – Business Organization 15

As we examine corporations, take a look at this 1:59 minute video, What is a

Corporation? by Investor Trading Academy. While watching the video, keep in mind
the following points:
What is a Corporation?

 Consider how a corporation has the right to enter into contracts, loan and borrow
money, sue and be sued, hire employees, own assets and pay taxes.
 Reflect on how in general, a corporation has all the legal rights of an individual.
 Assess how shareholders have the right to participate in the profits, through
dividends and/or the appreciation of stock, but are not held personally liable for
the company's debts.
This video provides an overview of corporations and its unique status as an individual
entity (known as Corporate Personhood) separate from its board of directors and
stockholders. As such a corporation is empowered in its own name to enter into
contracts, loan and borrow money, hire employees, own assets and pay taxes. So, when
a corporation seeks a business loan, it is the corporation, not the corporate officers, that
will receive the money and be obligated for its pay back. The power of the board of
directors to sue other businesses, private individuals, or even the government is another
example of a corporation having all the legal rights of an individual. This also includes
others having the right to sue the corporation. From a shareholder’s perspective, this
Corporate Personhood allows them to earn profits, through dividends and/or the
appreciation of stock, but they are not held personally liable for the company's debts.
Now that we have covered corporations, let us take a quick break and review the
material with an ungraded knowledge check.
Check Your Knowledge
True or False: A corporation is a legal entity that is separate and distinct from its
owners.
Answer: True. A corporation is considered its own separate legal entity entitled to
Equal Protection. This is commonly referred to as Corporate Personhood.

Multiple Choice: Which document is known as the rules of the corporation?

A. Bylaws
B. Articles of Incorporation
C. The Registry
D. Minutes of the Meeting

Answer: A. Bylaws set forth the operating rules of the corporation.

BUSS213 Week 2 Lecture – Business Organization 16

True or False: Corporations are given the right to exist by the state that issues their
charter.
Answer: True. State law controls the creation of a corporation.

Types of Business Law Activity

So, what exactly does a business do that will trigger knowledge of business law? The
answer to that question is actually quite simple: everything (or so it seems). For
example, if you decide to create web page, the content therein should be sent for
copyright protection. If you hire a public relations firm, you will need to have a contract
in place that identifies precisely the terms and conditions governing services of the
public relations firm to your business venture. Even the selection of your business name
should be investigated to ensure that it does not infringe on any trademarked names or
other business names registered with the Secretary of State.

Legal Compliance

As such, there is a lot of checking with relevant authorities to determine if you are
operating your business so that it is legally compliant with all local, state and federal
regulations. This can be many.
At the local level, whether it be a sole proprietorship or corporation, the enterprise must
obtain a business license which also requires payment of a fee. Consider the following
example (Businesslicenses.com, 2019):
A coffee shop in New York, NY may require up to 16 business licenses and/or
permits, including a state-specific New York beverage license. It may not be easy
to get that license in New York and it may require obscure documents like
an Application for Certificate of Approval for Bottled or Bulk Water Facilities.
Then there is a filing with the local government known as the DBA (doing business as)
which requires that the business publish its name in the newspaper for a few weeks as
public notice that this enterprise will be coming into existence. In Los Angeles County
(2019), this requirement is stated as follows:
Prior to opening a business, a business name must be selected that is not
already in use, and then registered. Fictitious business name statements
must be filed with the Registrar-Recorder/County Clerk's Office.

Renting office space requires the entering into a contract. Some businesses will need to
lease photocopy machines and other office equipment including furniture. In some
cases, local government will assess taxes on that office furniture and equipment that
BUSS213 Week 2 Lecture – Business Organization 17

must be paid. See this example from the Treasurer-Tax Collector’s Office from Orange
County, California (2019):
The Unsecured tax bill is for the business personal property which includes
tangible property owned, claimed, possessed or controlled in the conduct of a
business, profession or trade. Business personal property includes, but is not
limited to:

 Machinery
 Equipment
 Furniture
 Fax Machines
 Photocopiers
 Computers
 Telephones
 Desks and Chairs
 Bookcases
 Supplies

Sometimes, state and federal licenses and permits are required for the business be
operating legally. If the business is contracting with local, state or federal government
bodies, there are a plethora of requirements that must be complied with before the
business can be awarded the contract. The most complicate and challenging to meet are
those related to federal contracts and their related requirements that are known as the
Federal Acquisition Regulations.
The hiring of employees likewise demands that certain requirements be meet such as
yearly training of employees on zero-tolerance of sexual harassment. Workers’
Compensation insurance is another requirement in every state. Labor laws relating to
when employees are to be paid, when breaks and lunch can occur, and correct
classification of personnel as employees as opposed to independent contractors are
demands to be in place as soon as the business begins operation.
If the business is a corporation that trades on the New York Stock Exchange or
NASDEQ, they soon realize that selling stock to the public requires satisfaction of many
rules implemented and policed by the US Securities Exchange Commission (SEC). Here,
a lot of paperwork is regularly submitted to the SEC and there are certain disclosure
requirements that must be met when an event will affect the value of the stock. This
includes members of a board of directors and majority shareholders having to refrain
from certain buy-sell conduct.
Another area of legal compliance that is of major concern to businesses, employees,
customers, and society at-large happens to be cyber business laws. Specifically, we are
beginning to see states like California and New York leading the way in crafting data
BUSS213 Week 2 Lecture – Business Organization 18

breach notification laws which demand businesses immediately notify employees,

customers, investors and other stakeholders when personal private information has
been stolen via a cyber intrusion (hacking). Other cyber laws can concern what a
business does with personal identifiable information and for how long such information
can be held. Moreover, if a business has medical related information on its employees,
there is an obligation for that business to safeguard that information from cyber
intrusions.
Although there are many definitions from government agencies and state laws as to
what constitutes personal identifiable information, personal identifiable information
includes but is not limited to the following (ITLawwiki, 2019):

 Name, such as full name, maiden name, mother’s maiden name, or alias, in
connection with one or more of the following:
 Personal identification number, such as social security numbers, passport
numbers, driver’s license numbers, taxpayer identification number, or financial
account credit card number
 Address information, such as street address or email address
 Personal characteristics, including photographic image (especially of face or
other distinguishing characteristic), fingerprints, handwriting, or other biometric
image or template data (e.g., retina scans, voice signature, or facial geometry)
 Telephone number
 Vehicle registration plate number
 Information about an individual that is linked or linkable to one of the above
(e.g., date of birth, place of birth, race, religion, weight, activities, geographical
markers, employment information, medical information, education information,
or financial information).
These legal compliance issues are not all encompassing as there are many more
mandates and regulations that a business must comply with in order to be legally
operating. Where such legal compliance has not been satisfied, the ramifications can be
that the business cannot open, or if they are operating, a fine has to be paid. In some
cases, as where the business has a contract with a government body, that contracting
can be declared null and void.
Now that we have assessed the topic of legal compliance, let us take a quick break and
review the material with an ungraded knowledge check.
Check Your Knowledge
True or False: Local, state and federal regulations may have certain mandates that
businesses need to follow.
BUSS213 Week 2 Lecture – Business Organization 19

Answer: True. There can be various regulations that businesses need to follow from
either local, state or federal government.

Multiple Choice: When a business holds medical related information on its employees,
what is the obligation of that business?

A. Sell the information to health care providers

B. To safeguard that information from cyber intrusions
C. Keep that information for five years
D. None of the above

Answer: B. The business must ensure that the information is never compromised and if
it is stored in a computer system, that information must be protected from cyber
intrusions.

True or False: In some cities, local government will assess taxes on office furniture and
equipment that the business uses.
Answer: True. Local government regulations may allow for the taxing of office
furniture and equipment.

Transactions

Enterprise growth cannot happen in a vacuum. It requires relationships whether it be

with other businesses, their employees, customers or their surrounding community. At
its best, business transacts its goodwill, goods and services in a manner that will build
brand awareness.
So, within the workplace, a business will wish to establish itself as a good employer by
following all applicable employment laws. With customers, a business will strive to
ensure that warranties are honored, and goods/services are of a professional quality.
When dealing with other enterprises, a business will strive to foster a strategic long-
term relationship.
The keystone for transactions is the contract. A contract can exist in many forms. It can
be an employment agreement, a bank loan, a sales contract, or vendor agreement. For
those businesses that can afford it, in-house legal counsel or entire legal departments
handle a wide array of such contractual arrangements, including the legal compliance
issues discussed above.
Contract law and its specifics will be discussed in later weeks.
Another form of transactional work is the filing of intellectual property with the US
Patent and Trademark Office or the US Copyright Office. Filing applications are not
easy to complete and they involve more than just filling out a form. They demand the
BUSS213 Week 2 Lecture – Business Organization 20

creation of detailed explanations of how intellectual property uniquely functions as

government clerks at the US Patent and Trademark Office or the US Copyright Office
will consistently make inquiries that require a response from the business.
Now that we have assessed the topic of transactions, let us take a quick break and
review the material with an ungraded knowledge check.
Check Your Knowledge
True or False: Contract drafting is not a part of business operations.
Answer: False. The creation of contracts is essential for a business to establish relations
with strategic partners.
True or False: Hiring and maintaining employees is a form of employment law.
Answer: True. Hiring and interacting with employees is part of the employer-employee
relationship which triggers the application of state and federal employment laws.
Multiple Choice: Intellectual property registration is filed with which government
body?

A. US Department of Treasury
B. Federal Bureau of Investigation
C. US Patent and Trademark Office
D. None of the above

Answer: C. Intellectual property is filed with the US Patent and Trademark Office or the
US Copyright Office.

Ethics: Fiduciary Duties

In our discussion of partnerships, limited liability companies, and corporations, we see

that business entity structures can consist of multiple parties working together. As
previously noted, such a combination of forces can include a mix of individuals and
businesses who collectively have a financial and vested interest in the enterprise at
issue. Such a combination of talent and experience can help to foster prosperity as well
as enable the team to effectively problem solve. In the best of all worlds, the parties are
endeavoring together in goodwill for the success of the venture. In such a circumstance,
stakeholders – investors, employees, and the community – all mutually benefit.
However, there are times when the business decision-makers are focused on their own
self-interests at the risk of negatively impacting stakeholders. For this reason, the courts
recognize that those with decision-making authority must act in an ethical manner. An
obligation commonly referred to as a fiduciary duty is therefore created.
BUSS213 Week 2 Lecture – Business Organization 21

As a matter of law that is generally delineated by state statutory code, corporate

officers, directors, and controlling shareholders owe a duty, which will be enforced by
the court, to the corporation and, through the corporation, to the shareholders (Kutcher,
2019).
A relevant question to ask is what constitutes duty? Moreover, such a duty is not
limited to only corporate board member and officers. This concept of fiduciary duty is
extended to partnerships and members of a limited liability company.
Justice Frankfurter identified the problem best in a frequently quoted passage from SEC
v. Chenery Corp. 318 U.S. 80, 85 (1949):

But to say that a man is a fiduciary only begins the analysis; it gives direction to
further inquiry. To whom is he a fiduciary? What obligations does he owe as a
fiduciary? In what respect has he failed to discharge these obligations? And what
are the consequences of his deviation from duty?

The breach of the duty of care and duty of loyalty are often cited as the examples of
where self-interest decision-making has harmed the business enterprise. Breach of the
duty of care can be thought of a reckless management and decision-making that has
failed to consider the consequences of authorized acts. Breach of the duty of loyalty is
exemplified in acts where the decision-maker has personally benefitted from an
authorized act at the expense of the company and other related stakeholders.
However, does this mean that all poor decision-making can be categorized as a breach
of fiduciary duty?
Corporate directors are generally entitled by law to the presumption that their conduct is based
on “a bona fide regard for the interest of the corporation whose affairs the stockholders have
committed to their charge” (Kutcher, 2019). This presumption has generally come to be known
as the “business judgment rule.”

An excellent explanation of this rule comes from the case of Aronson v. Lewis 473 A.2d
805 (1984) where the court wrote:

It is a presumption that in making a business decision the directors of a

corporation acted on an informed basis, in good faith and in the honest belief
that the action taken was in the best interests of the company. . . Absent an abuse
of discretion, that judgment will be respected by the courts. The burden is on the
party challenging the decision to establish facts rebutting the presumption.
BUSS213 Week 2 Lecture – Business Organization 22

Therefore, a presumption of sound business judgment exists if the decision can be

attributed to any rational business purpose. A court under such circumstances will not
substitute its own notions of what is or is not sound business judgment (Kutcher, 2019).
Under those ethic standards that were introduced in Lecture 1, it can be seen that the
business judgement rule could be applied to justify business actions even where there
would be a negative impact to others. For example, per the Cost-Benefit Analysis
concept within Utilitarianism that is used by businesses, an argument that a decision
serves a “rational business purpose” can be cleverly crafted.
After reviewing the legal concept of fiduciary duties, take a look at this 5:06 minute
video, The Five Minute Legal Master Series: Fiduciary Duties of Officers or Directors of
a Corporation, by the Five Minute Legal Master Series. While watching the video, keep
in mind the following points:

The Five Minute Legal Master Series: Fiduciary Duties of Officers or Directors of a
Corporation

 Reflect on how the Duty of Loyalty is aimed to protect shareholders from

corporate board members and/or corporate officers from using their position for
self-interests.
 Analyze how the Duty of Care is intended to ensure that board members and/or
corporate officers make informed decisions
 Assess how attendance at board meetings helps to keep board members apprised
of what is happening in the corporation’s operation.

This video provides an overview of the fiduciary duties of care and loyalty that are
owed by board members and corporate officers. Specifically, the duty of loyalty
mandates that board members and corporate officers do not use their authoritative
position for self-enrichment. So for example, if a money-making opportunity arises, the
board members cannot steal it away and money off of it for themselves. In contrast, the
duty of care is concerned about board members and/or corporate officers doing their
due diligence in seeking the advice of attorneys and experts before making a decision.
In this regards, board members and/or corporate officers are acting as informed
persons when making decisions. Attending board meetings and interacting with board
members not only helps to keep one informed but it also educates board members of
what is happening within the corporation’s internal operation. If there is an issue that
needs to be corrected, this affords the concerned board member an opportunity to speak
up.
After considering the topic of fiduciary duty, let us take a quick break and review the
material with an ungraded knowledge check.
BUSS213 Week 2 Lecture – Business Organization 23

Check Your Knowledge

True or False: Fiduciary duty includes the duty of care and duty of loyalty.
Answer: True. Both the duty of care and duty of loyalty encompass the scope of
obligations owed by business decision-makers.
True or False: A good-faith decision made in the best interests of the company will be
respected by the courts.
Answer: True. Courts will not overturn a good-faith decision absent any showing of
abuse of discretion.
Multiple Choice: Where the decision-maker has personally benefited from an
authorized act at the expense of the company, this is known as breach of the …
A. Business Judgement Rule
B. Duty of Promise
C. Duty of Loyalty
D. None of the above

Answer: C. Breach of the duty of loyalty is exemplified in acts where the decision-
maker has personally benefitted from an authorized act at the expense of the company
and other related stakeholders.

Civil Litigation

Unfortunately, entrepreneurs can discover that the thrill of being in business is more
paperwork oriented than what they expected. A frustrating area of paperwork happens
when the business venture is being sued. Litigation can happen for a number of
reasons.
For example, if a third party has breached its contractual obligation to the business, it
must be determined what is that best responsive action. Should a breach of contract
lawsuit be filed or is the more practical move to negotiate a resolution?
If another company is using illegally using the intellectual property of a company, there
will be a need to file a cease and decease letter to stop infringement and use of that
unique creation by the other company.
Employees, who are laid off or terminated, might challenge the business decision to end
the employment relationship. Actions by the subordinate managers might be
tantamount to discrimination or sexual harassment which in turn results in a lawsuit
against the company. An employee injured on the job may file a workers’ compensation
claim.
BUSS213 Week 2 Lecture – Business Organization 24

Employees, investors and other third parties whose personal private information (like
social security and credit card numbers) was stolen in a cyber hack may file a
negligence claim against the company for not better securing computer networks from
cyber-attacks.
Whatever the allegation might be, a civil lawsuit is challenging to either pursue or
defend against. To begin, large companies may have their own in-house attorneys that
will try to resolve a dispute before it ever escalates to the lawsuit stage. Often such
attorneys are better skilled at doing transaction type of work.
Therefore, the task of civil litigation is bestowed on a business litigation law firm which
preferably has experience and the professionalism to handle the matter at hand.

The Phases of A Business Litigation Case

The opening salvo in any civil litigation case is the filing of the Complaint by the
Plaintiff (the suing party) which is a written document that identifies the parties
involved in the dispute, explains why the court has jurisdiction the hear the case, and
the specific causes of action (ex. Breach of contract, negligence) are identified and
briefly explained. The level of court in which the Complaint is filed is the trial court,
also known as the court of general jurisdiction, and it is known by many names such as
Superior Court in California or the Supreme Court in New York.
After the Complaint is filed, it is served on the other party (the Defendant) who
generally has 30 days to file an Answer that in basic terms, denies the allegations in the
Complaint.
It is a common practice that the defense will file a document called a Demurrer which
argues that the Complaint is vague in what is being alleged and that further
clarification is needed. Judges will usually grant the Demurrer and the Plaintiff is
instructed to file an amended Complaint that adds more clarity to the details and how
they form a cause of action.
Once this opening phase is past, the parties will begin the discovery phase which allows
the parties to obtain evidentiary information from each other. This includes the parties
propounding written questions (referred to as Interrogatories) to each other and/or the
demand to produce documents (referred to as Production of Document Requests).
Probably the most commonly known form of discovery is the deposition where a party
is asked questions by the opposing party’s attorney.
After discovery has been completed, the parties get closer to the trial phase but before
then, the defense has the opportunity to file a Motion for Summary Judgment which
basically states that the Plaintiff has failed to prove their claims. This is a tactic that the
defense will attempt to eliminate as many of the causes of action as possible. For the
BUSS213 Week 2 Lecture – Business Organization 25

Plaintiff, the hope is that maybe one or more causes of action still survive. At best for
the defense, all of the actions are ruled against by the court.
If there are still remaining allegations, there will be one last ditch effort by the court to
attempt to resolve the case through a hearing known as a Mandatory Settlement
Conference. If no settlement is reached, then the case finally reaches the trial phase.
Trial preparation is both expensive to fund and very time consuming as the required
documents that need to be filed before the court that will be used at trial are many.
Also, cases will often require the assistance of a trial expert in a number of specialized
fields such as forensic accounting.
As one can see, civil litigation can be a very expensive exercise and as such, monetary
settlements are more preferred at resolving a case than seeing it all the way through to trial.
Now that we have reviewed the topic of civil litigation and the phases of a lawsuit, let
us take a quick break and review the material with an ungraded knowledge check.
Check Your Knowledge
Multiple Choice: Civil litigation begins by the filing of which document by a Plaintiff in
civil court?
A. The Complaint
B. The Demurrer
C. The Objection
D. None of the above

Answer: A. The filing of the Compliant begins court jurisdiction over a dispute.
True or False: Once a Complaint is filed, the Defendant does not need to respond to it.
Answer: False. The Defendant generally has 30 days to respond to the allegations being
made by the Plaintiff.
True or False: In the discovery phase, the parties can obtain evidentiary information
from each other.
Answer: True. Such information can be obtained through written and oral questioning
as well as by demanding documentary evidence.

SPECIAL NOTE ON CRIMINAL LAW AND PROSECUTION

Although entrepreneurs will mostly find themselves in civil court, there may be times
when their conduct can rise to the level of criminality. For example, if there is an intent
to defraud customers or intentionally misrepresent products or services, such conduct
can be an example of criminal fraud or deceit. Other types of criminal acts include
BUSS213 Week 2 Lecture – Business Organization 26

illegal dumping of waste or deceitful statements made in the sale of stocks. These will
be cover specifically in later lectures.
What is important to distinguish is that in a criminal court, it is the government that
brings legal action against the wrongdoer on behalf of the people. The basis for the
action will be legally found in criminal laws (also commonly referred to as the state or
federal penal code). In comparison, civil lawsuits are based on civil codes and common
law rules derived from case law decisions.
So for example, if a rival business makes a false statement against another company
which results in the loss of customers and has a reduction in business, the defamed
company could sue in civil court for defamation. However, if that rival company
launched a cyber attack against its rival, then the local District Attorney’s Office could
file criminal charges.

Weekly Recap
We have seen that business entities can be structured in a number ways such as a sole
proprietorship, partnership, limited liability company or corporation. Each form of
business entity offers its own unique advantages depending upon the type of goods or
service being offered to the public. Where these entities do overlap in character is that
all businesses must deal with some form of government regulations whether from local,
state or federal government. This could be either the need to procure a business permit
form the local city hall or a state or federal permit license.
Business entities also engage in a variety of transactional activity which can include
creating contractual agreements, seeking and hiring new employees, and potentially
interfacing with the United States Patent and Trademark Office to register intellectual
property claims.
Unfortunately, it can happen that a disgruntled vendor or customer, or even an
employee might pursue litigation against the business. The steps in how a civil
litigation case were covered with special emphasis given to the use of mediation and
arbitration as a mechanism to avoid costly litigation.

References
Aronson v. Lewis 473 A.2d 805 (1984)
Audiopedia. ( 2016, October 1). What is PARTNERSHIP? What does PARTNERSHIP
mean? PARTNERSHIP meaning, definition & explanation. Retrieved from
https://www.youtube.com/watch?v=MkpV43PXgk4
Businesslicenses.com. (2019). New York Business License. Retrieved from
https://www.businesslicenses.com/Licenses/NY/
BUSS213 Week 2 Lecture – Business Organization 27

Five Minute Legal Master Series. (2017, Feb 16). The Five Minute Legal Master Series:
Fiduciary Duties of Officers or Directors of a Corporation. Retrieved from
https://www.youtube.com/watch?v=kYNs2WgsPZo

Hamill, S. (2005). The Story of LLCs: Combining the Best Features of a Flawed Business Tax
Structure. Retrieved from https://www.law.ua.edu/misc/hamill/Chapter%2010--Business
%20Tax%20Stories%20(Foundation).pdf
Holton, G. (2013, June 12). History of Corporations. Retrieved from
https://www.glynholton.com/notes/corporation/
Investor Trading Academy. (2015, Feb 5). What is a Corporation? Retrieved from
https://www.youtube.com/watch?v=DImqZ-xsizo
ITLawwiki. (2019). Personally Identifiable Information. Retrieved from
https://itlaw.wikia.org/wiki/Personally_identifiable_information
Kutcher, R. (2019). Breach of Fiduciary Duties. Retrieved from
https://apps.americanbar.org/abastore/products/books/abstracts/5310344_chap1_ab
s.pdf
LLC University. (2015, November 5). What is an LLC – Form an LLC. Retrieved from
https://www.youtube.com/watch?v=b_wAHBNDmI4
County of Los Angeles. (2019). Filing a Fictitious Business Name. Retrieved from
https://www.lacounty.gov/business/starting-a-business-in-the-county/filing-a-fictitious-business-
name/

ReferenceforBusiness.com. (2019). Partnership. Retrieved from

https://www.referenceforbusiness.com/small/Op-Qu/Partnership.html
SEC v. Chenery Corp. 318 U.S. 80, 85 (1949)
Short, J. (2011, September 11). Sole Proprietorship. Retrieved from
https://www.youtube.com/watch?v=7aYipxNeJCE
Study.com. (2013, December 31). What is Business Law: Definition and Overview. Retrieved
from https://www.youtube.com/watch?v=Ch9LPTtIwaI&feature=youtu.be
Treasurer-Tax Collector’s Office, County of Orange. (2019). Unsecured Taxes.
Retrieved from https://media.ocgov.com/gov/ttc/proptax/infofaq/faq/unsecuredtax.asp#646
Winkler, A. (2018, March 5). “Corporations are People” is Built on an Incredible 19th-
Century Lie. The Atlantic. Retrieved from
BUSS213 Week 2 Lecture – Business Organization 28

https://www.theatlantic.com/business/archive/2018/03/corporations-people-adam-winkler/
554852/