Legal underpinnings of business law

Legal Underpinnings Of Business Law

The reading assignments will help you gain an introduction to the legal system and the law. You can not understand how law comes into play within the business environment without understanding the fundamentals of the law itself. The legal system is defined as a politically motivated system in which all people within the system are required to follow the rules (what we call the law) and if those rules are violated, those same people are answerable to the system of courts which apply the law. (Barnes, 2008, p. 3). Further, we can define law as a set of principles, rules, standards of conduct that

1. Have general application in society

2. Were developed by a legitimate authority (typically the government)

3. Trigger penalties when those rules are violated. (Barnes, 2008, p.4).

Think of a recently passed law and how the above elements factor in. For example, in California, it is illegal to text while driving. (see http://www.drivinglaws.org/sb28.php) This law applies to all drivers. It also was developed by the state legislature and signed into law by California’s governor. Lastly, the law imposes a fine of $20 for the first offense and $50 for subsequent offenses.

Three of your Week One chapters focused on different forms of business entities. Each type of business organization possesses certain advantages and disadvantages. When considering a business form, one must consider seven important attributes: 1) Limited Liability; 2)Taxation; 3)Formalities; 4)Financing; 5)Management; 6)Life of Business; and 7)Liquidity of investment. (Barnes 2008, pg. 467).

Some of these attributes will matter more than others. For example, safety is a major consideration for the majority of investors. A limited partner and shareholder of a corporation may lose their investment if the business fails, but they have no further liability to creditors of the business. (Barnes 2008, pg. 468). In comparison, general partners may lose not only their investment, but also may have personal liability if the partnership assets are not enough to cover partnership debts. Sole proprietors bear the same risk of personal liability. However, if the business involves little risk or the owners have few other assets, liability will be given little weight and as a result, a favorable risk.

Another consideration is how difficult it may be to secure financing. Tax ramifications can also be important. The basic taxation difference between a partnership and a corporation is that a corporation is a separate taxable entity. Corporations pay income taxes on its own income while its shareholders generally pay taxes on dividends from the corporation, although they are paid out of income already taxed to the corporation. (Barnes, 2008, pg. 470). This is one reason why S Corporations and Limited Liability Companies are becoming favorable alternatives.

Even after considering these seven factors, rarely do they point to one single business entity. Often it is recommended that before making a final decision, a CPA or lawyer be contacted. (Barnes, 2008, pg. 475).

Reading Assignment:

Required Text

Please read the following chapters in: Business Law for Managers:

a. Chapter 1: The Civil Law and Common Law Traditions

b. Chapter 4: Business Ethics and Conflict Management

c. Chapter 27: Principal-Agency Law

d. Chapter 28: Sole Proprietorships and Partnerships

e. Chapter 29: Limited Partnerships

f. Chapter 30: Corporations

g. Appendix A: The Constitution of the United States of America

Recommended Resources:

Text: Business Law for Managers

a. Chapter 2: Beginning a Civil Lawsuit

b. Chapter 3: Completing the Civil Lawsuit and Alternative Dispute Resolution

c. Appendix C: Timeline of Major Modern Legal Developments That Affect Modern Businesses

Websites: Find Laws, Legal Information, and Attorneys - FindLaw. (n.d.). Find Laws, Legal Information, and Attorneys - FindLaw. Retrieved October 19, 2012, from http://findlaw.com

Discussion Forums

Purpose: The discussion forums take the place of the interaction that you would get between the students and instructor in a traditional classroom. As a result, you must score well on your discussion postings to score well in the class. Your posts and all responses must be formatted according to APA style as outlined in the Ashford Writing Center. Please include a list of references when applicable.

Introduction: Your "Post your Introduction" discussion forum is due by the end of Day 1. Tell me a little bit about yourself. If you get a rapid case of writer’s block, here are a few questions you might want to answer: what brought you to Ashford University? What are your educational goals? What are your expectations of the class? Your student introduction is posted by the “Post your Introduction” link in the Week One section. Then respond to at least three of your classmate's introductions by Monday. Use this as a chance to get to know your classmates.

Discussions One and Two: Your initial postings to the discussion forums are due by Day Three, and your response to two students postings are due by Day Seven, Monday. This is worth 37% of your grade so don’t forget. You must follow Ashford University Online Netiqutte Rules at all times on the Discussion Boards. If you have any question as to those rules, don’t hesitate to contact me.

Discussion One Topic: 1st Post Due by Day 3. Constitutional and Legal Underpinnings of Business Law. Review the Constitution in Chapter 31 and choose one of the following sections of the U.S. Constitution or a specified amendment to use as the basis for your initial response: Any of Congress’s enumerated powers under Article I, Section 8

1st Amendment 4th Amendment 5th Amendment 14th Amendment

Identify the section of the Constitution or its amendment that you have chosen. Discuss how this section of the Constitution or its amendments both limit and protect business in general. Describe an example of how the section of the Constitution or its amendment that you have chosen could be applied to your professional life (past, present, or future). In your example, discuss whether the section of the Constitution you have chosen to address limits business or protects it.

Guided Response: Respond to at least two of your fellow students’ posts in a substantive manner. Some ways to do this include the following, though you may choose a different approach, providing your response is substantive: Review the initial posts made by your peers, and note whether the responses relied upon a different section of the Constitution or amendment than your response. If your peer chose to focus on a different section of the Constitution or amendment than you did, discuss how that section of the Constitution relates to any example of a business situation from your professional life (past, present, or future).

If your peer chose to focus on the same section of the Constitution or amendment that you did, then compare and contrast the different applications of that section of the amendment to your respective examples from your own professional lives.

Suggest analytical differences that could lead to different outcomes. Point out ways in which the Constitution or its amendments might limit or protect business that your peer did not already identify.

Your posts and all responses must be formatted according to APA style as outlined in the Ashford Writing Center. Please include a list of references when applicable.

Discussion Two Topic: Ethics and Law. Use three philosophical theories from Chapter 4 to analyze whether it is more important for a business to be ethical or lawful. Provide one example of a situation in which it seems to be more important for a business to be ethical rather than lawful, and one example of a situation in which it seems more important for a business to be lawful rather than ethical.

Guided Response: Respond to at least two of your fellow students’ posts in a substantive manner. Apply a different ethical theory to the examples identified by your classmate. Discuss the difficulties faced by persons in the workplace who view business situations from different ethical perspectives. Suggest ways that those differences can be overcome while still ensuring the actions of the business are legal.

Your posts and all responses must be formatted according to APA style as outlined in the Ashford Writing Center. Please include a list of references when applicable.

Week One Writing Assignment: Legal Underpinnings of Business Law. Your paper must be two to three pages, excluding title page and references page(s), and formatted according to APA style as outlined in the Ashford Writing Center

Imagine that you own each of the following businesses: Tinker’s Home Security Service (sole proprietorship) Tinker & Tailor’s Home Security Service (general partnership) Tinker & Tailor’s Home Security Service (LP) Tinker & Tailor’s Home Security Service, Inc. (corporation) Tinker & Tailor’s Home Security Service, LLC (LLC)

a. The businesses are being sued for breach of contract. In a chart that does not exceed one-half of a page, compare and contrast your personal liability exposure as a result of the different lawsuits. In one paragraph, discuss how you might limit your liability exposure within each particular business organizational form.

b. After completing the first part of this exercise, describe one business that you may own some day or that you currently own. (Even if you never plan to own a business, pretend as if you will do so for the purposes of this assignment.) Identify the best business organizational form for the type of business that you have described, considering personal liability exposure as well as management, taxation, and ease of formation.

This assignment is Due Monday, Day 7 of the course.

Thank you and don’t hesitate to contact me with your questions.

Janet Fiorentino
Assistant Faculty Professor

References:

Barnes, J., Morehead, T., and Dworkin, E. (2008) Law for Business (10th ed,)Columbus: McGraw-Hill/Irwin

Cheeseman, H. (2007) Business Law: Legal Environment, Online Commerce, BusinessEthics, and International Issues (6th edition) New Jersey: Pearson-Prentice Hall

Seaquist, G., & Coulter, K. (2012). Business law for managers. San Diego, CA: Bridgepoint Education, Inc.

Legal Underpinnings of Business Law

Steven Jackson

BUS670: Legal Environment

Dr. Fiorentino

February 17, 2014

Tinker’s Home Security Service (Sole Proprietorship)

Tinker &Tailor’s Home Security Service (General Partnership)

Tinker & Tailor’s Home Security Service (Limited Partnership

Tinker & Tailor’s Home Security Service, Inc. (Corporation)

Tinker & Tailor’s Home Security Service, LLC (LLC)

In a breach of contract, I am personally liable for all actions taken in the lawsuit. All debts incurred by the business fall upon myself and my personal assets can be affected.

During a lawsuit, my partner and I are both equally held liable no matter who committed the tort. Our personal assets can be affected and we both will be responsible for the debt incurred.

As a limited partner I am only held liable for debts up to the amount that I originally invested. All other actions in a lawsuit must be taken care by the general partners.

As a shareholder in a corporation, I will have limited liability during a lawsuit. I am not liable for corporate debt but only the purchases made for stock.

In an LLC, I will have limited liability and my personal assets will not be affected. The LLC will only be held liable for the debts and liabilities incurred by the business.

Today in the business world the number one concern for most companies is profit and loss. From the outside looking in, most consumers only assume that every business is making a huge profit but not realizing the complexity of running a business. One of the biggest dangers of running a business is the possibility of a lawsuit. Depending on the type of business organization you have will determine how liable you are during a lawsuit. I will discuss the pros and cons of these business organizations as well as the personal liability exposure an owner has in each one.

Running head: LEGAL UNDERPINNINGS 1

2

LEGAL UNDERPINNINGS

As you can see from the above matrix, the amount of personal liability exposure decreases with the bigger business organizations. According to Seaquist (2012), “Each type of business organization offers certain benefits as well as drawbacks that should be carefully weighed before deciding which form is best suited to the new venture.” The sole proprietorship is the easiest and quickest business organization to get started, but you are held more liable when compared to a corporation or LLC. As the owner of a sole proprietorship all of my assets can be lost in a lawsuit. Corporations and LLC’s are more complicated and very expensive but they have limited liability, which is very helpful if the company were to be sued. As the owner of an LLC, my personal assets will not be affected during a lawsuit, only the business.

As the owner of a sole proprietorship I know that I have unlimited personal liability for all debts incurred by the business. I am basically responsible for all the debts, contracts, and legal issues that the business has. According to Seaquist (2012), “Many times in a business failure of a sole proprietorship, it leads to personal bankruptcy”. To limit my personal liability I would first think to get a partner. A general partnership would mean that my partner and I would equally be held liable for all debts, but our personal assets can still be affected. The best thing for me to do would be to turn the company into an LLC. As an LLC, the company is a separate entity from the owner. “If a person sues the company, only the assets of the company can be used to pay any legal judgment. The personal assets of the owner are safe” (LLC vs. Sole Proprietorship, para. 4, 2011).

As a member of a general partnership, my partner and I will be equally held liable for all debts and our personal assets can be considered part of the business. According to www.bizfilings.com, “Partners in a general partnership bear responsibility for the actions of the other partners. General partnerships are undoubtedly the easiest to create and have the lowest ongoing cost, but they also provide the highest risk to the partners” (para. 10). To limit my liability exposure it would be best for me to become a limited partner. Under this partnership, the general partner will have unlimited liability and the limited partner will have limited liability. Therefore, my personal assets will be protected and I can only be held liable for the amount that I invested in the partnership.

As a limited partner in a business I only have limited liability while the general partner has unlimited liability. In my situation as a limited partner I know that my liability exposure has already been decreased and can only be held liable for debts in the amount that I invested in the partnership. To make sure my liability exposure remains limited, I need to make sure that I do not get involved with running the business. According to Beckman v. Canada (1999), “A limited partner does not become liable as a general partner unless, in addition to exercising his rights and powers as a limited partner, he takes part in the control of the business” (para. 47).

As the owner of a corporation I have limited liability. According to Seaquist (2012), “Because a corporation is deemed to be an entity separate from its owners, the owners of a corporation are not personally liable for corporate debts beyond their investment in the company. All that a shareholder risks in purchasing a share of stock is the money paid for its purchase.” To limit my liability exposure and maintain it, I need to show that my business exists as a separate entity. A simple way of doing this can be by keeping my business and personal assets separated. Attorney Randall Fisher (2013) states, “Under no circumstances should you use personal accounts for business expenses or business accounts for personal.”

As the owner of an LLC, I have limited liability and my personal assets will remain safe from any debt incurred by the business. To decrease and maintain limited liability exposure I will need to make sure my LLC status is known.

If a judge cannot distinguish between what belongs to the business an what belongs to the owner- and the owner cannot prove the rules have been followed- the judge may determine the company effectively less like a corporation or LLC and more like a sole proprietorship or general partnership- entities that lack the same liability limitations. (Fisher, 2013, para. 14)

Simple things like having business cards and letterheads can also help maintain your LLC status.

A business that I have always wanted to open up is a fitness center. Growing up as an athlete playing college football and running track, I always had the desire to own a gym. Having my own gym could mean that I can put all the equipment and necessities that I feel are important to live a healthy lifestyle. The best business organization for me to open my fitness center would be a general partnership since I plan on it being small. The main reason why I would choose a general partnership is so that I can have someone help manage and run the business. I personally feel like opening my first business would be easier if I had a partner to help with ideas and day-to-day issues. Having a general partnership is also easy to form since it can only take a verbal commitment or handshake. Also, we would only need a business certificate which is not hard to get and inexpensive. This partnership will mean that we are a tax-reporting entity and not a tax-paying entity. Therefore, profits are split between my partner and I, and then taxed as personal income on our own tax return. In this general partnership of a fitness center, we both have unlimited personal liability. This means we will equally share all of the debt and legal issues that is accrued by our business no matter who is at fault. Also, our personal assets can be affected if we are involved in a lawsuit.

Owning a business can be very rewarding and a personal goal that someone might strive for. I feel that it is very important to know about the legal side of owning a business and to know what options you have. I think that the liability exposure that one has should be one of the major factors that helps a person decide what kind of business organization they want to have. Whether if you are determined to have a sole proprietorship or comfortable with just being a limited partner, I think that you will end up learning more about legal underpinnings no matter what kind of business organization you are involved with.

References

Beckman v. Canada, (1999). CanLII 9371 (FCA), [2000] 1 FC 555 para 47. Retrieved from http://canlii.ca/t/4lp9

Bizfilings.com, (2014). Choosing the right type of business partnership. Retrieved from http://www.bizfilings.com/learn/form-partnership.aspx

Essortment.com. (2011). Limited liability company vs. sole proprietorship. Retrieved from http://www.essortment.com/limited-liability-company-vs-sole-proprietorship-23913.html

Fisher, R. (2013). 5 Steps to limiting personal liability in business. Retrieved from www.thefisherlawoffice.wordpress.com/2013/02/12/5-steps-to-limiting-personal-liability-in-business/

Seaquist, G. (2012). Business law for managers. San Diego, CA; Bridgepoint Education Inc.