University of Nevada Las Vegas Personal Liability and Business Law

The biggest disadvantage of both sole proprietorships and general partnerships is the potential for unlimited personal liability for the debts and obligations of the business.Most new businesses fail within a few years.

Only a one person can own a sole proprietorship.

Under partnership law, if nothing is said to change this, profits are shared in proportion to the various partners’ capital accounts at the end of the year.

The income or losses from a sole proprietorship will be reported directly on the owner’s IRS form 1040.

Partnership tax law is very complicated and uncertain. Your professor considers this to be a disadvantage of the partnership form of business while aggressive tax planners might consider it to be an advantage.The partners are free to custom make their partnership agreement regarding allocations of income and loss between the various partners and so long as the written agreement is in force at the beginning of a particular tax year, the IRS will allow/recognize it.

Unless the partnership agreement provides otherwise, each partner has a co-equal vote regarding the management of the partnership.

Each partner in a general partnership is considered to be an agent of the partnership. Thus to some extent, through express, implied, and/or apparent authority, each has the power to bind the partnership in contract. Moreover, the partnership and the other partners can be held personally liable for the torts committed by one of the partners if committed within the scope of doing partnership business.

A partnership is required to file an annual tax return with the IRS (form 1065) but does not pay any taxes as an entity. Rather, it distributes K-1s to each of the partners telling them what amounts and types of income/expenses/losses each must report to the IRS on his/her individual form 1040. In this respect, a partnership is considered to be a “flow-through entity.”

The rights and duties of partners are generally derived from agency law except that the notion of implied authority is usually broader in the context of partnership law than under regular agency law.There is no such similar thing as “usurping a partnership opportunity” in the partnership context. Thus a partner could secretly pursue any non-competitive business opportunity he wished without violating his “duty of loyalty” to the partnership so long as he continues to spend adequate time promoting the partnership’s business.

A corporate officer or director who takes personal advantage of a business/investment opportunity that might be of interest to the board of directors of the corporation and who does so without first disclosing that opportunity to them and giving them a chance to pursue it on behalf of the corporation, would be an example of “usurping a corporate opportunity” which would violate that officer’s “duty of loyalty” owed to the corporation.

In both the case of partnerships and Sub-S corporations, the various partners/shareholders will be taxed on each person’s allocable share of entity income regardless of whether or not any distributions of cash are made to those people from these business entities.

Unless the partnership agreement provides otherwise, each partner is entitled to reasonable compensation for services/work performed on behalf of the general partnership.

While limited partners in a limited partnership hope to limit their potential losses in the partnership to the amount they invested in it, they will not accomplish that goal if they participate in the management decisions of the partnership.Except for general partnerships, all other forms of multi-owned businesses must go through some sort of formal creative process set forth by the state in which the co-owners wish to form their business entity.

Generally, states have different requirements to form S-corporations than to form C-corporations.

Assume A and B are partners in a medical general partnership. If A commits medical malpractice against a patient, B could be forced to pay 100% of that claim under the notion of “joint and several liability.”

A corporation like Apple could not form as an S-corporation.

One of the easiest ways for a plaintiff to “pierce the corporate veil” regarding a closely held corporation is when the controlling shareholder tends to ignore the separateness of the corporate entity by failing to hold annual shareholder meetings and board of director meetings, and using the corporate checkbook to pay personal obligations.Negligence in making a business decision on behalf of the entity will breach the person’s “duty of care” owed to that entity if he is a corporate officer but not if he is a partner of a partnership.

If a plaintiff could successfully “pierce the corporate veil” in a law suit, that would mean that he could hold the shareholders personally liable for whatever judgment was handed down by the court against the corporation and which could not be fully satisfied by liquidating the various corporate assets.

No form of business entity will effectively protect an individual co-owner from the consequences of the torts he personally commits.

One of the only effective ways to protect corporate assets from levy by a plaintiff in a law suit against a close corporation is for the Board of Directors to declare a liquidating stock redemption plan whereby the shareholders are given cash and/or other corporate assets in exchange for their stock. Then they can take those assets and form a new corporation. This will only be effective if the plan is completed before any judgment against the corporation is rendered by the court against the first corporation.

Question 63 pts

Corporate officers and directors are both fiduciaries and agents of the corporation.Generally speaking, the relatively recent creations of such entities as LLCs, LLPs, and LLLPs were made to enhance the goal of limited liability for business owners.

Professionals like doctors, dentists, lawyers, accountants, etc. seem to prefer Limited Liability Partnerships (LLPs) as the business vehicle they use to shield their personal assets from the consequences of their co-professionals’/co-business-owners’ commission of malpractice regarding clients of the firm/practice.

A franchise is not an alternative type of business entity like sole proprietorships, general partnerships, limited partnerships, corporations, LLCs, LLPs, or LLLPs.

Before deciding to buy a franchise, one of the most important things you must understand is how your franchise can be terminated by the franchisor and how difficult/costly it will be for you to voluntarily terminate your franchise commitment. A related and very important concern you should have is how costly and difficult it will be for you to meet the franchisor’s quality control standards.

The only form of business entity with multiple owners that is not a flow through tax entity is a C-corporation. All the rest pay no income taxes at the entity level and use K-1s to tell the various owners what types and amounts of income or losses they must show on their individual income tax returns.Business entities among professionals like doctors, lawyers, accountants, etc. will generally not be covered by the SEC Act of 1933 since each professional primarily relies upon his own efforts to make a return on his investment in the entity.

Generally, if you are going to sell ownership interests in a new business entity you should hire an attorney to make sure you do not violate any federal or state securities laws.

A “security” is more broadly defined in the ’33 Act compared to the ’34 Act. Under the ’33 Act, any ownership interest in a business that primarily relies upon the efforts of others to make a return on the owner’s investment in that business, is considered to be a covered “security.”

Under the ’33 Act, all sellers of ownership interests in their associated business entities must first file an acceptable “registration statement” with the SEC before making any sales of such securities.

The anti-fraud “Rule 10b-5” under the ’34 Act is very broad. In contrast with the notion of fraud under most states’ laws, it applies a very broad definition of fraud in the context of sales of securities which includes not only material misstatements of facts, but also material omissions of facts.When certain “significant events” occur regarding a Section 12 company, it must timely file an“8K” with the SEC notifying it of those significant events. For example, if such a company changes its auditor, it must file an 8K with the SEC regarding that change since the SEC might want to investigate whether that change occurred because of a disagreement between the auditor and management concerning how something should be reported on the company’s financial statements.

Only public companies traded over the national stock exchanges are covered by the ’34 Act.

“Rule 10b-5” also prohibits the use a material non-public information in the purchase or sale of securities. Even though she made no money on the deal, one case held the wife of a corporate officer liable for a federal 10b-5 violation for vaguely tipping her brother to sell his shares in the company after hearing her husband tell her some bad news about his company’s failed FDA drug test regarding a drug then in development in his company. Her brother was also held liable for a 10b-5 violation.

Companies covered by the ’34 Act are called “Section 12 companies.” They must file un-audited financial statements (“10Qs”) with the SEC for the first 3 quarters of each year and annual audited financial statements called “10Ks” after the 4th quarter is finished.

Assume a student graduates from SUU and starts working for a large national accounting firm. In the course of his audit work regarding a public company, he comes into the possession of material non-public information about the audit client. Motivated by that information, he buys some stock in the audit client and doubles his money within one month once that non-public information becomes public on Wall Street. Based upon the Alexander Grant case discussed in the materials, because he does not work as a direct employee of that public company, he probably could not be held liable for any potential Rule 10b-5 violation for what he did.Basically the common law rules of contract and any contrary rules contained within the UCC concerning a sale of goods, also apply regarding e-contracts made over the internet.

If you are going to start a business selling things over the web, it would be a good idea to make sure all the terms of your contract are included in the notice given to your customers before they can hit the “I accept” button on their computer screens to accept the terms of your offer. Any additional terms that do not appear there but first appear when your customer opens his box of goods when it arrives, will probably not be considered effective terms of the contract, but rather, non-binding attempts by you to unilaterally change the terms of the contract.

In making offers of contract over the web to some distant offeree, it would be wise to include terms that say in the case of later dispute, the laws and the courts of your state will be used to resolve any legal conflicts.

“Materiality” under Rule 10b-5 is defined very broadly to include any information that a reasonable person would consider important in making a decision to buy or sell a security.

The National Labor Relations Act addressed various abuses committed by unions.The rulings of the National Labor Relations Board (NLRB) are inconsistent from administration to administration since who happens to be in the White House determines the overall bias of that board in resolving disputes between labor and management.

When Thomas Sowell said that the “true minimum wage is zero,” he meant that just because federal law says an employer must pay his workers at least a certain hourly wage, does not mean that a person will be able to get a job. If the true economic value of his services is viewed as being less than the federal minimum wage, the employer will not offer him a job. Thus, an unintended side effect of the minimum wage law is to increase the unemployment rate.

The Fair Labor Standards Act created the federal minimum wage.

The Davis-Bacon Act effectively makes all federal construction projects more expensive since prevailing union wages must be paid to the workers.

Under the Labor-Management Reporting and Disclosure Act, union members have a right to attend and participate in union meetings, nominate union officers, and vote regarding such elections through secret ballots.Both government and non-government employees have the same general right against being required to submit to random drug testing by their employers.

Under the Labor-Management Relations Act, states can choose to become what are called “right to work” states meaning that no worker in such a state can be forced to join a union as a condition of employment.

In a strike, union members can be permanently replaced by management if the court portrays the strike as an “economic strike” as opposed to an “unfair labor practices strike” where they cannot be permanently replaced.

Currently the unionization process is a two-step voting process. The first non-secret ballot determines whether or not a second (and this time secret) ballot will be used to determine whether or not the workforce really wants to unionize. What is currently known as “cardcheck” legislation being considered by Congress, would eliminate the second secret ballot and just use the results of the first non-secret ballot to determine the outcome. Your teacher disfavors this proposal since it makes the outcome more susceptible to union intimidation—true freedom of choice in this matter demands a secret ballot where each person can safely vote his conscience without threat of intimidation by either the union or management.

Under workers’ compensation laws, an injured employee will probably lose his opportunity to recover something for his work-related injuries if he does not promptly notify his employer of those injuries soon after they occur.Your employer can probably monitor your email correspondence on company computers.

Regarding union conduct under the Labor-Management Reporting and Disclosure Act, while unions are prohibited from participating in “primary boycotts” as a means of winning company acceptance of their union demands, they are allowed to participate in “secondary boycotts” to put pressure on management to accept their demands.

Generally, workers’ compensation laws make it easier for injured employees to collect something from their employers for their injuries they incur during work. However, the amount they can recover will probably be less than what is necessary to fully compensate them for their actual loss.

In prior years when the federal government collected FICA taxes in excess of what was needed to pay out benefits to Social Security recipients in those years, instead of investing that excess in assets that were totally unrelated to the federal government, it “invested” those excess Social Security tax receipts by loaning them to itself to spend on other government programs totally unrelated to the Social Security program. Thus, the so-called “Social Security Trust Fund” simply consists of IOUs from the federal government to itself.

Generally pre-employment screening procedures must have a rational connection to the demands of the job sought to be filled by the employer.The various employment laws discussed in this test section generally apply to both employees and independent contractors.

Assume a local tattoo parlor has 6 employees. In order to attract customers, the owner has a specific policy to only hire “pretty white women” as employees. Assume this can be adequately proven. This would not violate Title VII of the Civil Rights of 1964.

The common law “employment at will” doctrine is much weaker today than it was a hundred years ago.

Generally, under Title VII of the Civil Rights Act of 1964, a large employer cannot discriminate based upon race, color, national origin, religion, or gender.

If an employer fails the EEOC’s “80%” test, it can ultimately avoid legal trouble if it can convince the EEOC that the failure to meet that test is because there was a higher percentage of unqualified applicants in the various minority groups when compared to the percentage of unqualified applicants within the white male category. One way this can be done is by comparing test results among the various applicants. So long as such tests are professionally developed ability tests which are directly related to the particular needs of the job in question, the EEOC will readily accept them as just cause for the employer’s actions.Under Title VII of the Civil Rights Act of 1964, intentional discrimination is called “disparate-treatment discrimination.” This legal theory is quite hard for the plaintiff to win since ultimately, he or she has the burden of proving that intent on the part of the defendant employer.

Under Title VII of the Civil Rights Act of 1964, unintentional discrimination is called “disparate-impact discrimination.” This legal theory is much easier for the plaintiff to win since discrimination can be inferred from all the facts and circumstances without any need to prove actual discriminatory intent on the part of the employer.

In a “disparate-impact discrimination” case the employer will probably lose unless it can show that the demographics of its labor force mirrors the demographics of the group of people comprising “qualified people from the relevant labor market.” In the case of SUU hiring a professor, that relevant labor market would probably be considered to be national regarding geographic scope; but regarding a fish cannery in a small, isolated town along the Alaskan coast, the relevant labor market might only be limited geographically to people residing in that particular town.

The federal Equal Employment Opportunity Commission uses an “80%” or “4/5ths” rule to determine whether or not a “disparate-impact discrimination” case is a viable/legitimate claim against the defendant-employer. Generally under it, the employer will have trouble with the EEOC unless its hiring rate among minority applicants is no worse than 80% of the hiring rate among white male applicants.

The national Olive Garden Italian restaurant chain could have a policy of hiring only people of Italian descent as waiters and waitresses, and not run afoul of the Civil Rights Act of 1964 since in this case ethnicity will probably be legally accepted as a Bona Fide Occupational Qualification (BFOQ).Generally under the Civil Rights Act of 1964, a covered employer has to accommodate the reasonable religious requests of its employees unless to do so would cause and undue hardship on the employer.

Regarding unlawful sexual harassment, an employer can be held vicariously liable for the acts of its employees for both “quid-pro-quo” type discrimination and “hostile environment” discrimination.

Notre Dame University could have a policy of only hiring members of the Catholic Church as professors and not run afoul of the Civil Rights Act of 1964 since in the case of a religious institution, religion will probably be legally accepted as a Bona Fide Occupational Qualification (BFOQ).

If a hostile sexual environment is created by a manager over a subordinate in a particular company, the company will probably be able to avoid vicarious liability to the victim by showing that before the harassment occurred, it had a strong policy discouraging such harassment and an effective process for dealing with such complaints.

The EEOC has published rules indicating what types of questions can and cannot be asked of potential job applicants with disabilities. As one reads the examples, several seem to defy common sense and tend to give the impression that a prospective employer needs to have his attorney by his side while interacting with a disabled job applicant in order to avoid any illegal nuances in the questions being asked.The Americans with Disabilities Act (ADA) only applies to employers with 15 or more employees.

Under the ADA an employer must reasonably accommodate disabled employees unless to do so would impose an undue hardship on the employer.

Upon graduation, if you can prove that an employer with 20 or more employees discriminates against you in his hiring decision because of your youthful age and inexperience, he would violate the federal Age Discrimination in Employment Act.

According to the lecture, using gross statistics (single factor comparisons like sex, race, etc.) to prove inappropriate discrimination is a weak argument since many other factors besides sex or race impact a person’s earning potential like his or her level of education, type of major, differences in hours worked, etc.

Affirmative action laws force people to discriminate in favor of certain people based upon those same classifications. This would probably fall within the meaning of the phrase “philanthropic tyranny” coined by Frederic Bastiat—in other words making/forcing people to be affirmatively good to one another.In contrast to what the word “rights” used to mean, the foregoing people said the following about what that word has now come to mean: Bastiat said the word has come to mean benefits doled out by the government. He criticized the socialists of his day for using the word to describe what really just amounted to mere “political demands”; Elshtain said it has come to mean entitlements, often in the form of state-sanctioned favors for groups of self-proclaimed victims; Howard said “Rights have taken on a new role in America. Whenever there is a perceived injustice, new rights are created to help victims….they don’t protect so much as provide. These rights are intended as a new, and often invisible, form of subsidy. They are provided at everyone else’s expense….”; Balint Vazsonyi said that “group rights” have inadvertently moved us away from representative democracy towards minority rule. Government has lost the effective power to govern—it has ceded its powers to individual and special interest groups who are turned loose to stop or force anything they want through the invocation of their so-called “rights.”

Anti discrimination laws prohibit discriminating against people in negative ways based upon various prohibited classifications.

All of the federal anti-trust laws carry potential criminal penalties.

In the lecture people were quoted as saying that the word “rights” used to have the following meanings: Frederic Bastiate said ‘rights’ should be limited to those things that naturally belong to all people as opposed to small groupings of people being given different privileges than others; Jean Bethke Elshtain said rights used to be defined as immunities against harm; Phillip K. Howard said “Rights are considered as American as apple pie….Rights were synonymous with freedom, protection against being ordered around by government and others.”

Federal anti-trust laws allow companies to dictate the resale prices of the goods their various distributors sell.Price fixing between competitors is a type of “per se” violation of the federal anti-trust laws.

“Per se” violations of the federal anti-trust laws cannot be legally justified by the defendant under any circumstances. Federal anti-trust violations falling under the “Rule of reason” test can be legally justified by the defendant under some circumstances.

Under both the Sherman Act and the Clayton Act, private parties can bring litigation against companies for violations of the anti-trust law.

Under federal anti-trust law, “horizontal restraints” have to do with restraints on competition between rival companies competing in the same market, whereas “vertical restraints” have to do with restraints within the chain of manufacturing and distribution.

A tort is a civil wrong or harm committed by one person against another. Tort law derives from two ideas, namely, (1) some sort of wrongful or harmful conduct, and (2) the desire to compensate the victim. Criminal law focuses more on punishment of the offender than compensation for the victim.Strict liability torts impose liability without fault. Proof of fault or lack of fault is irrelevant. All the plaintiff needs to prove is that (1) the defendant’s conduct or product caused the plaintiff’s harm and (2) that conduct was ultra-hazardous in nature or the product was unreasonably dangerous.

Intentional torts require the plaintiff to prove that the defendant either (1) intended to cause the general harm the particular tort theory in question was intended to protect the public from, or (2) knew with substantial certainty that his actions would cause that harm.

Some courts have held gun manufacturers strictly liable for the crimes committed with their guns since they considered guns to be “unreasonably dangerous.”

Even when the plaintiff is able to prove a case for battery against the defendant, the defendant may be able to raise an affirmative defense to avoid liability such as consent or self-defense.

Generally around the country, if it can be proven after-the-fact that an intruder intended to commit murder at the time he was shot by a spring-loaded shotgun attached to the door through which he tried to enter a home, the one who set the trap will be relieved of both criminal and tort liability.Generally a person cannot use force likely to cause serious bodily injury of death, just for the sake of protecting property.

In most states, the level of force that can be legally used in self-defense depends upon the level of force reasonably perceived by the would-be victim as being directed towards him. In other words, generally he cannot use deadly force in self defense unless he reasonably perceives that deadly force is being used against him or somebody else.

Under Utah law, the law is very protective of homeowners when it comes to using deadly force against intruders.

Flagrant violations of the rules of a game will probably not fall within the bounds of the legal defense called consent. Not only can the violator be punished by the league but he can also be sued in a court of law. One example used to illustrate this point was Mike Tyson biting off part of the ear of his opponent during a professional boxing match.

Since the potential for vicarious liability is so high, a store owner would be well-advised to hire an attorney to research the law in his state and suggest a legally safe store policy for employees to follow when they suspect somebody of shoplifting. The examples used to illustrate this point was the Basha’s case in Arizona where the suspect died when store employees struggled to detain him and the St. George case of an employee giving chase at high speeds on the city streets in pursuit of a suspected shoplifter.The most common setting in which the tort of “false imprisonment” is alleged is when a store detains a suspected shoplifter for questioning.

In that setting, a store will probably be free from all liability if it both (1) has reasonable grounds to suspect the person of taking something with the intent not to pay for it, and (2) both the means and length of detention are reasonable.

Truth is an absolute defense in both a defamation case and a case for breach of one’s right to privacy.

Generally courts have been hesitant to extend tort law to cover purely mental and/or emotional injuries because they are hard to prove and disprove and easy to fake.

The tort of nuisance has to do with using ones property in such a way as to unreasonably interfere with the neighbors use and enjoyment of his own property. For example, playing loud music late into the night might fall within this tort claim.Negligence is the tort we are most likely to commit since it has to do with carelessness rather than intentional harms committed on others. We all occasionally are careless.

A competitor might commit the business tort of “disparagement of property” when falsely saying bad things about the quality of the goods sold by his competitor or falsely accusing him of having bad title to the things he is selling.

The attractive nuisance doctrine effectively makes landowners strictly liable for any injuries sustained by trespassing children on their property.

Things said in the halls of Congress and in courts of law are absolutely protected from tort claims of defamation.

In the case of physical injuries, a defendant is normally deemed to owe a duty of care to everyone and everything within the foreseeable zone of danger. So foreseeability defines duty in that context.The question of whether or not the defendant breached his duty of care owed to the plaintiff is determined by the “reasonable person” standard. Effectively each jury member thinks of him- or herself as a reasonable person and asks what he or she would have done under the actual circumstances faced by the defendant. If what he did was at or above what a reasonable person would have done under the circumstances, then there was no breach and the negligence case will be dismissed against the defendant. But if the defendant’s conduct fell below what a reasonable person would have done under the circumstances, then that will be deemed to be a breach of the defendant’s duty of care owed to the plaintiff.

Generally, omissions to act will only subject a person to a potential negligence claim when the law requires him to affirmatively act in a certain way and he doesn’t act that way.

In the case of negligence or professional malpractice regarding auditors, most states say that mere foreseeability of likely users does not define to whom a duty of care is owed, but rather, most states require that the plaintiff was actually foreseen by the auditor before the auditor is deemed to have owed a duty of care to that user of the audit report.

Generally, Good Samaritan statues require people to stop and assist people in danger.

The sixth element of Proximate Causation is really a public policy determination by the court to limit potential liability for negligence so as to avoid absurd extensions of liability. The teacher used a domino analogy to illustrate the idea.In most states today, if the negligent defendant can convince the court that the plaintiff was also negligent, he will be completely free from liability to the plaintiff.

The term “tort reform” generally refers to attempts to cut back on potential tort liability claims and/or limit the amount of damages that can be awarded to plaintiffs—especially regarding the tort of negligence which would include professional malpractice claims.

If the first five elements of a negligence tort claim are met, then usually the 6th element of Proximate Causation is usually also met.

A golfer can probably use the “assumption of risk” defense to avoid having to pay for a window he breaks while playing golf.

Negligence law only requires people to reasonably foresee how they might injure others and take reasonable steps to avoid such injuries. It does not require people to go to super-human lengths for both foresee and avoid risks of harm to othersWhile CO2 seems to be the greenhouse gas of most concern regarding global climate change, its relative increase within the earth’s atmosphere may partially account for the increase in worldwide agricultural production that has led to the diminishment in malnutrition and starvation around the world over the past few decades

There are many legal defenses that can be effectively raised by those accused of breaking the various anti-pollution laws.

In the lecture, it was argued that when considering the fact that the environmental scare during the mid-1970s was global cooling and the threat of a new ice age, and that the nature of the environmental scare has since made a 180 degree reversal to global warming now, one can reasonably question the impact of natural variability and wonder if man is really the major cause of global climate change and whether using the force of law to cut back on global emissions of greenhouse gases like CO2 will really have much effect on things while exacting significant economic pain in the process.

According to the lecture, while those on the political left tend to paint a dire picture of environmental disaster that has to be addressed forcefully through the law right now, those on the political right tend to be skeptical and wonder if this isn’t just one more compelling political cover for the expansion of government control over our lives and an unnecessary reduction in our liberty and economic growth.