Basic Business Law Basic Business Law (BPP432/80) (BPP432/80)

2006 Fall Quarter2006 Fall QuarterInstructor: David OliveiriInstructor: David Oliveiri

Week 8: Week 8: Facilitating Facilitating Exchange Through Exchange Through

Business AssociationBusiness Association;; The Simple Case – The Simple Case –

Sole Proprietor + AgentsSole Proprietor + Agents

AgendaAgenda

Introduction to Business Introduction to Business AssociationAssociation

Sole ProprietorshipsSole Proprietorships

Agency ConceptsAgency Concepts

Sole Proprietor + Agents Sole Proprietor + Agents

Learning ObjectivesLearning Objectives

Understand Why Business Association Makes Understand Why Business Association Makes Good Economic SenseGood Economic Sense

Understand Some Basic Economic, Financial, Understand Some Basic Economic, Financial, and Legal Considerations of Business and Legal Considerations of Business Association Association

Understand How These Concepts Apply To Understand How These Concepts Apply To One-Person BusinessesOne-Person Businesses

Understand Pros and Cons of Sole Understand Pros and Cons of Sole ProprietorshipsProprietorships

Understand When “People Leverage” Makes Understand When “People Leverage” Makes SenseSense

Understand the Nature, Costs, and Benefits Understand the Nature, Costs, and Benefits of “People Leverage” of “People Leverage”

Understand Pros and Cons of Sole Understand Pros and Cons of Sole Proprietorships + AgentsProprietorships + Agents

Introduction to Business Introduction to Business AssociationAssociation

MBA Learnings = f(Optimizing MBA Learnings = f(Optimizing Exchange)Exchange)

Contracts Facilitate ExchangeContracts Facilitate Exchange

Optimization => More, Faster, Optimization => More, Faster, CheaperCheaper

Optimization = f(Association, …)Optimization = f(Association, …)

• AssemblAssembles es CapitalCapital

• Opens Opens AccountAccountss

• BorrowsBorrows

SALLY SALLY SMITHSMITH

““AskSimon”AskSimon”

TOMTOM ANNANN

• SpreadsheSpreadsheetsets

• PhonePhone

• ManualManual

• Hourly Hourly WageWage

• Sales Force Sales Force ConsultingConsulting

• ““Simon Simon Associates”Associates”

• CustomersCustomers

• SuppliersSuppliers

• CreditorsCreditors

• ““BystanderBystanders”s”

• ““ColleagueColleagues”s”

Some Basic Economic Some Basic Economic Considerations Considerations

of Business Associationof Business AssociationOwners and Residual/Equity Owners and Residual/Equity InterestInterest

What’s Left Is Sally’sWhat’s Left Is Sally’s

Notion of ControlNotion of ControlR C , But What If R CR C , But What If R C

Joint Economic Enterprise Joint Economic Enterprise (Association) vs. Hired Inputs(Association) vs. Hired Inputs

=> Relationships => Bargaining, Dealing=> Relationships => Bargaining, Dealing

Bargaining Elements in Bargaining Elements in Association Relationships – Association Relationships –

Adding OthersAdding OthersDeal Points of Sally, Tom, Deal Points of Sally, Tom,

AnnAnn

Risk of Loss -- Who Bears?Risk of Loss -- Who Bears?

Return -- What?Return -- What?

Control -- How Much?Control -- How Much?

Duration – How Long?Duration – How Long?

Additional Bargaining Additional Bargaining Considerations – The Question of Considerations – The Question of

Structured RelationshipsStructured Relationships

Informal Agreement vs. Written Informal Agreement vs. Written ContractContract

InformalInformal WrittenWrittenInformation CostsInformation Costs

Transaction CostsTransaction Costs

EMPLOYEE EMPLOYEE SOMETHING MORE SOMETHING MORE

Structured Relationships – Intended Structured Relationships – Intended and By Defaultand By Default

Additional Bargaining Additional Bargaining Constraints in Association Constraints in Association Relationships – Realities of Relationships – Realities of

Business EnvironmentBusiness Environment

Conflict of InterestConflict of Interest

Government Government RegulationRegulation

Pertinent Forms of Pertinent Forms of Business Association Business Association

Sole Proprietorship -- Sally d.b.a. “AskSimon”Sole Proprietorship -- Sally d.b.a. “AskSimon”

Agency Relationships --AskSimon + Tom + AnnAgency Relationships --AskSimon + Tom + Ann

Partnership -- “Simon Associates”Partnership -- “Simon Associates”

Corporation – “AskSimon, Inc.” Corporation – “AskSimon, Inc.”

Hybrids/Unincorporated Associations Hybrids/Unincorporated Associations ―― LLC’s, LLC’s, LLP’s, LLLP’sLLP’s, LLLP’s

Putting All These Economic Putting All These Economic Considerations In Play, An Considerations In Play, An Entrepreneur Like Sally Must Then Entrepreneur Like Sally Must Then Choose The Form She Wants To Choose The Form She Wants To Operate Her Business (And This Can Operate Her Business (And This Can Evolve Over Time)Evolve Over Time)

The Simple Case of the One-The Simple Case of the One-Person Business: A Special Person Business: A Special

Sole ProprietorSole ProprietorSally d.b.a. “AskSimon”Sally d.b.a. “AskSimon”

Proprietorships as Organizations: Proprietorships as Organizations: Nexus of Associations/Contract RightsNexus of Associations/Contract Rights

Ownership + ManagementOwnership + Management

COMPETITORCOMPETITORSS

SALLY D.B.A. SALLY D.B.A. “AskSimon”“AskSimon”

CUSTOMERCUSTOMERSS

SUPPLIERSUPPLIERSS

BANKBANKPUBLICPUBLIC

Sole Proprietor’s Relationships Sole Proprietor’s Relationships

with Creditorswith Creditors

Unlimited LiabilityUnlimited Liability

Open AccountsOpen Accounts

Business and Personal DebtBusiness and Personal Debt

Debt and Equity; Equity Attributes Debt and Equity; Equity Attributes of Debtof Debt

LeverageLeverage

Pros and Cons of Sole Pros and Cons of Sole ProprietorshipsProprietorships

PROSPROS CONSCONS

SimplerSimpler Unlimited Unlimited LiabilityLiability

InexpensiveInexpensive Term – LifeTerm – Life

Easy to EvolveEasy to Evolve Hard to TransferHard to Transfer

Single TaxSingle Tax No “People No “People Leverage”Leverage”

ControlControl

Adding Others to the Simple Adding Others to the Simple Case: Agency RelationshipsCase: Agency Relationships

Nature of Agency -- Relationship, Nature of Agency -- Relationship, Scope, 3d PartiesScope, 3d Parties

Formalities -- Consideration, Writing, Formalities -- Consideration, Writing, CapacityCapacity

Termination Termination

PP

AA 3d3d

Deal Points in Agency Deal Points in Agency Negotiations – Sally, Tom, AnnNegotiations – Sally, Tom, Ann

Principal’s Control – How Task Principal’s Control – How Task PerformedPerformedPower to Terminate Power to Terminate Duration of Relationship Duration of Relationship Presence or Absence of IncentivesPresence or Absence of IncentivesSpecificity in DirectionSpecificity in DirectionAvailability of ReplacementsAvailability of ReplacementsVicarious LiabilityVicarious Liability

[S&R 19 – Problem 12][S&R 19 – Problem 12]AGENTAGENTSS

IC’IC’SS

Employees – Servant-AgentsEmployees – Servant-Agents

Non-Servant Non-Servant AgentsAgents

Duties of Principal and AgentDuties of Principal and Agent

Duties of P to ACompensation

ReimbursementIndemnification

Duties of A to PObedienceDiligenceLoyalty

P

authorizes agent to act

Aagrees to act

S&R 19 – S&R 19 – Problem 8Problem 8

Loyalty of Agents – Loyalty of Agents – Fiduciary DutiesFiduciary Duties

““Highest Punctilio” of DutyHighest Punctilio” of Duty

Duty Not to CompeteDuty Not to Compete

No Conflict of InterestNo Conflict of Interest

ConfidentialityConfidentiality

Duty to Account for Financial Duty to Account for Financial BenefitsBenefits

Principal’s RemediesPrincipal’s Remedies[S&R 19 – Argovitz Case (p. 339), [S&R 19 – Argovitz Case (p. 339),

Problem 11]Problem 11]

Types of Authority of Types of Authority of AgentsAgents

Actual AuthorityActual Authority

– Actual Express Authority Actual Express Authority – – WWritten/Spoken Words of Pritten/Spoken Words of P

– Actual Implied Authority Actual Implied Authority – I– Inferred nferred from Words or Conduct of P to Afrom Words or Conduct of P to A

Apparent Authority Apparent Authority – Reasonable Belief – Reasonable Belief of 3d Partyof 3d Party

[S&R 20 – Problem 4][S&R 20 – Problem 4]

Termination of Apparent Termination of Apparent AuthorityAuthority

Third Parties with whom agent previously dealt on credit with whom agent has begun to deal to whom agent has been especially accredited

Third Parties with whom agent previously dealt on cash to whom there was apparent authority

All Other Third Parties

ActualNotice

Required

ActualKnowledge

Required

ConstructiveNotice

Required

No NoticeNecessary

No KnowledgeNecessary

[S&R 20 – Problems 1, 12][S&R 20 – Problems 1, 12]

Rules of Contractual Rules of Contractual Liability – P, A, 3dLiability – P, A, 3d

Disclosed Principal Disclosed Principal

Undisclosed PrincipalUndisclosed Principal

Contract Liability - Disclosed Contract Liability - Disclosed PrincipalPrincipal

Agent Has No Actual or Apparent Authority

liable

Principal

Third PartyAgent

Agent Has Actual Authority

PrincipalThird PartyAgent

bound

Agent Has Apparent Authority But Not Actual Authority

indemnityboundPrincipal

Third PartyAgent

Contract Liability - Contract Liability - Undisclosed PrincipalUndisclosed Principal

reimbursement

bound

Agent Has Actual Authority

Principal Third PartyAgent

bound

Agent Has No Actual or Apparent Authority

Principal

Third PartyAgent bound

Tort Liability of PTort Liability of P

P’s Direct Liability P’s Direct Liability – P’s Own Conduct Injuring A, 3d P P’s Own Conduct Injuring A, 3d P – Authorized Acts of A Authorized Acts of A – Unauthorized Acts of A Unauthorized Acts of A – If P Failed to – If P Failed to

EExercise Care in Employing A xercise Care in Employing A

P’s Indirect Liability – Vicarious LiabilityP’s Indirect Liability – Vicarious Liability– Respondent Superior for Servant-A; Respondent Superior for Servant-A;

Not ICNot IC

[S&R 20 – Problems 7][S&R 20 – Problems 7]

Tort LiabilityTort Liability

Agent’s Tort Authorized

Employee’s Tort Unauthorized But Within Scope of Employment

Employee’s Tort Outside Authority and Scope of Employment or Independent Contractor’s Tort Unauthorized

liableindemnity*

liable

*If not illegal or known by A to be wrongful.Principal

Third PartyAgent

indemnity liable

liable

PrincipalThird PartyAgent

liable

PrincipalThird PartyAgent

Bottom Lines; Q&ABottom Lines; Q&ABusiness Association Makes Good Economic SenseBusiness Association Makes Good Economic Sense

The Economic, Financial, and Legal Considerations The Economic, Financial, and Legal Considerations Differ Among Various Forms of Business Differ Among Various Forms of Business Association Association

Sole Proprietorship is a Basic (Though Not Sole Proprietorship is a Basic (Though Not Default) Form of Business AssociationDefault) Form of Business Association

There Are Both Pros and Cons of Sole There Are Both Pros and Cons of Sole ProprietorshipsProprietorships

““People Leverage” Generally Makes Sense, But People Leverage” Generally Makes Sense, But Entails Both Costs and BenefitsEntails Both Costs and Benefits

Associating With Agents Brings Benefits, But Also Associating With Agents Brings Benefits, But Also Introduces Costs and Potential LiabilitiesIntroduces Costs and Potential Liabilities