Critical Legal Thinking Cases, business and finance homework helpd

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Assignment

Prepare answers to the following cases from this week’s reading.

  • Case 29.1: Creation of an Agency on pages 498

Critical Legal Thinking Cases

29.1 Creation of an Agency Renaldo, Inc., doing business as Baker Street, owned and operated a nightclub in Georgia. On the evening in question, plaintiff Ginn became “silly drunk” at the nightclub and was asked by several patrons and the manager to leave the premises. The police were called, and Ginn left the premises. When Ginn realized that his jacket was still in the nightclub, he attempted to reenter the premises. He was met at the door by the manager, who refused him admittance. When Ginn persisted, an unidentified patron, without the approval of the manager, pushed Ginn, who lost his balance and fell backward. To break his fall, Ginn put his hand against the door jamb. The unidentified patron slammed the door on Ginn’s hand and held it shut for several minutes. Ginn, who suffered severe injuries to his right hand, sued the nightclub for damages. Is the unidentified patron an agent of the nightclub? Ginn v. Renaldo, Inc., 183 Ga.App. 618, 359 S.E.2d 390, Web 1987 Ga.App. Lexis 2023 (Court of Appeals of Georgia)

  • Case 37.7: Piercing the Corporate Veil on page 636

37.7 Piercing the Corporate Veil M.R. Watters was the majority shareholder of several closely held corporations, including Wildhorn Ranch, Inc. (Wildhorn). All these businesses were run out of Watters’s home in Rocky Ford, Colorado. Wildhorn operated a resort called the Wildhorn Ranch Resort in Teller County, Colorado. Although Watters claimed that the ranch was owned by the corporation, the deed for the property listed Watters as the owner. Watters paid little attention to corporate formalities, holding corporate meetings at his house, never taking minutes of those meetings, and paying the debts of one corporation with the assets of another. During August 1986, two guests of Wildhorn Ranch Resort drowned while operating a paddleboat at the ranch. The family of the deceased guests sued for damages. Is Watters personally liable? Geringer v. Wildhorn Ranch, Inc., 706 F.Supp. 1442, Web 1988 U.S. Dist. Lexis 15701 (United States District Court for the District of Columbia)

Your responses should be well-rounded and analytical, and should not just provide a conclusion or an opinion without explaining the reason for the choice.

For full credit, you need to use the material from the week’s lectures, text, and/or discussions when responding to the questions. It is important that you incorporate the question into your response (i.e., restate the question in your introduction) and explain the legal principle(s) or concept(s) from the text that underlies your judgment.

For each question, you should provide at least one reference in APA format (in-text citations and references as described in detail in the Syllabus. Each answer should be double spaced in 12-point font, and your response to each question should be between 300 and 1,000 words in length.

Submit this assignment as a single Word document covering both cases.

Note: Please be sure you refer to the numbers that appear on the printed pages in your electronic readings, not the numbers that appear with the navigation icons.

Week 7 Lectures:

Employees and Independent Contractors

The law of agency applies to all businesses, because all businesses use people to perform at least some tasks. A business as a principalacts through its employees and contractors as its agents. Most agents who work for a business are employees, but this is not always as straightforward as it may sound. Employers are liable for torts committed by employees within the scope of the employment, a legal doctrine known as respondeat superior, from a Latin term meaning “Let the master respond.” A tort committed by an employee in the course of performing job duties, on or away from the job site, is committed within the scope of the employment. Torts committed by employees on their own time, or when deviating from their work to enjoy a frolic, are not done within the scope of the employment, and the employer will not be liable for these torts. This is where the actual status of an agent can get tricky: Are they an employee or an independent contractor? The difference can be very costly.

Example

Fresh Foods hires Pedro as an employee. His job duties include driving a company delivery truck to grocery stores. On Monday, while driving a load to Eastside Grocery, he ran a red light and struck a car driven by Tanya, who was injured. On Friday, with some extra time before his last delivery of the day, he decided to drive to a theater and watch a movie. Pulling out of the movie theater parking lot, he cut a corner too short and damaged some shrubbery. Fresh Foods is liable for Tanya’s injuries resulting from Pedro’s negligent driving, because driving is within the scope of Pedro’s job duties. Fresh Foods is not liable to the movie theatre for the damaged bushes, because Pedro was on a frolic, not acting within the scope of his job duties when he went to the movies. Only Pedro is liable for the damaged bushes.

Employers also sometimes hire contractors to perform services. The doctrine of respondeat superior generally does not apply to contractors. If a contractor negligently injures someone or damages someone’s property in the course of performing work, the contractor is liable, but not the principal (employer). Because of this, many businesses have attempted to hire contractors, rather than employees, to perform necessary work.

The fact that an employer characterizes a worker as a contractor is not determinative of that worker’s status. The IRS, for payroll tax withholding purposes, and the courts, for tort liability purposes, looks at a series of factors, collectively known as the Economic Realities Test, to determine whether a purported contractor is truly independent, or is really an employee. A true independent contractor has an occupation or business different from the employer, works without supervision, supplies his or her own tools, is hired and paid by the job, not on a continuous basis, and does not receive benefits (vacation, health insurance, etc.) from the employer. If an employer is controlling the time and manner of doing the work, training and supervising the worker, supplying the tools, employing the worker on a continuous basis, and paying compensation on a regular schedule (weekly, biweekly, monthly, etc.), the worker is an employee. If some of the factors lean in favor of the worker being an employee and others lean toward independent contractor status, the courts look at the weight of the factors. Thus, it is very important for you to know exactly where you stand with someone you think is your employer? Does your position meet the criteria? If not, what will you do to minimize your liability when on the job?

Example

Martin hires Zena as a delivery driver. Zena is an experienced commercial truck driver. Martin directs Zena to make deliveries to customers on Tuesdays-Saturdays, between 8 AM and 6 PM. Martin provides Zena with a company delivery truck, and Zena loads it, without supervision, and makes delivery runs on a schedule set up by Martin. Zena is paid per delivery and per mile, and paid monthly. He is not provided with benefits and no taxes are withheld from his pay. Though some factors indicate Zena is a contractor (He’s experienced, loads the truck without supervision, is paid per job, pays his own taxes, and does not receive benefits), most factors indicate Zena is an employee (He’s working full-time and continuously for Martin, who controls the schedule, provides him with the truck, and pays him on a regular schedule). Zena is an employee (and Martin is violating tax law by not withholding taxes from his pay).

Whether one is an employee or an independent contractor, workers are agents for the principal who employs them. There are several ways an agency relationship can be formed. Typically, an agency is formed by agreement between the principal and agent, even though no written contract is signed. The exchange: “You’re hired”, and “Great. When do I start?”, forms an agency by agreement. Even when the parties do not agree to establish an agency relationship, an agency may arise by ratification, words or acts by a principal approving actions taken on his behalf. An agency may also arise by estoppel, when a principal causes a third person, such as a customer, to believe that someone is his agent.

Example

Joan owns a gift shop. Heather owns a cafe next door to Joan’s shop. Heather signs a receipt for a delivery of merchandise made to Joan’s shop when Joan is out. Heather had no authority to do so. Joan returns, displays the new merchandise and sells it. Joan has ratified Heather’s conduct in accepting the delivery.

Example

Amy rents a room above Joan’s shop. Joan tells Vera, a customer, that Amy can handle any returns the customer may need to make when Joan is out. Joan previously told Amy she is never to let anyone in the shop when she is out. Vera stops by one day when Joan is out, and Amy opens up the shop and handles a return of merchandise. Though Amy has no authority to handle the return, an agency by estoppel exists, preventing Joan from denying that Amy was her agent in handling the return.

Agents and principals owe each other certain fiduciary duties, duties of trust and confidence.

An agent owes five duties to a principal: performance (using reasonable care to perform job duties), notification (informing the principle of important matters), loyalty (keeping the principle’s information confidential and avoiding conflicts of interest with the principal’s business), obedience (following the principle’s lawful instructions unless an emergency dictates otherwise), and accounting (accounting to the principal for money and property collected on the principal’s behalf).

A principal owes five duties to an agent: compensation (paying the agent for services rendered), reimbursement (reimbursing the agent for expenses incurred on the principal’s behalf), indemnification (defending and compensating the agent for liability incurred because of the agent’s lawful actions on the principal’s behalf), cooperation (assisting the agent in performing her duties), and safe working conditions (providing a safe workplace and equipment to the agent).

Example

Charles works for Elizabeth. Elizabeth tells him to visit a client and prepare a report. Charles does so, incurring $50 in transportation expense. In the course of the visit, he learns that the client intends to stop doing business with Elizabeth. The client offers Charles $1,000 to give her a list of Elizabeth’s other clients. Charles refuses to do so. Charles has fulfilled his duties of obedience, performance, and loyalty but has a duty to notify Elizabeth of the client’s intention. Elizabeth has a duty to reimburse Charles for the transportation expense in addition to his compensation.

An agent’s authority can be actual or apparent. Actual authority, as the name indicates, means the principal told the agent what to do. If the principal was very specific and clear (“Fax this draft to the accountant”), the actual authority is also express authority. Actual authority also includes impliedauthority, the authority inferred in the nature of the agent’s job or something necessary to carry out express authority (“Fax this draft to the accountant,” implies “Turn on the fax machine”). Apparent authority, on the other hand, occurs when the principal, through words or actions, causes a third person to reasonably believe an agent has authority to act, even though the agent does not. This is another subtle area you need to consider with respect to your own position in the workplace to avoid unexpected and unnecessary liability.

Example

Amy rents a room above Joan’s shop. Joan tells Vera, a customer, that Amy can handle any returns the customer may need to make when Joan is out. Joan previously told Amy she is never to let anyone in the shop when she is out. Vera stops by one day when Joan is out, and Amy opens up the shop and handles a return of merchandise. Though Amy has no authority to handle the return, because Joan caused the customer to believe that Amy had that authority, Amy has apparent authority to handle the return, and has no liability to Joan as a result of handling the return.

Sometimes an agent enters into a contract on the principal’s behalf. If the agent acts within the scope of their authority in entering into the contract on the principal’s behalf and the third party knows who the principal is (a disclosed principal), the principal must honor the contract. In this situation, the agent has no liability to anyone if either party does not perform as agreed. If the third party knows the agent was acting on another person’s behalf, but does not know who the principal is (a partially disclosed principal), the principal must honor the contract. In this situation, however, most states make the agent liable to the third party if the principal fails to honor the contract. If the agent does not disclose that they are acting on behalf of a principal when negotiating a contract with a third party (an undisclosed principal), both the agent and the principal are bound by the contract, and the third party may sue either of them if the contract is not honored. If an agent who has no authority to enter into contracts for a principal does so, the agent, and not the principal, is liable to the third party.

Example

Brianna hires Shannon to arrange her packing and moving for a job transfer. Shannon is authorized to hire a moving company. Shannon hires Monster Movers, stating that the moving packing arrangements are for Brianna. Shannon also signs a contract to have some of Brianna’s property professionally cleaned, which she was not authorized to do. She informed the cleaning company that the property to be cleaned belonged to Brianna. Brianna is bound to honor the contract with Monster Movers, because Shannon was authorized to enter into that contract and Brianna was a disclosed principal. Shannon is liable on the cleaning contract, but Brianna is not, because Shannon was not authorized to make that contract. The fact that Brianna was disclosed as a principal to the cleaning company has no effect on this outcome.

Forms of Business Organization

Prospective business owner(s) must decide on a legal form under which the business will operate. The form of business organization used affects

  1. the number of individuals necessary to form the business and operate it;
  2. the control, the owners (and other investors, if any) have the day-to-day business operations;
  3. the liability of the owners and investors;
  4. the relationship between the owner(s) and other investors, such as shareholders;
  5. the life span of the business, and the relative ease or difficulty of changes to the business’ ownership;
  6. the ability of the business to raise money or obtain other financing;
  7. the insurance needs of the business; and
  8. the taxation of the business’ profits.

The most common forms of business organizations are listed below, with some of the pros and cons of each, and an example of how such a business must be named in order to inform the public of its structure.

Most Common Forms of Business Organizations

Type

Features

Advantages

Disadvantages

Name Examples

Sole Proprietorship

Single owner; may use a trade name (d/b/a).

  1. Easiest to set up; very few formalities.
  2. Owner controls the business and receives all profits.
  3. No double income taxation of business profits.
  1. Owner has unlimited personal liability for business debts.
  2. Business dies with the owner.
  3. Owner relies on personal funds and loans to build the business.
  4. Owner pays both employer and employee contributions to Social Security/Medicare on self-employment income.

Sam Smith Enterprises

Sam Smith d/b/a “The Greasy Spoon”

General Partnership

Two or more owners who share control and profits.

  1. Sharing of responsibility of operating the business.
  2. Ability to pool financial resources to build the business.
  3. No double income taxation of business profits; profits flow through to each partner, who pays at his or her personal income tax rate.
  1. Unlimited personal financial liability by each partner for business debts.
  2. Partnership ceases if any partner dies or leaves.
  3. Possibility of conflict between partners over how business is operated.

Smith and Jones

Smith, Jones, Hill & Adams

Limited Partnership

Two or more partners, with a general partner who operates the business day to day, and limited partners who invest capital for a share of the profits.

  1. Easier to attract capital because limited partners are not personally liable for partnership debts.
  2. Same tax benefits as a general partnership.
  1. General partner has unlimited personal liability for partnership debts.
  2. Limited partners have no say in the operation of the partnership business.

Smith & Associates, Ltd.

Smith & Sons, L.P.

Limited Liability Partnership (LLP)

Similar to a limited partnership, most common partnership form for professional practices (accountants, lawyers, etc.). Also popular for family-based partnership businesses.

  1. Same benefits as a limited partnership.
  2. Allows professionals to avoid personal liability for the malpractice of other partners.

Same as a limited partnership, except no liability for other partners’ malpractice.

Smith Enterprises, LLP

Smith & Jones, LLP

Corporation

  1. A separate legal entity from its founders, owners, and managers.
  2. Owned by shareholders, managed by officers, with oversight by a Board of Directors.
  3. Shareholders elect Directors, who appoint Officers.
  1. No individual liability for corporate debts. Only the corporation (entity) is liable.
  2. Ability to raise capital to build and expand the business by selling shares of stock to investors.
  3. In an “S” Corporation (organized under Subchapter S of the Internal Revenue Code), income is taxed the same as in a partnership. There is no double taxation of profits.

In a “C” Corporation (organized under Subchapter C of the Internal Revenue Code), income is taxed at the corporate level, and again when paid to shareholders as dividends.

The Greasy Spoon, Inc.

Smith & Jones Co.

SJH Corp.

Limited Liability Company (LLC)

  1. Same separate entity approach as a corporation.
  2. Owners are called members, and management can be member-based or manager-based.
  1. Same as a corporation (above).
  2. No double taxation of corporate profits—treated as a limited partnership for tax purposes.

LLC Statutes are not uniform from state to state, creating potential problems for LLCs that plan to operate in multiple states.

The Greasy Spoon, LLC

Smith Jones Hill, LLC

Smith Enterprises, LLC

Limited Liability Company (LLC)

  1. Same separate entity approach as a corporation.
  2. Owners are called members, and management can be member-based or manager-based.
  1. Same as a corporation (above).
  2. No double taxation of corporate profits—treated as a limited partnership for tax purposes.

LLC Statutes are not uniform from state to state, creating potential problems for LLCs that plan to operate in multiple states.

The Greasy Spoon, LLC

Smith Jones Hill, LLC

Smith Enterprises, LLC

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