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Chapter 9
Torts & Civil Wrongs

Halsey/McLaughlin, Legal Environment

You will be able to answer the following questions after reading this chapter:

  • What is reasonable foreseeability?
  • What is considered trespass?
  • What is an unintentional tort?
  • What are the elements of negligence?
  • What is res ipsa loquitur?
  • What is an abnormally dangerous activity?
  • What are cyber torts?

Basic Tort Law

Halsey/McLaughlin, Legal Environment

  • Intentional Torts: Torts in which a person acts with intention and as a result harms another person.
  • Unintentional Torts: Torts in which a person unintentionally acts in a way that causes harm to another.
  • Reasonably Foreseeable: A legal standard that asks whether a reasonable person could foresee that there would be harm from the act or behavior.

Negligence

Halsey/McLaughlin, Legal Environment

  • Duty of care owed by the defendant
  • Breach of that duty by the defendant
  • The breach of that duty caused harm to the plaintiff
  • Actual damages (harm) to the plaintiff

 

Res Ipsa Loquitur

Halsey/McLaughlin, Legal Environment

Res IpsaLoquitur: Latin for “the thing speaks for itself,” a tort theory that the fact that an accident took place means that the defendant had a duty to the plaintiff and breached it.

Defenses to Torts

Halsey/McLaughlin, Legal Environment

  • Assumption of the Risk: The plaintiff’s knowing the risk of harm in a given situation yet still participating in the behavior. It is a defense to certain tort claims.
  • Comparative Negligence:A defense to unintentional torts that provides that if the plaintiff was negligent (as well as the defendant), the plaintiff can only recover a portion of his damages from the defendant because he caused some of his own injuries.

Defenses to Tort

Halsey/McLaughlin, Legal Environment

  • Contributory Negligence:A defense to unintentional torts that provides that if the plaintiff was negligent at all, she would not be able to recover for any of the injuries caused by the defendant.

Strict Liability

Halsey/McLaughlin, Legal Environment

  • Strict Liability: Liability of one who sells a defective product or engages in abnormally hazardous activities for any damages that may occur because of using that product or engaging in that activity even if there was no negligence or intent to harm.

Products Liability

Halsey/McLaughlin, Legal Environment

  • Design Defects: A products-liability defective condition that occurs when the product was poorly designed.

  • Manufacturing Defects: A products-liability defective condition that occurs when a product was correctly and safely designed but there was an error in the manufacturing process on one, some, or all of the units.

  • Failure to Warn: A products-liability defective condition that occurs when there are dangers inherent in the products that are not obvious to the user and the defendant did not warn of those dangers.

Abnormally Dangerous Activities

Halsey/McLaughlin, Legal Environment

  • Abnormally Dangerous Activity: An activity in which a defendant engages that cannot be performed safely and for which a defendant is held strictly liable for the harm caused if something goes wrong regardless of fault or precautions taken.

Class Action Lawsuits

Halsey/McLaughlin, Legal Environment

  • Class Action Lawsuits: Cases in which one or more plaintiffs represent the interests of all the plaintiffs who have similar damages from a similar set of facts.
  • Class Action Fairness Act of 2005 (CAFA):A federal law that increased federal court jurisdiction over class actions where the amount in controversy was more than $5 million and there are plaintiffs who come from several different states.

Business Torts

Halsey/McLaughlin, Legal Environment

  • Wrongful Interference with a Contractual Relationship: A business tort in which there is a valid, enforceable contract between two parties; a third party knows of the contract; and the third party intentionally interferes with the contract and causes one party to breach the contract.

Cyber Torts

Halsey/McLaughlin, Legal Environment

  • Cyber Tort: Use of the Internet and modern communications technologies like mobile phones that causes harm to others.

  • Controlling the Assault of Non-Solicited Pornography and Marketing Act (CAN-SPAM): A federal law that places restrictions on bulk electronic marketing.

Chapter10
Legal Considerations in Selecting
the Business Format

Halsey/McLaughlin, Legal Environment

You will be able to answer the following questions after reading this chapter:

  • What is the importance of situs to a business?
  • What is the importance of capitalization to a business?
  • What is double taxation?
  • What is the danger of personal liability to a business owner?
  • What benefit does easy transferability of ownership give a business owner? 

Where to Establish a Business

Halsey/McLaughlin, Legal Environment

  • Situs: The legal and operating jurisdiction of a business.

Liability

Halsey/McLaughlin, Legal Environment

  • Liability: Responsibility for the inappropriate action or the inaction of a person or an entity like a business.

  • Limited Liability: Liability that is restricted by law or by contract and that prevents the owner of a business from being held personally liable for business debts. The owner can only lose his or her investment in that company.

Tax Treatment

Halsey/McLaughlin, Legal Environment

  • Tax Planning: The advanced study of the tax consequences of a given business’s configuration and operations. Tax planning also includes directing the configuration and operations in such a way so as to minimize or eliminate tax liabilities.

  • Tax Rate: The percentage of tax paid by an entity on every given dollar of taxable income received.

Tax Implications

Halsey/McLaughlin, Legal Environment

  • Shareholders: The owners of a corporation through shares.

  • Double Taxation: The taxation of a business’s profits twice—first, at the level of the business, and second, at the level of the owners.

  • Profit: The money made for the business and its owners after all expenses, taxes, and costs are paid.

Chapter 11
Overview of the Variety of Business Formats

Halsey/McLaughlin, Legal Environment

You will be able to answer the following questions after reading this chapter:

 

  • What are the basic differences between sole proprietorships, partnerships, limited partnerships, corporations, limited liability partnerships, and limited liability companies?
  • Who are the owners of each business type?
  • What are tax attributes of each business type?
  • How is each type of business created?
  • What are the transfer advantages and disadvantages for each business type?
  • What are the liability features of each business type?
  • What are the control mechanisms for each business type?

Sole Proprietorships

Halsey/McLaughlin, Legal Environment

  • Sole Proprietorship: The oldest form of business, formed by one person, and easily created and ended without interference from the state (excluding licensing and permit issues). It provides no liability protection for the sole proprietor.  
  • Personal Liability: Liability for which a person’s personal assets are subject to collection to satisfy a debt.

Partnerships

Halsey/McLaughlin, Legal Environment

  • Partnership: A business whereby two or more partners join together with common purpose to accomplish a goal.
  • Joint and Several Liability: Liability in which two or more parties are each entirely liable for a debt to a third party. The third party may collect on the debt from one party, the other, or both in any proportion necessary in order to satisfy the debt.
  • Pass-Through Entities: Business entities that do not pay their own income taxes. Instead, they file information returns with the taxation authorities, and the owners pay the taxes on the income, once, as appropriate, at the owners’ personal tax rates.

Limited Partnerships

Halsey/McLaughlin, Legal Environment

  • Limited Partnership: A form of business created by permission of the state consisting of a general partner and limited partners. The general partner has full control of the management of the business, and full personal liability. Limited partners have no personal liability for the acts of the business, but they cannot participate in its management or operations in any way.

  • General Partner: A partner in a standard partnership. Also a partner in a limited partnership who has full control of the management of the business as well as and full personal liability.

  • Limited Partner: A type of partner in a limited partnership who has no personal liability for the acts of the business but who cannot participate in its management or operations in any way.

Corporations

Halsey/McLaughlin, Legal Environment

  • Corporation: A legal entity independent from its owners that is usually formed to do business. It exists under state law and has most of the rights, duties, and obligations of a flesh-and-blood person.

  • Shareholders: The owners of a corporation.

Corporations

Halsey/McLaughlin, Legal Environment

  • Corporate Formalities: A term used to describe the actions that a corporation must take in order to be considered a corporation in good standing and to remain as a corporation in good standing with the relevant state government.

  • C Corporation: A type of corporation that pays taxes at the corporate level and that may be publicly traded. Most large corporations are required to have C corporation status. C corporations may retain earnings within the corporation or distribute them to shareholders as dividends.

 

  • Dividends: The share of C corporation earnings and profits distributed to the shareholders.

Control of Corporations

Halsey/McLaughlin, Legal Environment

  • Board of Directors: A group elected by the shareholders of a corporation for a fixed term of office and that provides overall direction to the corporation. It approves large changes in vision and direction, and it appoints the officers of the corporation.

  • Officers: Those charged with the day-to-day running of a corporation. The officers are appointed by the board of directors.

Limited Liability Partnerships

Halsey/McLaughlin, Legal Environment

  • Limited Liability Partnerships (LLPs): A variation on the general partnership in which partners are personally liable for the debts of the partnership as in a general partnership, but they are not personally liable for the torts (professional malpractice, usually) of the other partners. Many states restrict use of the LLP business form to professional businesses like those of attorneys, doctors, architects, and the like.

Limited Liability Companies

Halsey/McLaughlin, Legal Environment

  • Limited Liability Companies (LLCs): A relatively new form of legal business entity that combines the limited liability of a corporation with the pass-through taxation features and ease of management of a partnership.

  • Members: The owners of an LLC.

Chapter 12
Formation of Corporations

Halsey/McLaughlin, Legal Environment

You will be able to answer the following questions after reading this chapter:

  • Who are the parties involved in the preincorporation stage of a corporation?
  • What are the differences between domestic, foreign, and alien corporations?
  • What is the role of a registered agent for a corporation?
  • What are the requirements for a corporate name?
  • What are the roles of bylaws and articles of incorporation?

Preincorporation

Halsey/McLaughlin, Legal Environment

  • Preincorporation: The beginning of a corporation’s life cycle, prior to the filing of articles of incorporation with the state.

  • Promoters:The persons who perform the basic steps needed to create a corporation.

Registered Agents

Halsey/McLaughlin, Legal Environment

  • Registered Agent: The agent named by the corporation to accept legal notifications and service of process in the state.

  • Service of Process: The formal procedure whereby notice of a lawsuit or other legal process is given to a defendant.

 
Purpose

Halsey/McLaughlin, Legal Environment

  • Declaration of Purpose: A legal description of the purposes of a corporation’s founding that is required to be included in the articles of incorporation.

Bylaws

Halsey/McLaughlin, Legal Environment

  • Bylaws: The basic rules and regulations internal to a corporation that govern those internal workings and the relationships between all of the shareholders, directors, and officers of the corporation.

De Jure and Defective Corporations

Halsey/McLaughlin, Legal Environment

  • De Jure Corporation: A corporation that has been formed in accordance with all applicable laws.

  • Defective Corporation: An attempted corporation that has failed to meet some requirement for legal corporate status successfully.

Corporation by Estoppel

Halsey/McLaughlin, Legal Environment

  • Corporation by Estoppel: A defective corporation that is treated as a valid corporation for its dealings with a specific third party.

  • Estoppel: A legal doctrine that prevents a party’s denial of a corporation’s status.

Chapter 13
Corporate Financial Structure

Halsey/McLaughlin, Legal Environment

You will be able to answer the following questions after reading this chapter:

  • What is the Securities Act of 1933?
  • What are the differences between common and preferred stock?
  • What are bonds and their role in financing the corporation?
  • What is the role of the Securities and Exchange Commission?
  • What is the importance of the disclosure of material facts and registration of publicly traded stocks?

 

Equity Securities

Halsey/McLaughlin, Legal Environment

  • Equity Securities: A security issued by a corporation that represents a right of ownership or a right to a share of profits in the corporation.

 

  • Common Stock: provides the shareholder who owns that stock several rights.

  • Common Stock: The standard stock issued by a corporation that provides the right to vote, to dividends, and to a share of the assets of the corporation upon dissolution.

Preferred Stock

Halsey/McLaughlin, Legal Environment

  • Preferred Stock: A second type of stock issued by a corporation that generally does not provide the right to vote (although it may) but that does provide dividends and a share of the assets of the corporation to preferred shareholders before holders of common stock.

Debt Securities

Halsey/McLaughlin, Legal Environment

  • Debt Securities: Securities issued by a corporation in order to raise funds. They represent a debt of the corporation, but not an ownership interest.

Debt

Halsey/McLaughlin, Legal Environment

  • Bonds: A debt security whereby the company, in exchange for borrowed money, agrees to pay back investors holding the bonds a set amount of interest either periodically or at the end of the bond’s term, and then the principal amount at the bond’s maturity.

  • Promissory Note: A contract whereby one party agrees to pay a sum of money to another party.

  • Principal: The amount borrowed under a loan that remains unpaid, excluding interest.

  • Maturity: The end date for a bond at which the principal and outstanding interest are repaid.

Regulation

Halsey/McLaughlin, Legal Environment

  • Securities and Exchange Commission: The administrative agency of the federal government that is responsible, in part, for enforcing the securities laws of the United States.

  • Registration: For these purposes, a requirement of the SEC that a publicly traded company disclose a description of the company’s properties and business; a description of the security to be offered for sale; information about the management of the company; and financial statements certified by independent accountants.

Chapter 14
Qualification of Corporations in Foreign Jurisdictions and
Piercing the Corporate Veil

Halsey/McLaughlin, Legal Environment

You will be able to answer the following questions after reading this chapter:

  • What is the importance of jurisdiction to corporations?
  • Why must a corporation obtain authorization to do business in a state?
  • What are some common prohibitions imposed on unauthorized corporations doing business in a state?
  • How is the doctrine of piercing the corporate veil used in legal actions against corporate shareholders?

 

Jurisdiction

Halsey/McLaughlin, Legal Environment

  • Jurisdiction: The geographical area and subject matter within which a given governmental entity has power.

Statutory Prohibitions

Halsey/McLaughlin, Legal Environment

  • Statutory Prohibitions: In this context, provisions penalizing unauthorized corporations for doing business in a state.

Piercing the Corporate Veil

Halsey/McLaughlin, Legal Environment

  • Personal Liability: Liability for which an individual is personally responsible and for which a harmed party can seek recompense from that individual’s personal assets.
  • Piercing the Corporate Veil: A legal theory in every state that allows creditors of the corporation to move past the corporation, and its liability shields, and go directly to the personal assets of the officers, directors, and shareholders of the corporation.

Chapter 15
Corporate Meetings

Halsey/McLaughlin, Legal Environment

You will be able to answer the following questions after reading this chapter:

  • What are the various types of corporate meetings?
  • What are the requirements of a valid meeting?
  • What is a shareholder agreement, and what does it contain?
  • What is the difference between a merger and a combination?
  • What is entailed in the dissolution of a corporation?

 

Corporate Meetings

Halsey/McLaughlin, Legal Environment

  • Annual Meetings: Meetings that state statutes require corporations to hold for the board of directors to discuss corporate business with shareholders.

  • Special Meetings: Meetings called to discuss urgent but non-regular business of the corporation.

Requirements

Halsey/McLaughlin, Legal Environment

  • Quorum: The minimum number of persons eligible to vote that must attend the meeting.
  • Notice: A legal requirement that corporate meetings must be announced and declared in such a way as to notify all persons eligible to attend the meeting.
  • Waiver of Notice: An act by a party entitled to notice of a meeting indicating that it is not necessary to notify himof the meeting’s time and place.

Shareholder Agreements

Halsey/McLaughlin, Legal Environment

  • Shareholder Agreements: Contracts that provide basic guidance for the relationships among and between the shareholders.

Mergers and Consolidations

Halsey/McLaughlin, Legal Environment

  • Merger: The combining of corporate assets whereby one corporation is absorbed by another.
  • Consolidation: The combining of corporate assets whereby two corporations form a new, successor third corporation.

Chapter 16
Limited Liability Companies

Halsey/McLaughlin, Legal Environment

You will be able to answer the following questions after reading this chapter:

  • What is a limited liability company?
  • How is an LLC formed?
  • What are the advantages and disadvantages of this form of business?
  • How is an LLC terminated?

LLC

Halsey/McLaughlin, Legal Environment

  • Operating Agreement: A written contract between the members of a limited liability company that sets out the basic parameters of the members’ relationships with each other.

Management of the LLC

Halsey/McLaughlin, Legal Environment

  • Member-Managed LLC: An LLC managed by its members.
  • Manager-Managed LLC: An LLC managed by hired managers chosen by the members.
  • Board of Managers: A group of individuals chosen to manage the LLC in manager-managed LLCs. The board of managers functions like a board of directors.

Termination

Halsey/McLaughlin, Legal Environment

  • Articles of Termination: The formal paperwork filed with the state authority that ends an LLC’s existence.

Chapter 17
Partnerships and Limited Partnerships

Halsey/McLaughlin, Legal Environment

You will be able to answer the following questions after reading this chapter:

 

  • What is a partnership?
  • What are the features of a partnership agreement?
  • What is partnership by estoppel?
  • What is a limited partnership?
  • What kind of liability do partners and limited partners have?

Partnership

Halsey/McLaughlin, Legal Environment

  • Limited Partnership: An organization of partners with one or more general partners who control the business and have full liability and one or more limited partners who contribute capital and have limited liability but who cannot participate in management of the business.
  • General Partner: In a limited partnership, the partner who manages the partnership business and has full personal liability.
  •  Limited Partner: In a limited partnership, the partner who contributes capital and has personal liability only to the extent of that capital contribution but who cannot participate in management of the partnership.

Regulation

Halsey/McLaughlin, Legal Environment

  • Uniform Partnership Act of 1994:An Act adopted by individual states that governs the operation of partnerships where the partnership agreement has not addressed an issue.

Aggregate or Entity

Halsey/McLaughlin, Legal Environment

  • Entity Theory: A partnership theory stating that the partnership is an enterprise separate from the individual partners.

  • Aggregate Theory: A partnership theory stating that the partnership enterprise does not have an existence separate from the individuals who are its partners.