Law for Small Businesses Part I Palomar College. The Importance of Legal Counsel Those with the desire to start their own business need to be sure to.

Law for Small BusinessesPart I

Palomar College

The Importance of Legal Counsel

• Those with the desire to start their own business need to be sure to cover the options and legal requirements thoroughly with respect to issues such as:– Finding an Attorney.– Selecting the Appropriate Business Form.– Creating the Business Entity.– Intellectual Property Assets.– Raising Financial Capital.– Buy-Sell Agreements and Key-Person Insurance.– Contract Law.– Credit and Payment Issues.– Employment Issues.

1. Selecting an Appropriate Business Form

• Factors to consider:– Limitation on Liability.– Tax Consideration.– Continuity of Life.– Legal Formalities and Expense.

• Sole Proprietorship• Franchise• Partnerships • Corporations

• LLC

Advantages Disadvantages

Owner is in complete control & receives all profits

Owner is personally liable for all torts/contracts

Flexibility Lacks continuity after death

Ease of creation; maintenance

Difficult to raise financing

Sole ProprietorshipsSole Proprietorships The owner is the business; anyone who does

business without creating a separate business organization has a sole proprietorship.

FranchisesFranchises Franchise: agreement so that Franchisor

(Owner of trademark, trade name or copyright) licenses Franchisee to use the trade mark, trade name or copyright in the sale of goods or services.

Types of Franchises: Distributorship. Chain Style Business Operation. Manufacturing or Processing Arrangement.

PartnershipPartnership

Partnership is created when two or more persons agree to carry on business for profit as co-owners with equal right to manage and share profits (UPA uniform Partnership Act – governs partnership with no written agreement).

Case 36.1: Cap Care Group Inc. v. McDonald (2002).

Definition of PartnershipDefinition of Partnership

Advantages Disadvantages

Easy to create and maintain

Partners are personally liable for all torts/contracts

Flexible, informal Dissolved upon death

Partners share profits and losses equally

Difficult to raise financing

Partnership FormationPartnership Formation Duration of Partnership.

Partnership for a term. Partnership at will. Partnership agreements

can be oral unless Statute of Frauds requires a written agreement. Practically, agreements should be in writing.

Capacity. Partners must have legal capacity.

Corporations. UPA permits corporations to be a partner.

The CorporationThe Corporation

• A corporation is a creature of statute, an artificial “person.”

• C or S Corporation• The shares (stock) of a corporation are

owned by at least one shareholder (stockholder).

Nature of the Corporation Nature of the Corporation [2][2]

The corporation substitutes itself for the natural persons in conducting corporate business and incurring liability, but its authority and liability are separate and apart from the shareholders.

In certain situations, the corporate “veil” of limited liability can be pierced, holding the shareholders personally liable.

Corporate TaxationCorporate Taxation

• Corporate profits can either be kept as retained earnings or passed on to the shareholders as dividends.

• Corporate profits are taxed under federal and state law as a separate “person” from its shareholders.

• Regular “C” corporations are taxed twice: at the corporate level and at the shareholder level.

• Case 37.1: Bullington v. Palangio (2001).

Corporate PersonnelCorporate Personnel

Individual shareholders own corporation. Shareholders elect board of directors to

manage corporation. Board of directors hires officers to run

corporation on a daily basis.

Corporate Personnel Corporate Personnel [2][2]

Body of shareholders can change constantly without affecting the continued existence of the corporation.

Shareholder can sue corporation and be sued by corporation and bring suit for corporation in some instances (derivative action).

Torts and Criminal ActsTorts and Criminal Acts A corporation is liable for the torts

committed by its agents or officers within the course and scope of their employment under the doctrine of respondeat superior.

Corporation can be liable for criminal acts, but only fined. Responsible officers may go to prison.

Creating the Business Entity

• The creation of a business entity must be done with caution, with attention to:– Choosing a Corporate Name.– Creating the articles of incorporation, bylaws,

and holding initial meetings.– Creating and maintaining corporate records.

LLCLLC

• Limited liability companies are relatively new creatures of state statute.

• An LLC is a hybrid entity that combines the limited liability of a corporation and the tax advantages of a partnership.

• LLC’s are increasingly become the entity of choice for businesses.

LLC’s LLC’s

1997 IRS rules provide that any unincorporated business (including LLC’s) will automatically be taxed as a partnership unless otherwise indicated on the tax return.

LLC’s are attractive in today’s global business environment because they allow foreign investors to own interests.

Nature of the LLCNature of the LLC

Like corporations, LLC’s are creatures of state law.

The owners are called “members” (not shareholders) and their ownership is called an “interest” (not shares).

Members of an LLC enjoy limited liability. Case 41.1: Kaycee Land and Livestock v.

Flahive (2002). Can a third party pierce the LLC “veil” and hold managing member liable?

LLC FormationLLC Formation

Articles of Organization require: Name of Business. Principal Address. Name and Address of Registered Agent. Names of the Owners; and How the LLC will be managed.

Business name must include LLC or Limited Liability Company.

2: Setting the Right Ethical Tone2: Setting the Right Ethical Tone

Importance of Ethical Leadership and Creating Ethical Codes of Conduct.

Costco. Clear Communications to Employees. Johnson and Johnson: web-based ethical

training. Corporate Compliance Programs.

Sarbanes-Oxley and Web-based reporting. Conflicts and Trade-Offs

Case 42.2: Varity Corp. v. Howe (1996).

3. Intellectual Property

• Trademarks, patents, and trade secrets are protected by intellectual property laws to protect the value of the investment in their creation and their economic potential into the future.

• Register your trademark at the U.S. Patent and Trademark Office. http://www.uspto.gov

• Case 54.1: Royal Appliance Mfg. Co. v. Minuteman International, Inc. (2002).

Types of Intellectual PropertyTypes of Intellectual Property

• Trademarks.– Service Marks.– Trade Dress.

• Patents.• Copyrights.• Cyberspace I.P.

Trademark InfringementTrademark Infringement

• Whenever a trademark is copied or use, intentionally or unintentionally, there is infringement.

• Trademark owner has cause of action against infringer,unless trademark is a “generic” term.

• Lanham Act designed to prevent consumer confusion about similar marks.

Cyber MarksCyber Marks

• Online trademarks.• Domain Names: www.westlaw.com – Conflicts: ICANN, WIPO.

• Anti-Cybersquatting Consumer Protection Act (1999) amended the Lanham Act.

• Meta Tags.• Case 7.2: Playboy Enterprises v. Welles

(2002).• Cyber Mark Dilution.

4. Contract Law and Small Business

• Contract law is complex, especially in the area of sales of goods.

• An attorney should be consulted for creating contract forms for specific purposes and transactions involving a significant investment or dealings in unfamiliar areas.

• Case 54.2: Instant Print Centers, Inc. v. Crowley (2002).

The contractThe contract

• Promise is a declaration that something will or will not happen in the future.

• What is a Contract?– Contract is an agreement (based on a promise)

that can be enforced in court.

• What law governs?– Service contracts - common law of contracts.– Sale and lease contracts - Uniform Commercial

Code (UCC).

Elements of a ContractElements of a Contract

• Agreement (Offer and Acceptance).• Consideration.• Contractual Capacity.• Defense:– Legality.– Genuineness of assent.– Form.

Types of ContractsTypes of Contracts

• Express v. Implied In Fact. Express: Words (oral or written). Implied In Fact: Conduct creates and

defines the terms of the contract. Requirements:• PL furnished good or service• PL expected to be paid• DEF had chance to reject and did not.

Case 9.1: Homer v. Burman (2001).

Types of Contracts -Types of Contracts -

• Bilateral v. Unilateral. Bilateral - Offeree must only promise to perform

(“promise for a promise”). Unilateral - Offeree can accept the offer only by

completing the contract performance (“promise for an act”).• Irrevocable: Offer cannot be revoked once

performance has begun.

Interpretation of ContractsInterpretation of Contracts• Plain Meaning Rule: Courts give terms their

obvious meaning.• Ambiguous Terms. If terms are ambiguous, court

will attempt to interpret ambiguous contract terms in a reasonable, lawful, effective manner. – Contracts are interpreted as a whole.– Terms negotiated separately given greater

weight.– Ordinary, common meaning given.

5. Employment Issues

• A knowledge of employment law is crucial, to avoid common mistakes in:– Hiring Employees.– Employee Compensation.– Workers’ Compensation.

Employment Issues [2]

– Unemployment Compensation.– Firing Employees.• Case 54.3: Roberts v. Dudley (2000).

– Covenants not to Compete.– Using Independent Contractors. (Common

abuse)

Employment at WillEmployment at Will

• Traditionally, employment relationships have been by common law doctrine of “employment at will.”

• Either party may terminate at any time for any reason.

• Exceptions: Contract, Tort, Public Policy.

Union OrganizationUnion Organization• Elections.– An election can be held only if it can be shown that at

least 30% of the workers will be represented.

• Election Campaigns.– The National Labor Relations Board regulates the

rights and obligations of employers and workers in the election process.

– Each side can pursue their objectives, but cannot interfere, beyond certain limits, in the other’s activities.

• Case 33.2: Associated Rubber v. NLRB (2002).

Worker Health and SafetyWorker Health and Safety

• The Occupational Safety and Health Act. (OSHA).– The fundamental federal law aimed toward

safety in the workplace.– Enforcement is by OSHA, NIOSH, and the

OSHRC.

State Workers’ State Workers’ Compensation LawsCompensation Laws

• Reduce employer liability to employees for workplace injuries, and provide a measure of assurance that workplace injuries will be compensated, regardless of the solvency of the employer, by:– Requiring that injured employees make a claim

against the employer’s workers’ compensation insurance policy, instead of suing the employer.

– Requiring most employers to carry workers’ compensation insurance.

Income SecurityIncome Security

• The primary income security laws are:– Social Security and Welfare. Case 33.3: U.S. v. Cleveland Indians Baseball

(2001).– Private Pension Plans.• Employee Retirement Income Security Act (ERISA)

gives employee a vested right to receive pension benefits at a future date when she stops working.

– Unemployment Compensation.

Types of employee MonitoringTypes of employee Monitoring• Lie Detector Tests.– Prohibited, except under the ongoing

investigation exception.

• Drug Testing.– Most government employees are subject to

testing and the rights of private employees vary from state to state.

• AIDS Testing.– Some state statutes restrict AIDS testing.

DiscriminationDiscrimination

• The most important federal anti-discrimination laws are:– Title VII of the Civil Rights Act of 1964.– The Age Discrimination in Employment Act.– The Equal Pay Act.– The Americans with Disabilities Act.

§1: §1: Title VII of theTitle VII of theCivil Rights Act of 1964Civil Rights Act of 1964

• Title VII prohibits discrimination in employment on the basis of race, sex, color, religion, and national origin. “Sex” now includes pregnancy.

• In addition to prohibiting religious discrimination, employers must reasonably accommodate an employee’s religious practices.

• Enforcement of Title VII by EEOC.

Intentional and Unintentional Intentional and Unintentional DiscriminationDiscrimination

• Intentional: “Disparate-Treatment” Discrimination. Applicant must prove:– She is member of a protected class;– Applied, qualified and rejected for job; and– Employer continued to seek applicants.

• Negligent: “Disparate Impact” Discrimination.– No-protected applicant sues Employer who tries

to integrate members of protected classes into workplace.

Race, Color and Race, Color and National OriginNational Origin

• Title VII prohibits employment policies or intentional/ negligent discrimination on basis of race, color or national origin.

• Company policies that discriminate are illegal, unless (except for race) they have a substantial demonstrable relationship to realistic qualifications for job.

Harassment by Co-WorkersHarassment by Co-Workers

• Employer generally liable only if employer knew or should have known and failed to take action. – Employee notice to supervisor is notice to

Employer under agency law.

• Employers may also be liable for harassment by non-employees.

• Same-sex harassment also violates Title VII.

Business Law

Part IIIntroduction to Law

and Legal Reasoning

Stare DecisisStare Decisis and Precedent and Precedent

Stare decisis is “judge made law” based on precedent.

Precedents are judicial decisions that give rise to legal principles that can be applied in future cases based upon similar facts.

Precedents and other forms of positive law, such as statutes, constitutions, and regulations, are referred to as binding authority and must be followed.

Stare DecisisStare Decisis and Legal and Legal ReasoningReasoning

Method used by judges to reach a decision. Many courts and attorneys frame decisions

and briefs using the IRAC format: Issue (What is the question to be resolved?) Rule (What law governs this matter?) Application (Apply the law to the facts) Conclusion (Decision or Verdict)

Civil vs. Criminal Civil vs. Criminal

Civil law defines the rights between individuals or individuals and governments.

Criminal law defines an individual’s obligations to society as a whole.

Basic Judicial RequirementsBasic Judicial Requirements

Jurisdiction: “Juris” (law) “diction” (to speak) is the power of a court to hear a dispute and to “speak the law” into a controversy and render a verdict that is legally binding on the parties to the dispute.

Original and Appellate JurisdictionOriginal and Appellate Jurisdiction

Courts of original jurisdiction is where the case started (trial).

Courts of appellate jurisdiction have the power to hear an appeal from another court.

Pre-Trial ProceduresPre-Trial Procedures((Stages of Litigation)Stages of Litigation)

Pleadings. Discovery. Pre-Trial. Trial. Post-Trial.

Jurisdiction in CyberspaceJurisdiction in Cyberspace

“Sliding Scale” Standard

Case 2.2 Bird v. Parsons

No Yes

Substantial Business

Interaction

PassiveWebsite

ComplaintComplaint

Trial CourtsTrial Courts “Courts of record”-court reporters. Opening and closing arguments. Juries are selected. Evidence, such as witness testimony,

physical objects, documents, and pictures, is introduced.

Witnesses are examined and cross-examined.

Verdicts and Judgments are rendered.

Alternative Dispute ResolutionAlternative Dispute Resolution

Trials are a means of dispute resolution that are very expensive and sometimes take many months to resolve.

There are “alternative dispute resolution” (ADR) methods to resolve disputes that are inexpensive, relatively quick and leave more control with the parties involved.

ADRADR ADR describes any procedure or device

for resolving disputes other than the traditional judicial process.

Unless court-ordered, there is no record which is an important factor in commercial litigation due to trade secrets.

Most common: negotiation, mediation, arbitration.

Online Dispute ResolutionOnline Dispute Resolution

Also called ODR Uses the Internet to resolve disputes. Still in its infancy but is gaining momentum. See, e.g., www.cybersettle.com .

U.S. Commerce ClauseU.S. Commerce Clause

• Power to regulate interstate commerce defined in Gibbons v. Ogden (1824).

• Expansion to private businesses began with Wickard v. Fillburn (1942). Today, Commerce Clause it authorizes the national government to regulate virtually any business enterprise, including internet. Limits: U.S. v. Lopez (1995)

• Case 4.1: Reno v. Condon (2000)

Torts

Basis of Tort LawBasis of Tort Law

• Doing business today involves risks, both legal and financial.

• A tort is a civil injury designed to provide compensation for injury to a legally protected, tangible or intangible, interest.

• There are intentional and unintentional (negligence) torts.

NegligenceNegligence

• Tortfeasor does not intend the consequences of the act or believes they will occur.

• Actor’s conduct merely creates a foreseeable risk of injury. Analysis:– Defendant owed Plaintiff a duty of care;– Defendant breached that duty;– Plaintiff suffered legal injury;– Defendant’s breach caused the injury.

Duty of CareDuty of Care

• Defendant owes duty to protect Plaintiff from foreseeable risks that Defendant knew or should have known about.

• Courts use reasonable person standard (jury) to determine whether duty exists.

• Duty of Landowners to invitees. Case 5.2: Martin v. Wal-Mart Stores, Inc. (1999).

Duty of CareDuty of Care

• Duty of care varies, based on the Defendant’s occupation, relationship to Plaintiff.

• Professionals may owe higher duty of care based on special education, skill or intelligence. Breach of duty is called professional malpractice.

Cyber TortsCyber Torts

• Defamation Online.– Liability of ISP’s.– Piercing the Veil of Anonymity.

• Spam.– Trespass to Personal Property.– Statutory Regulation of Spam.