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Study Guide: Test 2

Theories of Ethics
Ethical Fundamentalism look outside for right/rule indications
Utilitarian choice to do greatest good
Kantian moral duties based on universal rules
Rawls Theory of Social Justice contract binds all of us to live in peace and harmony
Ethical Relativism each situation is differ; moral
Choice will differ
Sometimes called situational ethics
- Lot of ethical problems in law
- There needs to be trust
Worldwide Widget (our created business)
Forms of Businesses
1. Sole proprietorship simple, least cost, most convenient business form
One owner + no legal entity
People commonly start businesses as this
They are entitled to all the profits of the business and all the risk/liability
(there is no difference between business and personal assets)
Taxed once on personal form
No additional govt reporting or registration (because it is not a legal
Easily transferred
Protected with insurance
**most convenient and least cost to establish
2. General partnership 1. one or more partners join to share all liability and all profit
2. Agreements which specify how profits and losses will be shared /
Partners are entitled to no salary
3. To carry out a business
4. To make profit
Own Names or D/B/A (doing business as)
Worldwide widgets give notice in order to operate in that name because people need to know who to
go after if something goes wrong
1) Indemnification reimbursement of expenses connected with business (reasonable
incurred, in proper course of business)
2) Loan repayment
3) Information
4) Accounting go to court to ask judge to review book and records to divide profits and
5) Return of Capital
Duties (3 principle duties):

1) Loyalty: no self-dealing, no secret profits, no misuse of assets, no breach of confidentiality

2) Care: treat reasonable employer + manager would
3) Obedience: Adhere to agreement + laws

Sole and partnerships are taxed once

Partnership cant be transferred because they share all the profits/ liability
When partnerships dont work anymore they go through a dissolution process

Dissolution + distribution of Assets (figuratively or literally)

1) Winding up process when one or more partners depart
2) Notice must be given by departing partner
3) Remaining partners entitled to compensation for wind up work
4) Assets are distributed after liabilities accounted for
a. Creditors repaid
b. Loans to partners
c. Indemnification process
d. Reserves for potential liability
e. Assets distributed
Entrepreneur: someone who starts and maintains a business
Corporation legal person, entity formed pursuant to statutory requirements for business purpose
Owned by stockholders or shareholders, Limited liability (shares)
Ultimate decisions/ management of the company rests with the board of directors (many
have some liability)
1. Shares are easily transferable
2. Perpetual existence
3. Officers appoint by board to manage day to day operations
4. Private corporation closely held + sold in face to face transactions
Public corporation any corporation who shares are traded on the stock exchange accessible to
the public
Nonprofit corporation organized around a mission, can make revenues and pay salaries (there
are no owners) but no person gets profit as owners, they dont pay taxes, residual go to another
non-profit (if they dont want to operate anymore)
Municipal corporation city owned or owned by some type of government entity to manage
provision of government services
Professional corporation owners must be members of the designated profession ex.
Accountants, doctors, etc.
*Corporation (legal person) shoulders all the liability
Domestic corporation within the borders of a state
Foreign corporation outside of the state
Alien corporation outside of the country

1. Choose a state (diff. states have different law for corporation)
2. Name
3. Incorporators (the parents)
4. Articles of Incorporation (document that says name, incorporators, place), it can be amended if
5. Registered Agent receive all legal documents given to the corporation, so the company has
someone to accept the complaint
6. Establish bylaws governing document of corporation (ex. Establish board of directors, how
many times they need to meet, how many shares would be issued)
7. Corporate Seal some signature or mark that the corporation designate to show it actions

All corporations go through this process of birth and further processes if necessary
Example: non-profits also have to register with someone else after the birthing process

*Ultra vires Action when a corporation acts outside of the boundaries it has established for itself
Owners or Atty general can sue for injunction, they can also sue Board of D
Atty general can seek to dissolve
How do corporations finance their operations?
1. Stock issuance
Common stock: residual value of corporation after liabilities
Preferred: - participation in management
- dividend right
- liquidation preferences
- conversion to common stock
2. Issued: sold
Authorized: capable of being sold by by-laws
Outstanding: traded in market
Treasury: repurchased by corporation

Debt taking on liability

- Debenture: long term debt (secure or unsecure)
- Bond: long term secured debt (backed by asset)
- Notes: Short term debt (5 years or less), secure
of unsecured
Indenture Agreement : terms of borrowing time,
security, interest, etc.

Corporation Dissolution
1. Voluntary by filing articles of dissolution
2. Administratively: state will dissolve corporation for failures to meet obligations to it
3. Judicially: action of attny general seeking end to corporations for fraud of ultra vires act

Biggest advantage of signing corporation is limited liability

How do Corporations act?

They have designated people even though the corporation itself is a legal person
Power to Act
1. Express authority through statues (what corporations can/cannot do), found in the federal statues, state
statues, by laws, articles of incorporation, and corporation resolutions (occurs when they want to do

something they dont have laws for already and the B o D gets together and votes on it based on other
2. Implied authority takes acts to execute express authority ex, take check and make investment
Agent person who acts on behalf of corporation
Agency fiduciary (trust) relationship which results from
1. Manifestation on evidence of authority +consent
2. One person will act for another
3. On his/her/ its behalf
4. Under that persons (corporation) consent + control
*Agency relationship requires 2 parts
1. Principle one who directs and controls
2. Agent agrees to represent and act for principle
Board of directors elected by shareholders to manage, control, supervise, make policy for corporation
Inside directors employee of company
Outside directors (independent) not employed, but can receive compensation

Board governors through corporation resolutions

Activities guided by articles of incorporation and bylaws

Officers people specify bylaws, can or cannot sit on the board, responsible for day-to-day operations
- They can be director of board, an employee or not
- Or it can be outside lawyer
You have independent directors because inside directors might make decisions to benefit their salary
Director Duties
1. Obedience: act within authority
2. Care: a) good faith b) ordinary prudent person c) reasonably they are acting in Corps. best interest
3. Loyalty: directors have to act honestly and put corporations interest above their own
No self-dealing, no usurpation of corps opportunities, no secret profits, compete with corporation
What happened when things go wrong? Jail time
Some laws that were tightened due to tyco, enod, etc
New Law
*Sarbanes Oxley (2002)
CEO/CFO have to certify that financial statement contain no untrue statements of material facts
CEO/ CFO required to reimbursement of company ad bonuses
Prohibits personal loans by corporations
Penalties for evidence tampering
Could be barred as director or officer for time or always
Companies are required to have code of conduct or tell why they dont have one
Audit committee of directors
Piercing the corporate veil: shareholder dominating corporation can be subject to liability if acting outside of the
lines of using corporation to further personal interests

*Principle person who controls relationship

*Agency relationships
1. Express principle tells the agent what to do in a direct and obvious way/ direction is clear with verbal or
written instruction
2. Implied agency agreement + from course of conduct, it is not written or verbal, it is just implied
3. Apparent no consent but to outside observer it still appears to the public that he has consent
Principle Duties
1. Compensate Agent
2. Reimburse
3. Indemnify
4. Cooperate enables agent to do task designed
1. Perform any task assigned
2. Accounting show receipts
3. Notify have to keep agency informed, required to notify, in case they have to make another plan
Termination of agency agreement
1. Act
2. Change in circumstance ex. Randomly lost deal
3. Impossibility of performance ex. The building you were going to buy burned to the ground
4. Operation of law ex. There was zoning law changes
5. Wrongful termination ex. Person terminated due to discrimination

Corporations use agents to act in the world

Workers Compensation creates administrative procedure injured workers on the job to be compensated for
injury exclusive remedy for injury
OSHA promotes workplace safety, specific + general regulations
FLSA 1. Forbids child and oppressive labor
2. Establishes minimum wage
3. Established overtime wages, for non-exempt workers
Nonexempt: hourly worker
Exempt worker: 50 or more employees work more than 1 year, the have control over how the work is
delivered (2+3 does not apply because it is at a professional level)
FMLA guarantees time off (unpaid) for family and medical emergencies (birth, adoption, foster placements,
self-health, immediate family health)
COBRA right for employees to continue their health insurance benefits at the employers cost if terminated
or quit (18 months)
Unemployment compensation terminated from job, you are entitled to pay
*employment at will* - you can be fired at any time or any reason/ no reason at all