Business Structures: Sole Proprietorship

One owner controls the business. Easy and inexpensive to form, with pass-through taxation, but the owner is personally liable for business debts.

Pass-through: owners report business profits and losses. Double taxation: a corporation pays tax on profits, and shareholders pay tax on dividends.

Owners generally risk their investment for business debts, but remain responsible for their own wrongdoing and debts they personally guarantee.

A franchisor licenses its brand and business system for a fee. The franchisee owns the local business but must follow the franchise agreement.

Chain: standardized brand and operations. Distributorship: sells the franchisor's products. Manufacturer/processor: makes products to the franchisor's specifications.

Requires disclosures about the franchise, costs, restrictions, finances, and other franchisees. Earnings claims are optional, but any claims made must be properly supported.

Two or more co-owners run a business for profit. Usually easy to form, with shared management and pass-through taxation, but general partners have unlimited personal liability.

Operating as co-owners for profit can create a partnership even without a written agreement or an intention to become legal partners.

Has at least one general partner who manages and generally has unlimited liability, plus at least one limited partner whose liability is generally limited to the investment.

Partners can participate in management while receiving a statutory shield from partnership liabilities. Each remains liable for their own wrongdoing.

Dissociation: a partner leaves. Dissolution: the business begins closing. Winding up: settle affairs, pay debts, and distribute remaining assets. Under RUPA, departure does not always require closure.

Sets ownership, profit/loss shares, authority, decision-making, disputes, and departures. Partners can owe tax on allocated profits even when the business keeps the money.

Owners, called members, generally receive limited liability and pass-through taxation. An LLC offers flexible management and can elect corporate tax treatment.

Member-managed: owners run the business. Manager-managed: designated managers run it; managers need not be owners.

Articles of organization form the LLC through a state filing. The operating agreement sets internal rules for management, ownership, distributions, and membership changes.

A separate legal entity owned by shareholders. Offers limited liability, continuing existence, and access to investors, but involves formalities, costs, and possible double taxation.

Shareholders elect directors. Directors oversee the business and select officers. Officers manage operations. An individual director generally cannot act for the board without authorization.

The charter authorizes the corporation; articles establish its basic structure. Bylaws govern internal operations and cannot override applicable law or the articles.

An act beyond corporate authority. Modern law generally does not automatically invalidate the contract, but shareholders or the state may seek to stop the conduct.

Domestic: incorporated in that state. Foreign: incorporated in another U.S. state. Alien: incorporated in another country.

The corporation's state of incorporation generally supplies the law governing its internal management.

Loyalty: put corporate interests before conflicting personal interests. Due care: make reasonably informed, careful decisions. Good faith: act honestly and do not deliberately ignore responsibilities.

Directors and officers must offer corporate opportunities to the corporation before taking them personally. Resigning does not erase an existing obligation.

Protects informed, good-faith decisions made without improper conflicts, even if they fail. It does not protect fraud, bad faith, gross negligence, or improper self-dealing.

Vote on directors and major changes, inspect records for a proper purpose, receive declared dividends, and bring qualifying derivative suits. Preemptive rights may also apply.

A quorum is the minimum directors or voting shares needed to conduct business, usually a majority. Shareholders may authorize proxy voters; directors generally cannot delegate their votes.

Straight: shares vote separately for each director seat. Cumulative: shares multiplied by open seats give votes that may be concentrated on one candidate, helping minority shareholders.

When provided, existing shareholders can buy a proportionate amount of new stock to maintain their ownership percentage and avoid dilution.

A shareholder sues for injury to the corporation; damages generally go to the corporation. The shareholder ordinarily must first demand board action unless applicable law excuses demand.

A C corporation is generally taxed separately, creating possible double taxation. An eligible S corporation elects pass-through taxation while retaining the corporate legal structure.

Generally must be domestic, have no more than 100 shareholders, have eligible owners such as U.S. citizens or residents and certain trusts or estates, and issue one class of stock.

Private: shares are not publicly traded. Closely held: ownership is concentrated in a small group, often with restrictions on selling shares.

Authorized: shares permitted by the articles. Issued: shares actually issued. Treasury: issued shares later reacquired and held by the corporation.

Common stock usually carries voting rights. Preferred stock has specified priorities, often for dividends or liquidation payments; its voting rights depend on its terms.

Legislative branch makes laws, executive branch enforces them, and judicial branch interprets them. Their main constitutional foundations are Articles I, II, and III.

Each branch restrains the others. Examples: presidential veto, congressional override by two-thirds of each chamber, and Senate confirmation of judges nominated by the president.

Courts can determine whether government action violates the Constitution and invalidate unconstitutional action.

Government power is divided between federal and state governments, each with authority in its own sphere.

Enumerated powers are expressly granted. The Necessary and Proper Clause allows appropriate means of carrying them out. McCulloch upheld Congress's implied power to create a national bank.

Police powers protect health, safety, welfare, and morals. Concurrent powers, such as taxation, are exercised by both federal and state governments.

Generally prevents unjustified discrimination against citizens of other states in important activities, such as earning a living.

States must recognize qualifying judgments and public records from other states, subject to applicable rules.

Congress may regulate commerce with foreign nations, among the states, and with Indian tribes.

Congress can regulate qualifying local economic activity affecting interstate commerce. Wickard allowed regulation of homegrown wheat because similar conduct by many farmers affects the national market.

Heart of Atlanta upheld federal regulation of a motel serving interstate travelers. Lopez rejected the school-zone gun law because its connection to interstate commerce was insufficient.

Limits state discrimination against or excessive burdens on interstate commerce. Favoring local businesses is generally invalid; even neutral laws can impose excessive burdens compared with local benefits.

Congress may authorize otherwise prohibited state discrimination. A state acting as a market participant, rather than a regulator, may often favor local buyers or sellers.

Valid federal law prevails over conflicting state law. Preemption may be express, occupy an entire field, or result from conflict. Without preemption, businesses may need to follow both laws.

Constitutional rights generally protect against federal, state, or local government conduct, rather than ordinary private conduct.

Government must show a compelling interest and a narrowly tailored, necessary means. Usually applies to racial classifications and restrictions on fundamental rights; hardest test for government to satisfy.

Government must show an important interest and a substantial relationship between the classification and that interest. Generally applies to sex-based classifications.

Government action must reasonably relate to a legitimate interest. Usually applies to economic and social-welfare regulation, which is generally upheld.

Expression about government or public issues receives strong First Amendment protection, including corporate speech. Content-based restrictions generally face strict scrutiny; valid time, place, and manner rules may still apply.

False or unlawful advertising is unprotected. Restrictions on lawful, nonmisleading commercial speech must directly advance a substantial government interest and be no more extensive than necessary.

Government may take private property for public use but must pay just compensation. Kelo held that qualifying economic redevelopment can satisfy the federal public-use requirement.

Government regulation restricts property use so severely that compensation may be required, even without physically taking ownership.

Government must use fair procedures when depriving someone of protected life, liberty, or property interests, generally including notice and an appropriate opportunity to be heard.

Limits the government's action itself. Economic regulation generally receives rational basis review; restrictions on protected fundamental rights generally receive strict scrutiny.

Government must justify treating similarly situated people differently. Race generally triggers strict scrutiny, sex triggers intermediate scrutiny, and ordinary economic classifications trigger rational basis review.

Certain personal decisions and private interests receive implied constitutional protection. The Constitution does not contain one express general privacy clause.

A civil wrong other than a mere contract breach. Liability may involve intent, negligence, or strict liability. Ordinary claims require a preponderance of evidence; one act may also be criminal.

Compensatory damages repay losses: special damages are economic; general damages cover noneconomic harm. Punitive damages punish serious misconduct. Nominal damages recognize a wrong without substantial proven loss.

An employer may be liable for an employee's tort within the scope of employment. The employee remains personally liable for their own wrongful act.

A detour is a minor work-related departure that may leave employer liability intact. A frolic is a substantial personal departure generally outside the scope of employment.

Hiring parties generally are not vicariously liable for independent contractors, but may be liable for their own negligent hiring or supervision. Actual control matters more than the worker's label.

Joint and several: one liable defendant may pay the entire recoverable injury. Several: each pays only their assigned share. Contribution allows reimbursement from another liable party.

Assault intentionally creates reasonable apprehension of imminent harmful or offensive contact. Battery involves intentional harmful or offensive contact, including contact with something closely connected to the person.

False imprisonment is unlawful intentional confinement. A merchant may reasonably detain a suspected shoplifter when there are reasonable grounds, using a reasonable manner and duration.

Extreme and outrageous conduct intentionally or recklessly causing severe emotional distress. Ordinary insults or rudeness are not enough.

Intentionally entering or remaining on another's land without permission or legal authority. Mistakenly believing the land is yours generally does not excuse the entry.

Trespass is lesser harmful interference with personal property. Conversion is serious interference that can require payment of its full value; Kremen applied it to a domain name.

A substantial, unreasonable interference with another's use and enjoyment of land, such as excessive fumes. Remedies may include damages or an injunction.

A known valid contract, intentional improper interference causing its breach or disruption, and resulting loss. Example: knowingly inducing an employee to breach an existing employment contract.

Improperly interfering with a likely future business relationship. Ordinary competition is generally lawful; fraud, threats, or other wrongful methods may create liability.

A false defamatory factual statement communicated to another, with required fault and legally recognized harm. Libel is written or lasting; slander is spoken. Publication means communication to a third party.

Substantial truth defeats a defamation claim. Absolute privilege protects covered proceedings. Qualified privilege protects certain communications but can be lost through abuse.

Public figures generally must show the speaker knew a statement was false or recklessly disregarded its truth. Actual malice does not simply mean personal dislike.

Appropriation: unauthorized use of identity. Intrusion: highly offensive invasion of private affairs. Disclosure: publicity of protected private facts. False light: publicity creating a highly offensive false impression.

Duty, breach of duty, actual cause, proximate cause, and damages. The plaintiff must establish all five; carelessness without legally recognized harm is insufficient.

Trespassers: no intentional harm or traps. Social guests: warn of known hidden dangers. Business visitors: reasonably discover and address hazards. State rules and exceptions can differ.

Ordinarily there is no duty to rescue strangers. Special relationships or undertaking assistance can create duties. Good Samaritan laws protect qualifying helpers within their statutory limits.

Use the care a reasonable person would under similar circumstances. Physical disability and relevant special skills matter; poor judgment does not generally lower the standard.

Ask whether the injury would have occurred without the defendant's conduct. If not, that conduct is a factual cause; an injury can have multiple causes.

Limits liability to harms within the foreseeable risks created by the conduct. Palsgraf lost because she was outside the reasonably foreseeable zone of danger.

An intervening event contributes to injury; a foreseeable one generally does not end liability. A superseding event legally breaks the chain, often because it is extraordinary and unforeseeable.

Slight: failure to use great care when required. Ordinary: failure to use reasonable care. Gross: serious failure to use even slight care, often involving reckless disregard.

Negligence may be inferred when the accident ordinarily implies negligence, the responsible instrumentality was under defendant's control, and plaintiff did not significantly cause it. Example: a sponge left inside a surgical patient.

A qualifying safety-law violation establishes or supports negligence when the plaintiff is in the protected group, suffers the targeted type of harm, and the violation causes it.

Under the traditional rule, even slight plaintiff negligence contributing to the injury can completely bar recovery.

Reduce recovery by the plaintiff's fault percentage, even if the plaintiff is mostly at fault. Example:

Recovery is reduced but barred at a cutoff. A 50% bar requires plaintiff fault below 50%; a 51% bar allows recovery at 50% but not above it.

The plaintiff knowingly and voluntarily accepts a particular risk. Traditionally a complete defense; some states instead incorporate it into comparative fault.

The deadline for filing a lawsuit. Missing it may bar recovery; deadlines and exceptions depend on the claim and jurisdiction.

Liability without proving intent or negligence when the rule's elements and causation are met. Traditional examples include wild animals and abnormally dangerous activities such as blasting.

A commercial supplier may be liable when a defective, unreasonably dangerous product causes injury without relevant substantial change. Direct purchase from the manufacturer and proof of negligent manufacturing are unnecessary.

A product differs from its intended design, such as an incorrectly assembled bicycle. Under the Third Restatement, separate proof of unreasonable dangerousness is unnecessary.

The product's design creates avoidable danger. The Third Restatement focuses on foreseeable risks that a reasonable alternative design could reduce or avoid.

Inadequate instructions or warnings leave foreseeable risks unaddressed. Manufacturers may need to anticipate misuse; Bunch illustrates that warnings must clearly communicate dangers to the intended audience.

Knowing assumption of risk, legally significant misuse, or a later alteration causing harm may reduce or bar recovery. Mere failure to discover a hidden defect generally does not count as fault.

Argues the product used the best available technology. It generally does not excuse a manufacturing defect; its relevance to design and warning claims varies.