Sources of Law Constitutional Law is based on a formal document that defines broad powers. Federal constitutional law originates from the U.S. constitution. State constitutional law originates from the individual state constitutions. Statutes and Ordinances are legislation passed on the federal, state, or local levels. Common Law is based on the concept of precedence – on how the courts have interpreted the law. Under common law, the facts of a particular case are determined and compared to previous cases having similar facts in order to reach a decision by analogy. Common law applies mostly at the state level. It originated in the 13th century when royal judges began recording their decisions and the reasoning behind the decisions. Administrative Law – federal, state, and local level. Administrative law is made by administrative agencies that define the intent of the legislative body that passed the law. The sources of law have both vertical and horizontal dimensions. Vertical dimensions include federal authority, state authority, and concurrent authority. Federalism refers to this form of government, in which there is national and local authority. Federal authority covers laws related to patents, pensions and profit sharing, and labor issues. State authority covers business association, contracts, and…

Ways to Reduce Legal Costs Once a small company having no in-house legal staff finds itself in litigation, it already has lost since the legal fees it pays may be large with respect to the company’s size. In the U.S., losers do not have to pay the winner’s legal fees, except in the case of frivolous suits, which are rare. Larger companies already have their own legal staff so the incremental cost of litigation for them may be small. Unfortunately, there is no pro bona program for companies that cannot afford legal defense. Small companies therefore must take actions to reduce potential legal costs. The follow steps can reduce legal costs substantially: When at all possible, don’t litigate – negotiate. Put into contracts a clause requiring the losing party to pay the winning party’s legal fees. Put an arbitration clause into contracts. Note that arbitration is binding and enforceable in court whereas mediation is non-binding. Purchase the broadest possible insurance policies in order to have the insurance company pay legal costs. Whenever possible, specify in contracts that any litigation be in your own state. The costs of going to court are much higher away from home. Types of Attorneys Two…

Duties to One’s Former Employer When starting a company, many entrepreneurs believe that the end justifies the means, and may be lax about fulfilling obligations to former employers. However, the fastest way to put a startup out of business is to sue it for violating duties to a former employer. Even if no duties were breached, such a lawsuit could result in over $100,000 in legal fees. There are two types of duties to former employers, those that arise from tort law and those that arise from contract law. Under agency law (tort law) there are three duties that an employee owes the employer: Duty of loyalty – the obligation to act only in the interest of one’s employer and not to compete with one’s employer. Even if one is working on one’s own project at home in the evening using one’s own computer and equipment, the project may constitute a breech of loyalty if it competes in the same line of business as that of the employer. Duty of obedience – the obligation to obey all reasonable orders of one’s employer. An act of insubordination is a violation of this duty. Duty of care – lack of performance is…

The sole proprietorship is the most common form of business structure for small companies. It is viewed as being one and the same as its owner. This characteristic has the advantage of simplicity but also has the disadvantage of personal liability. Taxation A sole proprietorship has pass-through taxation. The business itself does not file a tax return; rather, the income passes through and is reported on the owner’s personal tax return. Liability The owner of a sole proprietorship has unlimited personal liability. However, with insurance for tort risk and contractual limitations for contract risk, the sole proprietor can insure against most risks and operate with near the same level of comfort as the owners of a corporation. Continuity of existence A sole proprietorship exists only as long as the owner is alive or until the owner decides to close the business. Risk and Control The control of a sole proprietorship belongs entirely to the owner, who also assumes the full risk of the business. Transferability Transferring one’s interest in a sole proprietorship is very easy – one simply prepares an asset purchase agreement and sells the assets. The assets of a sole proprietorship are transferred with the estate of the…

A general partnership (or simply partnership) is an association of two or more people carrying on a business with the goal of earning a profit. A partnership is viewed as being one and the same as its owners. There is little formality involved in creating a partnership. In fact, if someone can establish that you are in business with somebody else, then there is a general partnership. The intention or lack thereof of having a formal partnership is not important. Existence of a Partnership Rules for determining the existence of a partnership are outlined in Part II of the Uniform Partnership Act (UPA). Some of these rules are summarized as follows: 1.  Joint tenancy, common property, part ownership, etc. does not by itself establish a partnership, regardless of whether the owners of the property share any profits from it. Three ways to jointly own property are: Tenants in common – when one dies, one’s portion of the partnership is transferred to one’s heirs. Joint tenancy – right of survivorship – when one dies, the entire interest goes to the other person. Tenancy by entirety – for example, a husband and wife. Each tenant owns by whole and by part. If…

A limited partnership (LP) consists of two or more persons, with at least one general partner and one limited partner. While a general partner in an LP has unlimited personal liability, a limited partner’s liability is limited to the amount of his or her investment in the company. LP’s are creatures of statute since they must file with the state to form them. Because of the limited liability of limited partnerships, they often are used as vehicles for raising capital. The limited partnership is a separate entity and files taxes as a separate entity. The statute that provided for the formation of limited partnerships was the Uniform Limited Partnership Act (ULPA), which dates back to 1916. In 1976, ULPA was revised into the Revised Uniform Limited Partnership Act (RULPA), which was amended in 1985 to address the issue of limited partners’ taking control. RULPA states that a limited partner shall not be liable as a general partner unless he or she takes control of the business. However, a limited partner is not considered to control the business if he or she is a member of the board of directors. Because the general partner is exposed to unlimited personal liability, LP’s…

  The corporation is the most sophisticated form of business entity and the most common among large companies. The corporate business form was well-developed under Roman law. In the second and third centuries, the corporate form was used by the early Christian church to hold and transfer church property, for example, for transferring control of parish assets to the new bishop when the previous bishop died. The corporate form was brought to the American colonies by the British. When to Incorporate A venture usually does not need to incorporate in its very early stages. The need for incorporation often arises from a specific event such as: The business begins to sell a product, opening up potential liability. The business seeks external financing, necessitating the need for a formal legal structure. Some other specific reason develops. From a venture capitalist’s point of view, C corporations are the preferred choice of business form because the VC partnership does not want to see the pass-through income. For entrepreneurs without VC funding, limited liability companies are the preferred choice since losses in the first few years can pass-through for personal tax deductions. Delaware now allows easy conversion from a limited liability company to a…

Preservation of limited liability is an important issue specific to corporations. The corporate protection of limited liability can be lost through: Piercing of the corporate veil Defective incorporation Improper signing of documents. Piercing the Corporation Veil A court may pierce through the veil of liability protection if the corporation does not follow proper corporate formalities, if it is undercapitalized, or if it can be shown that it is a sham that was set up to defraud. If the corporate formalities are not followed, the corporation may be deemed to not be functioning as a corporation, but rather, as the alter ego of the owners. To prevent the corporate veil from being pierced, it is important to keep minutes of the board meetings and to not co-mingle bank accounts. These measures help to ensure that the corporation will be treated as a separate entity should it be sued. Case:  Edwards Company, Inc.  v.  Monogram Industries, Inc. Facts In 1977, Monogram Industries, Inc. acquired Entronic Corporation, a company that produced smoke detectors. Monogram made the puchase through a wholly-owned subsidiary called Monotronics, itself a corporation. Monogram owned 100% of Monotronics’ stock. Monotronics then formed the Entronic Company, a limited partnership in which…

The internal affairs of a corporation are governed by the laws of the state in which it is formed. A corporation does not have to have an office or do business in the state in which it is incorporated; it need only have a registered agent in that state. There are companies such as CT Corporation System that will act as a registered agent in the state of incorporation. Delaware Delaware often is the preferred state of incorporation. Initially, Delaware gave management better rights in the event of a takeover, so in the 1940’s and 1950’s many corporations moved there. Delaware set up a court system that has expertise in commercial transactions and well-developed corporate law. Other states improved their corporate legal systems, but virtually every corporate attorney is familiar with Delaware law. Delaware also has the Delaware Asset Protection Trust, which permits one to set up a trust that cannot be touched by creditors but that allows one to get one’s money. Most other states require irrevocable trusts that prevent one from accessing one’s money once it is in the trust. The state of Alaska responded with a similar trust, but added spouses and children to the list of…

Historically, Delaware has been the state of choice for incorporation. However, some other states such as Nevada have shaped their corporate laws in order to attract corporations. Here is how Delaware and Nevada compare on several points: Taxes on corporate earnings: Delaware taxes the proportion of corporate profits earned in Delaware. Nevada is tax-free, regardless of where the profits are earned. Annual franchise tax: Delaware and most other states have an annual franchise tax on corporations. Nevada does not. Annual disclosure: Delaware requires an annual report of stockholder meeting dates, business locations outside of Delaware, and the number and value of shares issued. Nevada requires only the current list of officers and directors. In both Delaware and Nevada, the officers and directors can be one person. Protection of officers and directors: Nevada provides broader protection against personal liability of officers and directors than does Delaware. Shareholder disclosure: Nevada and Wyoming are two states that allow bearer shares. When corporations first came into existence, their stock certificates were like cash in the sense that whoever was holding them at the moment legally was the owner. However, in order to protect their shareholders against theft of the stock certificates, corporations began to…