Basic Business Law (BPP432/80) 2006 Fall Quarter

1. Basic Business Law (BPP432/80) 2006 Fall Quarter Instructor: David Oliveiri Week 8: Facilitating Exchange Through Business Association; The Simple Case – Sole Proprietor + Agents

2. Agenda • Introduction to Business Association • Sole Proprietorships • Agency Concepts • Sole Proprietor + Agents

3. Learning Objectives • Understand Why Business Association Makes Good Economic Sense • Understand Some Basic Economic, Financial, and Legal Considerations of Business Association • Understand How These Concepts Apply To One-Person Businesses • Understand Pros and Cons of Sole Proprietorships • Understand When “People Leverage” Makes Sense • Understand the Nature, Costs, and Benefits of “People Leverage” • Understand Pros and Cons of Sole Proprietorships + Agents

4. Introduction to Business Association • MBA Learnings = f(Optimizing Exchange) • Contracts Facilitate Exchange • Optimization => More, Faster, Cheaper • Optimization = f(Association, …)

5. SALLY SMITH “AskSimon” • Assembles Capital • Opens Accounts • Borrows ANN TOM • Customers • Suppliers • Creditors • “Bystanders” • “Colleagues” • Spreadsheets • Phone • Manual • Hourly Wage • Sales Force Consulting • “Simon Associates”

6. Some Basic Economic Considerations of Business Association • Owners and Residual/Equity Interest What’s Left Is Sally’s • Notion of Control R C , But What If R C • Joint Economic Enterprise (Association) vs. Hired Inputs => Relationships => Bargaining, Dealing

7. Bargaining Elements in Association Relationships – Adding Others Deal Points of Sally, Tom, Ann • Risk of Loss -- Who Bears? • Return -- What? • Control -- How Much? • Duration – How Long?

8. Additional Bargaining Considerations – The Question of Structured Relationships • Informal Agreement vs. Written Contract InformalWritten Information Costs Transaction Costs EMPLOYEE SOMETHING MORE • Structured Relationships – Intended and By Default

9. Additional Bargaining Constraints in Association Relationships – Realities of Business Environment • Conflict of Interest • Government Regulation

10. Pertinent Forms of Business Association • Sole Proprietorship -- Sally d.b.a. “AskSimon” • Agency Relationships --AskSimon + Tom + Ann • Partnership -- “Simon Associates” • Corporation – “AskSimon, Inc.” • Hybrids/Unincorporated Associations ― LLC’s, LLP’s, LLLP’s Putting All These Economic Considerations In Play, An Entrepreneur Like Sally Must Then Choose The Form She Wants To Operate Her Business (And This Can Evolve Over Time)

11. The Simple Case of the One-Person Business: A Special Sole Proprietor Sally d.b.a. “AskSimon” • Proprietorships as Organizations: Nexus of Associations/Contract Rights • Ownership + Management COMPETITORS CUSTOMERS SUPPLIERS SALLY D.B.A. “AskSimon” BANK PUBLIC

12. Sole Proprietor’s Relationships with Creditors • Unlimited Liability • Open Accounts • Business and Personal Debt • Debt and Equity; Equity Attributes of Debt • Leverage

13. Pros and Cons of Sole Proprietorships PROSCONS Simpler Unlimited Liability Inexpensive Term – Life Easy to Evolve Hard to Transfer Single Tax No “People Leverage” Control

14. Adding Others to the Simple Case: Agency Relationships • Nature of Agency -- Relationship, Scope, 3d Parties • Formalities -- Consideration, Writing, Capacity • Termination P A 3d

15. Deal Points in Agency Negotiations – Sally, Tom, Ann • Principal’s Control – How Task Performed • Power to Terminate • Duration of Relationship • Presence or Absence of Incentives • Specificity in Direction • Availability of Replacements • Vicarious Liability Employees – Servant-Agents [S&R 19 – Problem 12] AGENTS IC’S Non-Servant Agents

16. authorizes agent to act P A agrees to act Duties of Principal and Agent Duties of P to A Compensation Reimbursement Indemnification Duties of A to P ObedienceDiligence Loyalty S&R 19 – Problem 8

17. Loyalty of Agents – Fiduciary Duties • “Highest Punctilio” of Duty • Duty Not to Compete • No Conflict of Interest • Confidentiality • Duty to Account for Financial Benefits • Principal’s Remedies [S&R 19 – Argovitz Case (p. 339), Problem 11]

18. Types of Authority of Agents • Actual Authority • Actual Express Authority – Written/Spoken Words of P • Actual Implied Authority – Inferred from Words or Conduct of P to A • Apparent Authority – Reasonable Belief of 3d Party [S&R 20 – Problem 4]

19. ActualNotice Required Actual Knowledge Required ConstructiveNotice Required No KnowledgeNecessary No NoticeNecessary Termination of Apparent Authority Third Parties  with whom agent previously dealt on credit  with whom agent has begun to deal  to whom agent has been especially accredited Third Parties  with whom agent previously dealt on cash  to whom there was apparent authority All Other Third Parties [S&R 20 – Problems 1, 12]

20. Rules of Contractual Liability – P, A, 3d • Disclosed Principal • Undisclosed Principal

21. Agent Has Actual Authority Agent Principal Third Party bound Agent Has Apparent Authority But Not Actual Authority Agent Principal Third Party bound indemnity Agent Has No Actual or Apparent Authority Principal Agent Third Party liable Contract Liability - Disclosed Principal

22. Agent Has Actual Authority Principal bound reimbursement Agent Third Party bound Agent Has No Actual or Apparent Authority Principal Agent Third Party bound Contract Liability - Undisclosed Principal

23. Tort Liability of P • P’s Direct Liability • P’s Own Conduct Injuring A, 3d P • Authorized Acts of A • Unauthorized Acts of A – If P Failed to Exercise Care in Employing A • P’s Indirect Liability – Vicarious Liability • Respondent Superior for Servant-A; Not IC [S&R 20 – Problems 7]

24. *If not illegal or known by A to be wrongful. Principal liable indemnity* Third Party Agent liable Principal liable indemnity Third Party Agent liable Principal Third Party Agent liable Tort Liability Agent’s Tort Authorized Employee’s Tort Unauthorized But Within Scope of Employment Employee’s Tort Outside Authority and Scope of Employment or Independent Contractor’s Tort Unauthorized

25. Bottom Lines; Q&A • Business Association Makes Good Economic Sense • The Economic, Financial, and Legal Considerations Differ Among Various Forms of Business Association • Sole Proprietorship is a Basic (Though Not Default) Form of Business Association • There Are Both Pros and Cons of Sole Proprietorships • “People Leverage” Generally Makes Sense, But Entails Both Costs and Benefits • Associating With Agents Brings Benefits, But Also Introduces Costs and Potential Liabilities