The Law of Corporations and Other Business Organizations

Chapter Review Answers

⦁ Is a general partnership or a corporation easier to form? Why?

A general partnership is easier to form because few (if any) state filings will be required. Corporations are subject to far heavier regulatory control (by the states in which they are formed and operate and possibly by federal and state securities laws).

⦁ What is the purpose of an S corporation?

The purpose of an S corporation is to provide relief against the burden of double taxation to which “regular” or “C” corporations are subject.

⦁ Which business entities afford pass-through taxation?

The following business entities afford pass-through taxation: sole proprietorships, general partnerships, limited partnerships, limited liability partnerships, limited liability companies, and S corporations. (C corporations are subject to double taxation, and professional corporations may be subject to flat tax rates.)

⦁ Chelsea has asked David to attend an art auction for her and to bid on a sculpture called “Sunrise.” Chelsea has informed David that she will pay no more than $20,000 for the sculpture. David later entered into an agreement with Jon to submit bids on Jon’s behalf at the auction.

⦁ May David represent both Chelsea and Jon at the auction?

David may represent both parties if their interests will not conflict. For example, if Chelsea is only interested in the sculpture, and Jon in interested only in oil paintings, their interests will not conflict. If their interests will conflict, David must obtain the consent of each principal because his loyalty to each principal must be undivided.

⦁ May David bid on “Sunrise” for both Chelsea and Jon?

David likely cannot bid on “Sunrise” for both parties/principals. A successful bid for one principal is clearly going to be unsuccessful for the other, violating David’s duty of loyalty to his principals. Even if both principals consent, there is likely to be an irreconcilable conflict. (Nevertheless, if Jon is willing to pay more than $20,000 for “Sunrise,” once a bid exceeds this limit that Chelsea has imposed, there is no longer a conflict with Chelsea’s interests, and David could likely represent Jon in this instance, assuming full disclosure has been made, because his duties to Chelsea will have been performed.)

⦁ If David successfully bids on “Sunrise” for Chelsea for $18,000, may David inform Chelsea that the purchase price was $20,000 and then retain the extra $2,000?

No. Agents such as David have duties to account to their principals for all money paid out or received on the principal’s behalf. Retaining “extra” money also violates the agent’s fiduciary duty and the duties of loyalty and notification.

⦁ ABC Moving Company has hired various employees. One of these employees dropped a grand piano in the process of moving it for one of ABC’s customers, causing damage to the piano. Who has liability for the damage to the piano? Would your answer be different if the mover who dropped the piano was a contractor hired by ABC for this one-time event?

The act of moving the piano clearly occurred in the course and scope of the employee/agent’s duties. Thus, the principal (ABC Moving Company) is liable for this act if done by an employee. If the negligent act were done by the independent contractor, the contractor would retain liability for the act, and ABC Moving Company would generally not have liability for the negligence act (unless it directed the act).