The Law of Corporations and Other Business Organizations

Chapter Review Answers

⦁ Identify whether the following business names would likely require the filing of a fictitious business name statement.

Wally’s Muffler Repair Shop
Requires a fictitious name statement because the owner’s surname is not included

Walter Anderson’s Muffler Repair Shop
Does not require a fictitious name statement because the owner’s surname (and full name) are included

Anderson’s Muffler Repair Shop
Does not require a fictitious name statement because the owner’s surname is included

Anderson & Associates Muffler Repair Shop
Requires a fictitious name statement because it implies the existence of other owners

Cupcakes by Cara
Requires a fictitious name statement because no surname is included

⦁ Sarah is operating a small catering business from her home. She has one full-time employee. At a recent event, Sarah’s employee spilled red wine on the client’s expensive rug, causing $5,500 damage. Sarah has $2,500 in the business bank accounts. Who is liable to pay for this damage, and from what sources may the customer recover?

Under the doctrine of respondeat superior, Sarah is liable for the acts of her employee, which occurred in the course and scope of the employment. A creditor may recover from Sarah’s business assets ($2,500) and from any of Sarah’s personal assets (personal bank accounts, personal items and effects, and so forth – assuming no exemptions) until the debt is satisfied. Because sole proprietors have personal liability, a creditor may recover from business and personal assets.

⦁ Using the facts from the previous question, discuss whether there is anything Sarah might have done to protect herself from liability.

Sarah may have obtained liability insurance to cover this sort of occurrence. It’s unlikely Sarah would be able to obtain some form of release by the client or agreement by the client not to hold Sarah personally liable.

⦁ Jake is the owner of a well-known restaurant that he has operated as a sole proprietorship for several years. He would like to expand his business and open additional restaurants although he lacks capital to do so. Discuss whether Jake should continue to maintain his business as a sole proprietor or whether he should consider a different business structure.

Sole proprietors such as Jake often have difficulty raising capital, which can hamper expansion of the sole proprietor’s business. If Jake is determined to expand and cannot borrow money from a bank (and lacks his own funds), he should likely consider bringing in a partner or perhaps incorporating and then selling shares to others to raise funds.

⦁ Amanda has significant financial assets. Discuss the advantages and disadvantages for her in operating her physical therapy business as a sole proprietorship.

The biggest disadvantage for Amanda is that she is operating a fairly high-risk business; her clients/customers may allege that she caused them additional physical injuries, which could result in significant liability. Because sole proprietors suffer unlimited personal liability, Amanda is exposing all of her “significant” financial assets to this liability. Advantages of operating as a sole proprietor are the ease and flexibility of maintaining this business, the pass-through taxation, and the ability to make all decisions without consulting others. Other disadvantages include the limited ways of raising capital and lack of continuity of the business.