Business Organizations

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Select two of the scenarios listed below and explain the best solution for each. Include comments related to any ethical issues that arise. Support your responses with appropriate cases, laws and other relevant examples by using at least one scholarly source from the SUO Library in addition to your textbook for each scenario.

Scenario I – Business Organizations

Yolanda, Ginny, and Sara met while working for the Campus Subs in Knoxville, Tennessee. Yolanda was attending college to earn a business degree in hospitality. Ginny was attending culinary school to become a chef, and Sara was a recent graduate in sales and marketing. The three ladies decided to open their own soup and sandwich restaurant on wheels, also known as a food truck. They planned to start small with one truck but had big dreams to own a whole fleet of trucks that served a variety of foods.

Yolanda took a business law class and remembers there are several forms for organizing businesses. The ladies have come to you for advice about the various forms of business organizations.

Evaluate three forms of business organizations including advantages and disadvantages related to the business the ladies plan to operate. At least one of the options must be the LLC or LLP.
Select a business form for the friends and defend your choice.
Explain the requirements for starting that form of business in your state.
Scenario 2—LLC Liability

Plaintiffs Karl and Ginny Drake were injured by lead paint while living in a house owned by Riverwood Homes, LLC. The plaintiffs sued Bill Ding, a member of the LLC at the time it owned the property, alleging that he was liable for their injuries. Ding had limited involvement with the property. He has never visited the property, and neither he nor the LLC was aware that the plaintiffs were occupying the property until after the LLC acquired it. Once they realized this fact, they took legal action to have the plaintiffs removed. The applicable housing code imposes liability on any individual who “owns, holds, or controls” the title to the property.

Is Ding liable for the plaintiffs’ injuries?
What are the policy arguments in favor of both parties?
Scenario 3—Securities

In 2010, after working at Regions Bank for 6 years, Noah Lott helped found Nova Capital Corporation, a venture capital firm that invested in the technology sectors. NCC went public in 2012, and Lott served as its CEO and chairman of the board. Various documents filed with the SEC stated that Lott “earned his MBA in finance from Harvard University and an undergraduate degree in management.” In fact, he attended Harvard for only year and did not graduate. After being pressured by a journalist, Lott disclosed the misrepresentation to the NCC board. The same day, the company issued a press release correcting the statement.

The press responded negatively to “another CEO that lied about his resume” and speculated about “what else might not be right.” On the day the press release was issued, NCC’s stock price dropped from $33.58 per share to $26.40, but it fully recovered within a six weeks.

Shareholders sued, alleging that the misrepresentation violated section 11 of the 1933 Act, section 10(b) of the 1934 Act, and Rule 10b-5.

Was Lott’s lie about having a college degree material?
Would your answer be the same if a CEO lied about having helped to take a company through an initial public offering and subsequent acquisition by another company and having led a pharmaceutical company from incorporation through human clinical trials and launch of a new drug?
If you were a member of the NCC board, would you be comfortable keeping Lott as CEO once you learned that he had lied about having a college degree?
Scenario 4 – Bankruptcy and Secured Transactions

Coastal Property Restoration (CPR) periodically purchased used restaurant equipment from Slyce Pizza Company. CPR refurbishes and sells restaurant equipment to small restaurants. In December 2015, CPR purchased five used pizza ovens for $25,000. Because of the good relationship between the companies, Slyce financed the ovens for two years; however, Slyce did not obtain a perfected security interest in the ovens. In July 2016, CPR sold four of the ovens to another refurbishing company for $2,000 two days before filing bankruptcy. CPR still owes approximately $20,000 to Slyce for the ovens.

Evaluate the legal and ethical issues associated with CPR’s sale of the pizza ovens before filing bankruptcy. What recourse does Slyce have in recovering the monies still owed on the equipment or the remaining oven?

 

Sample Solution

Choosing the Right Business Form for a Food Truck

Three forms of business organizations to consider:

  1. Sole Proprietorship:

This is the simplest and most common form of business. The owner is personally liable for the business’s debts and obligations.

 

Partnership: A partnership involves two or more individuals who share the profits and losses of a business. There are two types of partnerships: general and limited.

 

Limited Liability Company (LLC): An LLC offers limited liability protection to its members while allowing them to choose the tax treatment of the business.

 

Advantages and Disadvantages:

Business Form Advantages Disadvantages
Sole Proprietorship Easy to form and manage, flexible, no double taxation Unlimited personal liability
Partnership Shared profits and losses, pooled resources Unlimited personal liability for general partners, potential conflicts between partners
LLC Limited liability protection, flexibility in tax treatment, can be managed by members or managers More complex to form and manage than a sole proprietorship or partnership, annual fees and filings required

Export to Sheets

Recommended Business Form:

For a food truck business, an LLC is the most recommended option. It offers limited liability protection, which is crucial for protecting personal assets in case of business debts or lawsuits. Additionally, LLCs provide flexibility in tax treatment, allowing the members to choose between sole proprietorship or partnership taxation.

 

 

Requirements for Starting an LLC in Tennessee:

To start an LLC in Tennessee, you need to:

  • Choose a business name that is not already in use.
  • File Articles of Organization with the Tennessee Secretary of State.
  • Designate a registered agent in Tennessee.
  • Pay the filing fee.
  • Create an operating agreement to outline the rights, responsibilities, and ownership interests of the members.

Scenario 2: LLC Liability

Is Ding liable for the plaintiffs’ injuries?

Bill Ding, as a member of the LLC, is generally not personally liable for the plaintiffs’ injuries due to the limited liability protection afforded by the LLC structure. However, the specific laws and circumstances in this case may affect Ding’s liability.

 

Policy Arguments:

  • In Favor of Ding: Proponents of limited liability argue that it encourages entrepreneurship and investment by protecting individuals from personal liability for business debts and liabilities. This can promote economic growth and innovation.
  • In Favor of the Plaintiffs: Opponents of limited liability argue that it can shield individuals from the consequences of their wrongful actions, particularly in cases involving harm to others. They contend that limited liability can lead to moral hazard and encourage irresponsible behavior.

Additional Considerations:

  • Piercing the Corporate Veil: Courts may “pierce the corporate veil” and hold individual members of an LLC personally liable if the LLC is a sham or if the members have engaged in fraudulent or illegal activities.

 

Contractual Liability: If Ding entered into a contract that explicitly made him personally liable for the LLC’s debts or liabilities, he could be held responsible.

Scenario 3: Securities

Was Lott’s lie about having a college degree material?

Yes, Lott’s lie about having a college degree was likely material. Investors rely on accurate information about a company’s management team to make informed decisions about their investments. A CEO’s educational background can be a relevant factor in assessing their qualifications and experience

 

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