When used as a noun, it refers to a person having
a duty created by his or her undertaking to act
primarily for another's benefit in matters connected
with the undertaking.
When used as an adjective, as
in the phrase fiduciary relationship, it means that the
relationship involves trust and confidence.
Criteria used by courts to determine a worker's status as an employee or independent contractor
1. How much control does the employer exercise
over the details of the work? (If the employer
exercises considerable control over the details
of the work and the day-to-day activities of the
worker, this indicates employee status. This is
perhaps the most important factor weighed by
the courts in determining employee status.)
2. Is the worker engaged in an occupation or business
distinct from that of the employer? (If so, this
points to independent-contractor, not employee,
3. Is the work usually done under the employer's
direction or by a specialist without supervision?
(If the work is usually done under the employer's
direction, this indicates employee status.)
4. Does the employer supply the tools at the place
of work? (If so, this indicates employee status.)
5. For how long is the person employed? (If the person
is employed for a long period of time, this
indicates employee status.)
6. What is the method of payment—by time period
or at the completion of the job? (Payment by time
period, such as once every two weeks or once a
month, indicates employee status.)
7. What degree of skill is required of the worker? (If
a great degree of skill is required, this may indicate
that the person is an independent contractor
hired for a specialized job and not an employee.)
4 ways agency relationships can be created
By agreement, by ratification, by estoppel, and by operation of law. (Pg 628).
Duties that agents and principals owe each other
Performance, loyalty, accounting, notification, and obedience.
Rights and remedies available to agents and principals
The agent has the right to be compensated, to be
reimbursed and indemnified, and to have a safe
working environment. An agent also has the right
to perform agency duties without interference by
In general, a principal has contract remedies for
an agent's breach of fiduciary duties. The principal
also has tort remedies if the agent engages in misrepresentation,
negligence, deceit, libel, slander,
or trespass. In addition, any breach of a fiduciary
duty by an agent may justify the principal's termination
of the agency. The main actions available to
the principal are constructive trust, avoidance, and
indemnification. (Pg 634-635).
Different types (scopes) of an agent's authority
Actual (express or implied) or apparent. (Pg 639).
The third party contract liability of a principal when his status is undisclosed, partially disclosed, and fully disclosed.
A disclosed principal is a principal whose identity
is known by the third party at the time the contract
is made by the agent. A partially disclosed
principal is a principal whose identity is not known
by the third party, but the third party knows that the
agent is or may be acting for a principal at the time
the contract is made. An undisclosed principal is
a principal whose identity is totally unknown by the
third party, and the third party has no knowledge
that the agent is acting in an agency capacity at the
time the contract is made.
When is a principal liable for an agent's tortious conduct?
A principal who acts through an agent may be liable
for harm resulting from the principal's own negligence
or recklessness. Therefore, a principal may
be liable if he or she gives improper instructions,
authorizes the use of improper materials or tools, or establishes improper rules that result in the agent's committing a tort.
For instance, Peter knows that
Audrey's driver's license has been suspended but
nevertheless tells her to use the company truck to
deliver some equipment to a customer. If someone
is injured as a result, Peter will be liable for his own
negligence in instructing Audrey to drive without a
Ways an agency relationship can terminate.
an agency may be terminated by an
act of the parties or by operation of law. Once the
relationship between the principal and the agent
has ended, the agent no longer has the right (actual
authority) to bind the principal. For an agent's
apparent authority to be terminated, though, third
persons may also need to be notified that the agency
has been terminated. (Pg 651).
How is a sole proprietorship is formed and operated and what is the scope of liability associated with it.
The owner is the business. Anyone who does business without creating a separate business organization has a sole proprietorship.
The sole proprietor has unlimited liability, or legal responsibility, for all
obligations that arise in doing business.
What is a franchise and how does it operate?
A franchise is an arrangement in which the owner of a trademark, a
trade name, or a copyright licenses others to use the trademark, trade name, or copyright in the selling of goods or services.
In other words, a franchisee can operate as an independent businessperson but still obtain the advantages of a regional or national organization.
An association of two or more persons to carry on as co-owners
a business for profit. One significant disadvantage associated with a traditional partnership is that the partners are personally liable for the debts of the partnership. Moreover, in most states, the liability is essentially unlimited because the acts of one partner in the ordinary course of business subject the other partners to personal liability
Limited Partnership (LP)
A limited partnership consists of at least one general partner and one or more limited partners. A general partner assumes management
responsibility for the partnership and has full responsibility for the partnership and for all its debts. A limited partner contributes cash or other property and owns an interest in the firm but does not undertake any management responsibilities and is not personally liable for partnership debts beyond the amount of his or her investment. A limited partner can forfeit limited liability by taking part in the management of the business.
An LLP allows professionals, such as attorneys and accountants, to avoid personal liability for the malpractice of other partners. A partner in an LLP is still liable for her or his own wrongful acts, such as
negligence, however. Also liable is the partner who supervised the individual who committed a wrongful act.
Limited Liability Partnership (LLP)
The limited liability partnership (LLP) is a hybrid form of business designed mostly for professionals who normally do business as partners in a partnership. The major advantage of the LLP is that it allows a partnership to continue as a pass-through entity for tax purposes but limits the personal liability of the partners. The LLP is especially attractive for two categories of businesses: professional service firms and family businesses. In fact, all of the "Big Four"
accounting firms—the four largest international accountancy and professional services firms—are organized as LLPs, including Ernst & Young, LLP, and PricewaterhouseCoopers, LLP.
How are profits, losses, and management authority distributed in a partnership?
By agreement; or, in the absence of agreement, profits are shared equally by the partners, and losses are shared in the same ratio as profits. By agreement; or, in the absence of agreement, all partners have an equal voice in management authority.
How is a limited liability company is created and how are profits, losses, and management authority distributed?
To form an LLC, articles of organization must be filed with a central state agency—usually the secretary of state's office [ULLCA 202].3 Typically, the articles are required to include such information as the name of the business, its principal address, the name and address of a registered agent, the names of the owners, and information on how the LLC will be managed [ULLCA 203]. The business's name must include the words Limited Liability Company or the initials LLC [ULLCA 105(a)]. Although a majority of the states permit one-member LLCs, some states require at least two members.
How is a corporation created and managed? What is the liability exposure of the board of directors, officers, and shareholders?
A corporation is a legal entity created and recognized by state law. This business entity can have one or more owners (called shareholders), and it operates under a name distinct from the names of its owners. (Pg 753).
Normally, corporate shareholders are not personally liable for the
obligations of the corporation beyond the extent of their investments. In certain limited situations, however, a court can pierce the corporate veil (see page 766) and impose liability on shareholders for
the corporation's obligations. Additionally, creditors often will not extend credit to small companies unless the shareholders assume personal liability, as guarantors, for corporate obligations.
Directors and officers are exposed to liability on many fronts. They can be held liable for negligence in certain circumstances, as previously discussed. They may also be held liable for the crimes and torts committed by themselves or by corporate employees
under their supervision.
What are the differences between a corporation and a professional corporation? (formation, operation, and liability).
A public corporation is formed by a government (for example, a city, town, or public project).
A corporation formed by professionals (for example, physicians or lawyers) to obtain the advantages of incorporation (such as tax benefits and limited liability). In most situations, the professional corporation is treated like other corporations, but sometimes the courts disregard the corporate form and treat the shareholders as partners, especially with regard to malpractice liability.
What are the roles of directors and officers in a corporation?
Working out the strategy of the corporation, putting internal controls in place, preparing merger and acquisition transactions as well as strategic alliances. They are expected to perform their duties and responsibilities in good faith and in the corporation's best interest. The duty of loyalty bans officers and directors from using their positions for their own personal gains.
What are the fiduciary duties owed by officers and directors to the corporation and shareholders?
To act in the best interest of the company.
What is the business judgement rule?
A corporate director or officer will not be liable to the corporation or to its shareholders for honest mistakes of judgment and bad business
decisions. Courts give significant deference to the decisions of corporate directors and officers, and consider the reasonableness of a decision at the time it was made, without the benefit of hindsight.
Thus, corporate decision makers are not subjected to second-guessing by shareholders or others in the corporation. This rule applies as long as the director or officer took reasonable steps to become informed about the matter, he or she had a rational basis for the decision, and there was no conflict of interest between the director's or officer's personal interest and that of the corporation.
What is a shareholder's derivative suit? What remedy is sought?
When the corporation is harmed by the actions of a third party, the directors can bring a lawsuit in the name of the corporation against that party. If the corporate directors fail to bring a lawsuit, shareholders can do so "derivatively" in what is known as a shareholder's derivative suit. Before shareholders can bring a derivative suit, they must submit a written demand to the corporation, asking the board of directors to take appropriate action [RMBCA 7.40]. The directors then have ninety days in which to act. Only if they refuse to do so can the derivative suit go forward.The right of shareholders to bring a derivative action is especially important when the wrong suffered by the corporation results from the actions of
the corporate directors and officers—because they, for obvious reasons, would probably be unwilling to take any action against themselves.
What are the basic purposes of the Securities Act of 1933 and the Securities Exchange Act of 1934?
The Securities Act of 1933 governs initial sales of
stock by businesses. Basically, the purpose of this act is to require disclosure.
The Securities Exchange Act of 1934 provides for the regulation and registration of securities exchanges, brokers, dealers, and national securities associations, such as the National Association of Securities Dealers (NASD). Unlike the 1933 act, which is a one-time
disclosure law, the 1934 act provides for continuous periodic disclosures by publicly held corporations to enable the SEC to regulate subsequent trading. The Securities Exchange Act of 1934 applies to companies that have assets in excess of $10 million
and five hundred or more shareholders (these companies are known as section 12 companies).
What are the rights and responsibilities attached to stock ownership?
Right to earn dividends. If the company chooses to retain its earnings and invest in future projects rather than pay dividends, the investor receives a return in the form of an increase in the stock price. This is called Capital Appreciation. Besides receiving dividends and capital appreciation, you also have certain voting rights with stock ownership. These include the right to vote for the company's board of directors, and the right to vote on issues such as mergers and acquisitions.
What are the exemptions to registration requirements for an initial sale of stock with regard to accredited and unaccredited investors.
Section 5 of the Securities Act of 1933 broadly provides that if a security does not qualify for an exemption, that security must be registered before it is offered to the public.
What is the potential liability a corporate officer faces by providing intentional misrepresentations of material facts to potential investors who invest and suffer a loss.
What does SEC Rule 10b-5 apply to?
SEC Rule 10b-5 applies to almost all cases concerning the trading
of securities, whether on organized exchanges, in over-the-counter markets, or in private transactions. Generally, the rule covers just about any form of security, including notes, bonds, agreements to
form a corporation, and joint-venture agreements. The securities need not be registered under the 1933 act for the 1934 act to apply. Applies to almost every commercial transaction (if they involve interstate contracts).
What is the scope of regulation of securities sold over the Internet (e.g. federal or state or both?).