Fundamentals of Business Law
At its core, business law is the body of law that governs all of the rights and obligations concerning commercial entities of all sizes. This includes any business that is formed as a corporation, a partnership or a limited liability company with respect to the complex system of rules, regulations and practices that are in place in everyday commercial transactions. While there are many different types of business law that play a role in shaping the formation and operation of a business, there are general principles, applicability and significance that run throughout. The most essential of these is that business law is necessarily dynamic in nature in order to keep pace with changes in commerce and trade, along with technology advances.
Contracts or agreements are the backbone of nearly every single business activity in which a company participates . Even the most basic functions of running the business, such as hiring an employee and engaging a vendor, requires a contract. The importance of contracts law in business law cannot be overstated, as it essentially delineates the accepted commercial norms that parties to a contract have to abide by when entering into the terms of a deal.
Even though there are dedicated business law attorneys who can handle either the real estate or lending aspects of a business transaction, most of the time they do not fall under the category of business law. These attorneys are generally trained in the specific area of the transaction, depending on where their current engagement is taking place. Still, in order for a business attorney to be effective, they need to have a general understanding of real estate and financial transactions that pertain to business.
Key Legal Terms in Business
When starting or operating a business, it is essential to consider and implement various legal safeguards to protect company assets. Here are some key legal aspects to think about:
Contracts
Contracts impact many areas of daily business operations, from employment to sales to negotiating leases. It is vital to have a contract attorney on hand to review or write contracts to ensure their enforceability. It can be easy to become too comfortable with an industry and assume there are no special requirements. Such assumptions have been known to lead to legal issues when entrepreneurs begin signing contracts or starting relationships.
Liability
Companies could be held personally liable for the actions of their employees. This could be in the form of criminal action, employee negligence, or other behaviors. Liability issues can result in damaged relationships with the public. Protecting the business from liability claims is key to a long-term operation.
Compliance
Compliance refers to following all of the legal rules and regulations that apply to the industry. For some businesses, compliance is quite strict, such as those offering healthcare. Others are less regulated, but still may have industry-specific laws that might impact key operations such as advertising practices.
Business Structure and the Law
One of the most common and complex decisions that entrepreneurs will face is the choice of the corporate structure for the business. The basic options are a sole proprietorship, general partnership, limited partnership, corporation and limited liability company.
A sole proprietorship is often chosen by self-employed individuals because of the low cost and the simplicity of operation. However, the sole proprietor is personally liable for the debts of the business (except as to secured assets) and even for the actions of the employees and agents of the business. This essentially makes an employee of a sole proprietorship no different than any other unsecured creditor of the business.
A general partnership does not require a formal filing with the state and is formed when two or more people start a business and a profit is earned and shared by the individuals. Each partner is fully personally liable for all of the assets of the partnership. However, the general partners may provide a great deal of flexibility by entering into a partnership agreement that properly structures the rights and duties of the partners in much the same way as members of a limited liability company. Taxation on a partnership is direct and not double, although care must be taken that the company does not run afoul of the Internal Revenue Service’s classification rules for partnerships which can result in double taxation.
A limited partnership must be formally registered with the state and requires at least one general partner who has full liability for the assets of the partnership and one or more limited partners who have limited liability (and will gain little or no control) over the assets of the partnership. Typically a limited partnership is used by one or more limited partners to invest in a business without exposing the investment to personal liability. The corporation was originally designed primarily for large, publicly traded companies. However, its use has been expanded significantly in southeastern Virginia to all businesses, both large and small. The most significant feature of a corporation is limited liability. As a shareholder you cannot be held liable for business debts or liabilities beyond your prescribed investment in the corporation. Unlike a limited partnership, a corporation cannot be controlled by one or two general partners who can manage the business as they see fit and limit any other person’s right to participate in the overall direction of the business.
Lastly, the limited liability company ("LLC") is the newest and most flexible option. The IRS essentially allows the LLC to be treated as either a corporation (resulting in double taxation) or a partnership (direct taxation) for tax purposes. Thus, a business has much greater flexibility in choosing how it pays its taxes. It is also the easiest business structure to form and maintain. Unlike the state informalities required of a corporation, the LLC requires only that the organizer file an "Articles of Organization" with the state corporation commission (which is important because without it, the LLC will not exist) and pay an annual fee of $200. Members of the LLC have few restrictions on management and decision-making authority. Also, the members of the LLC have limited liability similar to the shareholders of a corporation.
Intellectual Property and the Law
In the modern economy, many businesses rely on their intellectual property rights (IPR) to a greater or lesser degree. Businesses often find themselves in a position where they are publicly or privately listed and dealing in what would be described as valuable assets.
The value of a business is based on its net worth. A large part of that net worth is down to the value it places on its IPR. What does that mean? It means that the IPR held by a business is very often its most valuable asset. In turn, this makes IPR and its management vitally important to the business itself.
For example, a university will often appoint a director of research who is charged with commercialising and protecting the university’s IPR. Unlike a company, an HEI does not have shareholders which makes its need for income meeting a deeper seated public need. However, a university is commercially astute on the parent company model.
Altamation (University of Southampton) has this aim: "Our aim is to work with researchers to identify, manage and exploit intellectual property that could be of potential value using our model for commercialisation of academic IP."
New legislation annually is updated and amended at a rapid rate and it’s difficult to keep track of how this impacts on IPR and how best to contain it. Indeed it is so complex that most businesses rely on a specialist solicitor to advise them on this area. It is important to understand at an early stage that many solicitors charge £500 per hour so good use of their skill will save the business cash.
How Employment Law Impacts Businesses
Employment law in the workplace encompasses the myriad issues arising in the employer-employee relationship. For MBA students, these legal principles are essential to know as they navigate the workforce.
State and federal employment laws range from compensation and benefits to workplace health and safety to anti-discrimination laws. In addition, as technology continues to infiltrate the workplace, new areas of employment law have emerged, specifically dealing with the availability of benefits provided by employers over the internet.
In terms of anti-discrimination rules, employers are generally barred from making employment decisions based on an applicants age, gender, or race, as well as certain other protected classes. Under the Americans with Disabilities Act ("ADA"), employers are prohibited from discriminating against workers "on the basis of disability in regard to job application procedures , the hiring, advancement or discharge of employees, employee compensation, job training, and other terms, conditions, and privileges of employment."
When it comes to hiring, employers can implement certain employment tests as long as they are job-related, do not have an excessive adverse impact on a protected group, and are consistent with business necessity. The ADA also provides protection against pre-employment inquiries that screen out applicants with disabilities.
Once employees are hired, they cannot be discriminated against, harassed, or terminated on the basis of their disability, unless it can be shown that doing so would cause the employer an undue hardship under the circumstances. Even when there is an undue hardship, covered employers must make reasonable accommodations for the known physical or mental limitations of employees.
International Business and the Law
When breaking into global markets, having a legal framework to protect your enterprise is a priority. Understanding international intellectual property laws and how they impact the local culture is essential, and is another area for MBA students to focus on. International contracts vary from nation to nation in terms of scope and enforceability. This presents challenges for any enterprise that imports or exports products across borders. Familiarity with global trade practices are essential to make these transactions go smoothly. Practical considerations include knowing the global marketplace. Asia, the UK and the US have specific laws and regulation that impact new business. If you launch a new product in the US, does the patent protect it from international degradation? How can a local legislation aide your deliverables, and how can you protect your business interests in international waters? Engaging with experts to draft unique international contracts that cater to the intricacies of each market is needed if you seek to broaden your footprint.
Business Law in Action – Case Studies
Many of the biggest business legal stories each year go unnoticed by all but those in the industry. But often those stories can provide essential business insights that can benefit business professionals, including MBA students. A paper trail of problems can give business students a clearer idea of what is going on behind the scenes at major corporations.
Marlowe v. The Florida Bar
James Marlowe, a Florida attorney, created a self-help legal website called Law4welfaresystems.com. The Florida Bar, however, informed Marlowe that he was in violation of Florida’s unauthorized practice of law rule. The rule requires that any person wishing to prepare documents – even if they do not wish to represent clients – must be a licensed attorney. It was particularly concerned that La4people’s services would encourage the fraudulent use of Florida’s public-assistance programs. On appeal, the Eleventh Circuit sided with the Florida Bar, stating that it had a substantial interest in protecting vulnerable residents from unscrupulous scams. The case illustrates how bar associations maintain state statutes while balancing the public welfare.
Federal Trade Commission v. Claridge Associates, Ltd.
The Federal Trade Commission filed a lawsuit against Claridge Associates, Inc., and its principles for attempting to avoid federal Fair Debt Collection Practices Act. The commission cited the language on Claridge’s website and in its advertisement that instructions were provided to clients to inform them how to avoid the debt collector’s act. The defendants attempted to claim protection under the First Amendment. The court, however, held that the advertisement was a commercial speech, which the court could regulate if the regulation was not broader than necessary to serve a substantial government interest. Lawyers must be cognizant of the limits of the First Amendment for their clients’ advertising.
Heap v. State of Arizona
This case involved homeowner complaints against a real estate brokerage service, as well as the company’s underwriter and policy issuer. The class action suit alleged that the company failed to disclose third-party relationships to homeowners. When the suit was brought to court, it was discovered that the plaintiffs’ counsel had already settled with the underwriters and policy issuers, leaving only the brokerage service to pay for damages. In their decision, the Ninth Circuit recognized that this practice confuses juries and encourages plaintiffs to devalue the claims against others when they know that one defendant has settled. The Court also noted that given the choice, most defendants would probably prefer to settle after trial or face higher potential damages than to risk invalidating the liability of other defendants by settling with some of them first.
Where to Learn More About Business Law
In addition to textbooks and class syllabi, there are numerous popular and accessible business law blogs that MBA students can follow for further information on relevant topics. One of the most well know and influential business law blogs is Concurring Opinions, which features commentary from a team of leading legal scholars and practitioners. Concurring Opinions’ star team of contributors includes University of Chicago law professor Geoffrey Stone and Stanford law professor Pam Karlan, both of whom have served as U.S. government officials under President Obama. In addition, Concurring Opinions lawyers have clerked for everyone from Supreme Court Justice John Paul Stevens to former Chief Justice William H. Rehnquist. The blog’s posts are consistently on the legal pulse, whether opining on such recent topics as President Obama’s recent health care reform legislation or the Supreme Court’s controversial decision in Citizens United v. Federal Election Commission . Amy Gajda, a former New York Times legal journalist who was recently appointed the Craig Newmark Professor of Journalism at CUNY Graduate School of Journalism, is another popular voice at The Huffington Post Law Blog. Posts touch on a range of contemporary business law topics, such as executive compensation, consumer protection laws, international law issues and hot scholarship. Gajda’s engaging style makes her posts all the more enjoyable to read.
Finally, a valuable resource for entrepreneurial students interested in real-world problems and solutions in business legal practice is Latham & Watkins’ "Latham’s Business Law Blog." Subtitled "Business Law Blog," this free resource was created by a group of Latham lawyers to analyze current business law developments as they relate to corporate finance, mergers and acquisitions, and capital markets. In addition, visitors to the site can also gain information on Latham’s regional practices in such areas as antitrust, environmental, and energy law.
MBA students will find many of these resources helpful in their efforts to deepen their understanding of business law concepts.