Analysis of Scenarios: Business Organizations and LLC Liability

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?

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Sample Answer

Analysis of Scenarios: Business Organizations and LLC Liability

Scenario I – Business Organizations

Evaluation of Business Forms

Yolanda, Ginny, and Sara are looking to start a food truck business. They should consider the following three forms of business organizations:

1. Sole Proprietorship

– Advantages: – Simple to set up and operate.
– Complete control over decision-making.
– Minimal regulatory burden.

– Disadvantages: – Unlimited personal liability for debts and obligations.
– Difficulty in raising capital.
– Business ceases upon death of the owner.

2. Partnership

– Advantages: – Easy to establish with shared responsibility.
– Greater capital access through partner contributions.
– Pass-through taxation avoids double taxation.

– Disadvantages: – Joint liability can put personal assets at risk.
– Potential for conflicts among partners.
– Shared profits may lead to disputes.

3. Limited Liability Company (LLC)

– Advantages: – Limited liability protects personal assets from business debts.
– Flexibility in management and profit distribution.
– Pass-through taxation, avoiding double taxation.

– Disadvantages: – More complex and costly to set up than sole proprietorships or partnerships.
– Subject to varying regulations by state.

Recommended Business Form

Given the nature of their business and their aspirations, an LLC is the best choice for Yolanda, Ginny, and Sara. The LLC structure offers them limited liability, which is essential considering the risks associated with operating a food truck, including potential accidents or food safety issues that could lead to lawsuits.

Requirements for Starting an LLC in Tennessee

To establish an LLC in Tennessee, the following steps must be taken:

1. Choose a name: The name must be unique and include “Limited Liability Company” or “LLC”.
2. File Articles of Organization: This document must be submitted to the Tennessee Secretary of State along with a filing fee.
3. Create an Operating Agreement: While not required, it is advisable to outline management and operational procedures.
4. Obtain necessary permits: Depending on the location, food service permits and health department approvals are likely needed.

Ethical Considerations

Establishing an LLC raises ethical considerations regarding transparency with customers about product sourcing and ensuring food safety standards are met. A failure to adhere to these ethical obligations can result in reputational damage and legal repercussions.

Scenario II – LLC Liability

Issue of Liability for Bill Ding

In this scenario, plaintiffs Karl and Ginny Drake are suing Bill Ding, a member of Riverwood Homes, LLC, alleging his liability for injuries caused by lead paint in a property owned by the LLC.

Is Ding Liable?

Ding’s liability hinges on his level of involvement with the property. Since he had no active role in managing or visiting the property, and was unaware of the plaintiffs residing there, it is unlikely he can be held personally liable under the principle of limited liability typically afforded to LLC members.

Policy Arguments

– For Ding: It is unfair to hold him liable when he had no control or knowledge of the situation. The principle of limited liability exists to protect individuals from personal liability for business debts and actions.

– For the Plaintiffs: Allowing LLC members to evade responsibility undermines consumer protection laws. If individuals can escape liability altogether, it may lead to negligence in property management and increased risks for tenants.

Ethical Considerations

This situation raises ethical questions about accountability within LLC structures. If members can completely shield themselves from liability regardless of their involvement level, it could encourage negligence in property management practices.

Conclusion

In both scenarios, the friends should carefully consider their options when organizing their business and individuals involved in an LLC must recognize the moral obligations tied to property ownership and tenant safety.

 

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