Forms of Business Organization

¶ … court, it will be a state court. Each state has different laws with respect to how they treat LLCs in such situations. Without knowing the state, it is impossible to know which statute a state might apply. There can be significant differences between state law on this matter (Garon, 2008). In most states, it will be difficult to adjudicate such disputes, insomuch as there is likely to be limited precedence (Garon, 2008).

If the court uses the Uniform Limited Liability Company Act, it would turn to the language in Section 112, particularly subsection D.

The relevant text is as follows: "Absent any contrary provision in the operating agreement, language in an LLC's certificate of organization might be evidence of the members' agreement and might thereby constitute or at least imply a term of the operating agreement." If there is nothing written down at all, the court is likely to find that the profits should be split by share of ownership, under the logic that ownership share implies profit sharing in the same manner, which it does unless otherwise stated, as this is the law of fiduciary duty.

This dispute could have been avoided in the first place in two ways. First, if the principles acted like grown-ups. Going to court with something like this probably costs the parties more money that this company makes in profits. Plus, there are many other dispute resolution mechanisms available to these people, such that it would be unusual for something like this to end up in litigation. The second way is that all LLCs should have a corporate operating agreement.

This document is agreed to and signed by the owning when the LLC is formed. It specifically covers critical issues such as how the profit will be split among them. Even a standard COA will contain all of the elements describing the contributions that each owner commits to making, and what their compensation/profit-sharing will be in exchange for those contributions.

A standard COA would have avoided this issue -- they may still have disagreed about changing the split at some point in the future, but the current dispute would have been avoided by addressing this issue in a legal document at the time that the LLC was formed. Unit 9 Discussion The theory under which Darla might be liable is the breach of trust theory. She traded on the basis of material non-public information, which would in theory cause her to breach trust to the potential purchasers of FCPA, Cardware.

The breach of trust is owed under statute not only directly, but indirectly and derivatively. The defences against this charge could include Darla having a prior plan -- that she can prove -- to buy this stock. That was not the case. That said, the SEC would have to prove that she actually had material information. Darla's trades can be used against her, but this is dissimilar to the Falbo case -- Falbo's wife was an assistant to a Grand Met executive.

While Darla knows who the players are in this case, there is no direct tie between an insider and her trades. Unless the SEC can prove that she received that information, they have hearsay and circumstantial evidence (such as evidence that she was in the building). But unless an insider testifies that they Darla something, Darla can defend this because the one thing lacking is actual evidence that she possessed insider knowledge. SEC Rule 10b-5 is fairly clear that duty of trust can be indirect or derivative.

That means that Darla had such a duty, should she have come across insider information. The misappropriation theory holds that "Rule 10b-5 is violated whenever a person trades while in knowing possession of material, non-public information that has been gained while in violation of a fiduciary duty to its source." Darla clearly had non-public information and traded on it, but the question is whether or not she had fiduciary duty to the information's source.

If it is determined that Darla had insider information -- a big if -- it would need to be determined if her presence in the building meant that she had a duty of trust to the company. If not, then walking past an open door is certainly no violation of trust -- the door was open and the conversation could be heard by any passer-by.

Thus, while Darla's actions meet the criteria of a breach of trust, it will be difficult to prove other than via trading patterns that Darla possessed insider knowledge. Even if that is proved, the duty that she owed Cardware as a person on their premises is a critical point of discussion, especially in light of the meeting room door being open for any passerby to hear the information.

She will probably be found liable for insider trading at least to the extent that the court accepts that she was in possession of insider information -- proving that could be difficult, since unlike in the Falbo case, nobody actually provided her with that information. She found out for herself. Unit 8 Assignment Date: October 17, 2015 To: P. Strami and M. Bacon Re: Business formation of potential Cardigan Home Store There are different types of business organizations: sole proprietorships, partnerships, and corporations. Each has advantages and disadvantages.

The advantage of a sole proprietorship is that it is the easiest, lowest cost method of organization, but it is not appropriate for a business run by two people. A partnership has the benefits of being easy and low cost. It requires only a partnership agreement. Profits in a partnership flow through directly to the owners, but so do all of the risks.

This form of organization is thus not appropriate for a retail business, where there can be significant downside risk -- in the event of litigation, personal assets can be at risk. There are several different types of corporations. In general, they are costlier to organize, but they have the benefit of being a distinct legal entity. Profits do not flow through to the owners -- they are taxed at the corporate level. However, the corporation bears the legal risk, thereby minimizing the legal exposure for the owners of the corporation.

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