Business Law Chapter 43 Homework Law For Small Business 381

CHAPTER 43

LAW FOR SMALL BUSINESS

ANSWERS TO QUESTIONS

AT THE ENDS OF THE CASES

CASE 43.1—QUESTIONS (PAGE 842)

1A. What might Mixon and the other members of Iberia Surgical have done to avoid the litigation

and its ultimate result in this case? Initially, Mixon could have attempted to negotiate different terms in

Iberia Surgical’s “Operating Agreement.” Termination of a member’s interest might have been permitted

only with cause, for example, or the determination of the value of a member’s interest on withdrawal

might have clearly been according to its “fair market value,” as Mixon later asserted. When

disagreement about the firm’s management practices arose, Mixon might have made more effort to

curtail his objections or at least to compromise. The other members might have made similar

concessions. They could have acquiesced to at least some of Mixon’s criticisms of their practices or have

made other more concerted efforts to harmonize all of the members’ desires. When it became clear that

the differences were not reconcilable, the other members might have offered Mixon a better price for

the value of his interest on its buy-out.

2A. Does the outcome in this case illustrate the advantages or the disadvantages of the limited

liability company form of business organization? Explain. The outcome in this case illustrates the

CASE 43.2—QUESTIONS (PAGE 847)

THE ETHICAL DIMENSION

There was an important legal distinction in the duties that the defendants owed to Halo and New

Empagio. Was there a similar ethical distinction? Explain. During the events that led to the suit in this

case, both defendants owed Halo and New Empagio a duty to act in good faith. Cooper also owed the

plaintiffs a duty of loyalty. Primus’s duty related to the nondisclosure agreement and its negotiations for

the purchase of New Empagio. Cooper’s duty included a responsibility to subordinate his own self–

interest to the interests of the plaintiffs by, among other things, avoiding self-dealing and not thwarting

the firms’ objectives.

THE LEGAL ENVIRONMENT DIMENSION

Why did the court dismiss Halo’s claims? The court dismissed Halo’s claims “at this point in the litigation”

because it found that Halo had no standing. Recall from Chapter 2 that a party must have a sufficient

stake in the matter to justify seeking relief through the court system. Standing requires a party to show

that they have suffered a harm. The court found that Halo was trying to allege an indirect harm but

could not establish that it had been harmed because Halo no longer owned any shares.

ANSWERS TO QUESTIONS IN THE REVIEWING FEATURE

AT THE END OF THE CHAPTER

1A. Approaches to investing

An LLC would be a common form as it limits the liability of the parties. It can be structured in almost any

way the parties desire, such as Newmark contributing his talents, labor, and existing capital, while APC

kicks in a lot of cash and strategic guidance. Other investors could be brought in as members if things

developed.

380 UNIT EIGHT: BUSINESS ORGANIZATIONS

ANSWER TO DEBATE THIS QUESTION IN THE REVIEWING FEATURE AT

THE END OF THE CHAPTER

The new penalty tax on employers that do not provide health insurance for their employees

should apply to all employers, not just those with fifty or more employees. If the current new health

care reform law remains as is, then all those employers with fewer than 50 employees will not be

punished if they do not provide health care insurance for their employees. That means that many

American workers will continue to be without this valuable insurance.

ANSWERS TO QUESTIONS AND CASE PROBLEMS

AT THE END OF THE CHAPTER

43-1A. Business forms

(Chapter 43—Page 839)

43-2A. QUESTION WITH SAMPLE ANSWER: Limited liability companies

CHAPTER 43: LAW FOR SMALL BUSINESS 381

A court might initially consider whether a member of a limited liability company (LLC) who has a material

conflict of interest should be prohibited from dealing with matters of the LLC. Most likely, a court would

conclude that a member—even a member with a conflict of interest—can vote to transfer LLC property,

but must do so fairly. In this problem, the transfer of BP’s sole asset by two of BP’s members to

themselves, disguised as Excel, a newly created LLC, represented a material conflict of interest. Not only

did Amy and Carl engage in self-dealing, but in doing so, they increased their interests in Excel. This con-

43–3A. Officer liability

(Chapter 43—Page 849)

43–4A. Trade secrets

(Chapter 43—Page 845)

43–5A. Owner liability

(Chapter 43—Page 849)

43–6A. Limited partnerships

(Chapter 43—Page 839)

43–7A. CASE PROBLEM WITH SAMPLE ANSWER: Fraud

43–8A. Limited liability companies

(Chapter 43—Pages 840–842)

43–9A. Limited liability companies

(Chapter 43—Pages 840–842)

43-10A. A QUESTION OF ETHICS: Taxation of LLCs

(a) Of course, the IRS rejected McNamee’s argument and ruled that he was “personally liable

for the employment tax debt of the LLC.” McNamee filed a suit in a federal district court against the

Treasury Department. The court issued a summary judgment in the defendant’s favor. On McNamee’s

appeal, the U.S. Court of Appeals for the Second Circuit affirmed the lower court’s judgment. The

would not be double taxed, but as the owner, he could be held personally liable for it. The court added

that it knew of “no provision, policy, or principle that required the federal government to allow him both

to escape personal liability for the taxes owed by his sole proprietorship and to have the proprietorship

escape taxation as a separate entity.”

(b) McNamee made this contention. He argued that “the fact that the IRS has proposed new