Case Study 1
Fred is well known in his town for his homeopathic cough syrup. After years of encouragement, he has decided to take his miracle cough remedy to market as “Fred’s Miracle Cough Syrup.” While his cough syrup is homeopathic, one of the key ingredients causes a severe reaction when taken in conjunction with aspirin. Fred plans to make and bottle his cough syrup in an outbuilding on the family farm. His son, Sam, has been raving to the locals about his father’s cough syrup for years, and the local drug store and grocer have contacted Fred to place orders as a result. Sam also intends to approach several national chains in an effort to secure supply contracts for Fred’s cough syrup. Fred has asked Sam to assist him with deliveries, as Sam has a van. Fred would like Sam to be involved with the business as an employee initially, with the option of making him a partial owner at a later time. Fred and his wife Sally have two children, Sam and Lilly. Both live in cabins on the family farm with their spouses and children. Fred and Sally engage you as their attorney to assist with the formation of the new business, including determining the appropriate business entity type, management issues, product liability issues, and estate planning for both the business and family property. After your initial meeting, you identify and research the following issues.
Specifically, the following critical elements must be addressed:
Describe the main types of business entities and their defining characteristics.
Apply product liability law and determine what issues are present. How would you advise your client to mitigate those issues?
Apply the elements and characteristics of an agency relationship to Sam’s actions. Does Sam’s involvement prior to the business formation, as well as his anticipated role once the business is formed, create an agency relationship? Why or why not?
Identify potential real property issues based on the location of the business on the family farm. Justify each potential issue
Does the manufacture of Fred’s Miracle Cough Syrup on the family farm necessitate a formal transfer of ownership or possessory rights? Defend your response.
Identify potential personal property issues based on the use of Sam’s personal vehicle to deliver the product. Justify each potential issue.
Does the use of Sam’s personal vehicle in the course of business expose Sam or the business to any liability issues? Defend your response.
Identify potential estate planning issues with regard to the business and the family farm. Justify each potential issue.
What estate planning vehicles are available to Fred and Sally should they desire to transfer ownership in the business and family farm, respectively, to Sam and Lilly equally? What are the advantages and disadvantages to each?
Applying your analysis of the issues above, which type of business entity do you recommend for Fred’s Miracle Cough Syrup and why?
Sample Solution
The main types of business entities are sole proprietorships, partnerships, limited liability companies (LLC), and corporations.
A sole proprietorship is a business that is owned by one person and operated without any formal legal structure or paperwork. The sole proprietor has full control over the business and all profits generated from it as well as full liability for any debts or losses incurred by it.
A partnership is a form of unincorporated business with two or more people sharing ownership. A general partnership involves both partners sharing management responsibilities and liabilities while a limited partnership allows an individual to invest in the company without taking active responsibility for managing it. Each partner has personal liability for their own actions but not those of other partners in the entity.
Limited Liability Companies (LLC) are hybrid structures that combine aspects of partnerships and corporations. LLCs offer owners protection from personal liability while allowing members to benefit from pass through taxation like partnerships do. Members can manage the LLC themselves or appoint managers who will be responsible for operations on their behalf.
Sample Solution
The main types of business entities are sole proprietorships, partnerships, limited liability companies (LLC), and corporations.
A sole proprietorship is a business that is owned by one person and operated without any formal legal structure or paperwork. The sole proprietor has full control over the business and all profits generated from it as well as full liability for any debts or losses incurred by it.
A partnership is a form of unincorporated business with two or more people sharing ownership. A general partnership involves both partners sharing management responsibilities and liabilities while a limited partnership allows an individual to invest in the company without taking active responsibility for managing it. Each partner has personal liability for their own actions but not those of other partners in the entity.
Limited Liability Companies (LLC) are hybrid structures that combine aspects of partnerships and corporations. LLCs offer owners protection from personal liability while allowing members to benefit from pass through taxation like partnerships do. Members can manage the LLC themselves or appoint managers who will be responsible for operations on their behalf.
