BUSI 561 Week 8 DB Forum 3: Replies Example

Discussion Board Forum 3: Replies

BUSI 561 Legal Issues in Business, Discussion Board Forum 3: Replies

Thread by [Student Name]

The two classmates and their threads are composites; the research and the Scripture cited are real, and the requirements follow Liberty's public course guide for BUSI 561.

Reply to Jasmine

Jasmine, your thread explained why you plan to organize your coffee roasting business as a benefit corporation: you want to pay farmers above-market prices and keep that commitment even if you later take on investors who would prefer higher profits. I think your instinct to put the commitment into the company's legal structure is wise, and I want to add some research that may help you decide how to do it.

Hiller (2013) describes the benefit corporation as a legal form that changes what directors may and must consider. Directors of a benefit corporation are required to consider the effects of their decisions on workers, suppliers, communities and the environment, as well as shareholders, and the company must report on its pursuit of a general public benefit. Hiller argues that the form gives social enterprises legal protection for decisions that might otherwise invite shareholder suits and signals the company's commitments to customers and employees. For your roasting business, that protection could matter if a future investor objects to paying farmers more than the market price.

There is a serious objection worth considering. Jensen (2001) warned that a manager instructed to balance every stakeholder's interests has no rule for choosing among them, and so ends up answerable to nobody. A director who can justify any decision by pointing to some stakeholder may end up serving no stakeholder well. Hart and Zingales (2017) offered a middle position: companies should maximize the welfare of their shareholders, which includes the social values those shareholders hold, rather than market value alone. On their view, a company whose owners genuinely care about farmers can pursue that goal without abandoning accountability.

Applied to your plan, these ideas suggest a practical refinement. Rather than a general commitment to all stakeholders, state your specific purpose in the charter, a minimum price premium for farmers, for example, and report on it each year. That keeps the benefit concrete and measurable.

Scripture supports the generosity at the heart of your plan. Paul tells the Philippians that each of them should keep an eye on what is good for others and not just on personal advantage (English Standard Version Bible, 2001/2016, Philippians 2:4). The benefit corporation lets a company write that instruction into its charter, but only a specific, measured commitment keeps it from becoming a slogan. You might also look at whether your state allows a benefit LLC, since a small roasting business may not need the formalities of a corporation. And if you plan to seek investors, benefit corporation status will help you find the right ones: investors who object to the farmer premium will self-select out at the start, rather than fighting you over it later. Would you consider naming the farmer price premium as your company's specific public benefit?

Reply to Derrick

Derrick, your thread described how you and a friend plan to start a home renovation business as a general partnership, sharing profits equally, because it is simple and you trust each other completely. I appreciated your honesty about wanting to avoid paperwork, but I think the research and our chapters point toward a different choice, and the reasons have little to do with how much the two of you trust each other.

The first issue is liability. In a general partnership, each partner is personally liable for all of the partnership's obligations, including contracts your friend signs and accidents on a job site you never visited (Kubasek et al., 2016). The economic case Easterbrook and Fischel (1985) made for limited liability rests on letting owners commit capital to risky ventures without putting everything they own at stake, and renovation work carries real risks of property damage and injury.

The second issue is one most people overlook. Hansmann and Kraakman (2000) argued that the essential function of organizational law is not limited liability but asset partitioning: shielding the firm's assets from the personal creditors of its owners. If your partner went through a divorce or a personal bankruptcy, an LLC would make it much harder for his creditors to reach the business's trucks, tools and accounts, protecting you and your customers.

The third issue is the agreement itself. Hellmann and Wasserman (2017) studied 1,476 founders in 511 ventures and found that teams that split equity equally, often quickly and without negotiation, tended to differ in contributions they had not accounted for, and that equal splits were associated with lower valuations when the companies later raised money. Your equal split may be right, but it should reflect a discussion of who contributes capital, who brings customers and what happens if one of you leaves.

The prophet Amos asks a question every pair of co-founders should take seriously: can two people travel together unless they have first agreed (Amos 3:3)? Agreement does not happen by assumption. A written operating agreement for an LLC, covering contributions, decision making, buyouts and what happens if one of you wants out, is the practical form of that agreement, and it protects the friendship as much as the business. The operating agreement can also address the issue this week's employment chapter raises: once you hire your first crew members, the company, not either of you personally, should be their employer, with its own payroll, workers' compensation coverage and policies, so that employment claims run against the business. Insurance belongs in the plan too, because general liability and commercial auto coverage are the first line of protection, with the LLC as the second. Would you and your friend be willing to draft one before you sign your first renovation contract?

References

Easterbrook, F. H., & Fischel, D. R. (1985). Limited liability and the corporation. The University of Chicago Law Review, 52(1), 89-117. https://doi.org/10.2307/1599572

English Standard Version Bible. (2016). Crossway. (Original work published 2001)

Hansmann, H., & Kraakman, R. (2000). The essential role of organizational law. The Yale Law Journal, 110(3), 387-440. https://doi.org/10.2307/797521

Hart, O., & Zingales, L. (2017). Companies should maximize shareholder welfare not market value. Journal of Law, Finance, and Accounting, 2(2), 247-275. https://doi.org/10.1561/108.00000022

Hellmann, T., & Wasserman, N. (2017). The first deal: The division of founder equity in new ventures. Management Science, 63(8), 2647-2666. https://doi.org/10.1287/mnsc.2016.2474

Hiller, J. S. (2013). The benefit corporation and corporate social responsibility. Journal of Business Ethics, 118(2), 287-301. https://doi.org/10.1007/s10551-012-1580-3

Jensen, M. C. (2001). Value maximization, stakeholder theory, and the corporate objective function. Journal of Applied Corporate Finance, 14(3), 8-21. https://doi.org/10.1111/j.1745-6622.2001.tb00434.x

Kubasek, N. K., Browne, M. N., Herron, D. J., Dhooge, L. J., & Barkacs, L. L. (2016). Dynamic business law (Biblical worldview ed.). McGraw-Hill Education.