Getting Real
Tax Concerns for the Sole Proprietor
Tax Concerns for the General Partnership
Tax Concerns for the Limited Partnership
Tax Concerns for the Corporation
Appendix A: Answers to Case Problems
Chapter 1: Introduction to Microeconomics
Chapter 4: Common Law Contracts
Chapter 6: Secured Transactions
Chapter 8: Business Associations
Introduction
Business Law is typically a two-semester sequence at business schools throughout the United States. The first semester involves what is known as the Legal Environment of Business. This focuses on the relationships of marketplace actors among one another. The second semester involves what is known as the Regulatory Environment of Business. Here, attention turns to the relationship between the firm and the various levels of government that regulate the conduct of the firm. This textbook is directed toward the Legal Environment of Business.
For many managers, the legal environment is, at first, a curiosity. Managers are curious about how the legal environment affects them, but they quickly realize that fully understanding the law is time consuming and difficult. Instead of implementing legal strategy into agreements, negotiations focus on total cost (T) as some function of price per unit (p), quantity (q), and negotiating skill (n). That approach could be defined like this:
T=f(p,n,q)=∫n*qdpdq
This approach is badly misplaced however. A manager who is focused on price and quantity will quickly find that taking large legal risks without accounting for changes in price in the face of a constant quantity can be very dangerous. This manager discovers that there is a worst case scenario (X) and some probability that it will happen, which has nothing to do with price or quantity:
E[X]=∫−∞∞x*f(x)dx
where
f(x)=12πe−x22
the probability density of the standard normal distribution. This book challenges that f(x), the function of something going wrong, is mere randomness. Rather, a legal strategy operates to 1) locate risks, 2) assign costs to risks, and 3) determine whether risks are worth taking.
The legal strategy of a firm or a future firm can be modeled, at least at generally, with Michael Porter’s Five Force Model.1 Porter analyzes industries as a whole and not firms, but the framework is still helpful. He considers the competitive nature of the industry, the availability of substitute products, the ability for new entrants to come into the industry, the power of suppliers, and the power of customers.
Porter’s model is static and simply measures the competitive landscape of an industry at a specific point in time. Legal strategy leverages legal tools and techniques to become more competitive over time by managing 1) risks within the firm, including relationships between owners and employees; 2) risks between the firm and its suppliers; and 3) risks between the firm and its customers. This monograph models these risks through microeconomic theory.
Chapter 1 lays out a microeconomic framework that is used throughout the text. There are buyers and sellers in the marketplace. Most firms are buyers and sellers in different markets at the same time. Firms have limited resources and need to select the marketplaces that they enter carefully. The chapter concludes with deviations from neoclassical models provided by inefficient information.
When acting in the presence of inefficient information, actors behave differently in the marketplace and engage in games. These games involve players who, much like actors under neoclassical theory, want to ensure the best outcomes for themselves.
These games have a common goal—profit and a common enemy—transaction cost. Chapter 1 introduces the protagonist of the story—Ronald Coase—whose legal strategies set forth much of the remainder of the text by finding ways to reduce transaction cost, determine risk, and assign the risk between parties.
Risk has two components: likelihood and magnitude. Chapter 2 deals with magnitude of risk where the defendant prevails. In the United States, in the absence of a statute to the contrary, each side in a lawsuit pays its own expenses. It is rare that a manager would be satisfied with assurance of winning a legal dispute. Rather, the manager would want to know the cost it would incur to win the legal dispute.
In general, there are three
