Business Organizations and Governance
What this domain tests
Business Organizations and Governance tests entity selection, authority, fiduciary duties, and liability shields. Expect agency concepts, the business judgment rule, and veil-piercing.
Core rules and concepts
- Entity basics: Sole proprietorship has no liability shield. General partnership: joint and several liability, default equal profits. LP has limited partners without management control. LLP and LLC shield members. Corporation is a separate legal person; S corp avoids double tax but has eligibility limits.
- Agency: Principal binds the principal if the agent has actual (express or implied) or apparent authority. Ratification and estoppel can also bind.
- Fiduciary duties: Directors and officers owe care and loyalty. Duty of loyalty covers self-dealing, usurping corporate opportunities, and confidential information. Caremark requires good-faith oversight, not perfect monitoring.
- Business judgment rule: Presumes informed, disinterested decisions; plaintiff must rebut. Fraud, bad faith, or conflict loses protection; entire fairness applies to self-dealing.
- Veil piercing: Rare; requires alter ego, commingling, undercapitalization, or fraud. Limited liability is the default.
Worked example
CEO owns a supplier and votes to buy from it without disclosure. Shareholder sues. The business judgment rule does not shield the CEO because self-dealing creates a conflict. The court applies entire fairness: the CEO must prove fair dealing (timing, disclosure, approval) and fair price. If independent directors approved after full disclosure, the standard may shift to waste or BJR under Delaware law; absent that, the transaction is vulnerable.
Traps that cost marks
- Treating the business judgment rule as absolute; it fails for fraud, bad faith, or conflicts.
- Piercing the veil for mere failure to hold meetings; courts require abuse.
- Confusing apparent authority with actual authority.
- Assuming LLC members are personally liable for company debts.