SPELL·C covers the five main entity types ranked by complexity. The key questions for each: Who has personal liability? Who manages? How is it taxed? Sole proprietors and general partners have unlimited personal liability. LLCs and corporations shield owners from business debts — the critical difference most students mix up.
Sole proprietorship
Simplest — no formation required. Owner and business are one legal entity. Unlimited personal liability. Taxed on owner's personal return.
General partnership
Two or more persons carrying on a business for profit. No filing required. Each partner has unlimited personal liability and equal management rights.
LLC
Limited liability + pass-through taxation. Members shielded from business debts. Flexible management. Most popular small business entity.
Agency
AIR (A=Actual authority, I=Implied authority, R=apparent/Represented authority)
Actual authority · Implied authority · Apparent authority
Actual authority · Implied authority · Apparent authority
Agency law determines when a principal is bound by an agent's acts. AIR: Actual authority (principal expressly or impliedly authorized the act) · Implied authority (reasonably necessary to carry out actual authority) · Apparent authority (principal's conduct led third party to reasonably believe agent had authority). All three bind the principal.
Actual express
Principal explicitly authorizes the agent — "You are authorized to sign contracts up to $10,000." Clear, direct grant of authority.
Actual implied
Authority reasonably necessary to accomplish the express authority — a store manager hired to run the store has implied authority to hire staff.
Apparent authority
Created by principal's conduct — not agent's claims. Third party reasonably believes agent has authority based on principal's representations or course of dealing.
Corporate Veil
FUFA (F=Fraud, U=Undercapitalization, F=Formalities ignored, A=Alter ego) — grounds for piercing the corporate veil
Fraud · Undercapitalization · Formalities ignored · Alter ego
Fraud · Undercapitalization · Formalities ignored · Alter ego
Limited liability is the whole point of a corporation or LLC — but courts can pierce the corporate veil and hold owners personally liable when FUFA applies. Fraud · Undercapitalization (not enough money to cover foreseeable liabilities) · Formalities ignored (no minutes, commingled funds) · Alter ego (owner treats business as personal piggy bank).
Fraud
Corporate form used to perpetrate fraud — courts won't allow the shield to protect wrongdoers who abused the entity.
Undercapitalization
Starting a business without enough capital to cover reasonably foreseeable liabilities — courts may pierce when creditors are left holding the bag.
Formalities
Failure to hold meetings, keep minutes, maintain separate accounts, or file required documents. Treating the entity as if it doesn't exist.
Fiduciary Duties
CLOC (C=Care, L=Loyalty, O=Obedience, C=Candor) — fiduciary duties of directors and officers
Care · Loyalty · Obedience · Candor
Care · Loyalty · Obedience · Candor
Corporate directors and officers owe fiduciary duties to the corporation and its shareholders. CLOC: Duty of Care (act as a reasonably prudent person in a similar position) · Duty of Loyalty (put corporation's interests above personal interests) · Obedience (follow the law and corporate charter) · Candor (full disclosure to shareholders).
Duty of Care
Informed, good-faith business decisions. Business Judgment Rule: courts defer to directors' decisions if made in good faith, informed, and rationally believed to be in corp's best interest.
Duty of Loyalty
No self-dealing, usurping corporate opportunities, or competing with the corporation. Interested director transactions require board approval after full disclosure.
Business Judgment Rule
Protects directors from liability for bad business decisions — courts won't second-guess informed, good-faith decisions. Doesn't protect breaches of loyalty.
WAVED covers the core employment law concepts. At-will employment (default in US — either party can end the relationship) has exceptions: Wrongful termination (firing for illegal reasons) · protected classes under federal law (Title VII, ADA, ADEA) · vicarious liability (employer liable for employee's on-duty torts) · EEOC enforcement.
At-will employment
Either party may terminate for any reason or no reason — with exceptions. Most US states follow at-will. Contracts and handbooks can modify this.
Title VII
Prohibits employment discrimination based on race, color, religion, sex, national origin. Applies to employers with 15+ employees. EEOC enforces.
Protected classes
Title VII · ADA (disability) · ADEA (age 40+) · GINA (genetic info) · FMLA (family/medical leave) · Equal Pay Act (gender pay equity).
UCC Article 2
GAPS (G=Gap-filler price, A=Gap-filler place of delivery, P=Gap-filler time of Performance, S=Gap-filler Shipment) — UCC Article 2 gap-fillers
Gap fillers · Acceptance (battle of forms) · Perfect tender · Sellers' remedies
Gap fillers · Acceptance (battle of forms) · Perfect tender · Sellers' remedies
UCC Article 2 governs the sale of goods and is more flexible than common law. GAPS: Gap fillers (UCC supplies missing terms like price and delivery) · Acceptance via battle of forms (§2-207) · Perfect tender rule (buyer can reject goods that fail in any respect) · Sellers' remedies (resell, recover price, damages).
Gap fillers
If parties leave terms open, UCC supplies reasonable terms — reasonable price, reasonable time, seller's place of business for delivery. Contract not void for indefiniteness.
Battle of the forms §2-207
Additional terms in acceptance become part of contract between merchants unless: offer limits acceptance, terms materially alter, offeror objects. Between non-merchants: additional terms are proposals only.
Perfect tender rule
Buyer may reject goods that fail to conform in any respect. But seller has right to cure if time for performance has not expired.
Partnership Liability
JUMP (J=Joint and several liability, U=Unlimited personal liability, M=Mutual agency, P=Personal assets at risk) — general partnership risks
Joint · Unlimited · Mutual agency · Personal liability
Joint · Unlimited · Mutual agency · Personal liability
General partnerships are the default when two or more people do business together — no paperwork needed. But JUMP captures the danger: Joint and several liability · Unlimited personal liability for all partnership debts · Mutual agency (each partner binds the partnership) · Personal assets at risk. One partner's bad deal = all partners' problem.
Joint and several liability
Creditor can sue any one partner for the full amount of the debt — that partner must then seek contribution from other partners.
Mutual agency
Each partner is an agent of the partnership — any partner can bind the entire partnership on ordinary business matters without other partners' consent.
Partnership dissolution
UPA: dissociation occurs when partner leaves. Winding up: completing existing business, liquidating assets, paying creditors, distributing remainder to partners.
Antitrust
SHIP (S=Sherman Act, H=Horizontal restraints, I=Interlocking directorates, P=Per se vs rule of reason) — antitrust framework
Sherman Act · Horizontal restraints · Interstate commerce · Per se vs. rule of reason
Sherman Act · Horizontal restraints · Interstate commerce · Per se vs. rule of reason
Antitrust law prevents businesses from unlawfully restricting competition. SHIP: Sherman Act §1 (agreements in restraint of trade) and §2 (monopolization) · Horizontal restraints (competitors agreeing — most serious) · Interstate commerce required · Per se illegal (price-fixing, bid-rigging, market allocation) vs. Rule of reason analysis.
Sherman Act §1
Every contract, combination, or conspiracy in restraint of trade is illegal. Requires two or more parties — unilateral conduct not covered by §1.
Per se illegal
Price-fixing · bid-rigging · market allocation among competitors · group boycotts. No need to show actual harm — automatic violation.
Rule of reason
Most other restraints — court weighs anticompetitive effects against procompetitive justifications. Most vertical restraints analyzed under rule of reason.
Bankruptcy gives debtors a fresh start and fairly distributes assets to creditors. 7·11·13: Chapter 7 (liquidation — trustee sells assets, debts discharged) · Chapter 11 (business reorganization — company keeps operating under a repayment plan) · Chapter 13 (individuals with regular income restructure debt over 3–5 years).
Automatic stay
Filing bankruptcy immediately halts all collection actions, lawsuits, foreclosures, and wage garnishments. Gives debtor breathing room. Applies in all chapters.
Chapter 7
Means test required. Non-exempt assets liquidated by trustee. Most unsecured debts discharged. Process takes ~4–6 months. Cannot file again for 8 years.
Non-dischargeable debts
Student loans (generally) · child support/alimony · recent tax debts · debts from fraud · criminal fines. These survive bankruptcy and must still be paid.
🎓 Common Exam Questions
Q: What does SPELL·C stand for and what are the key liability differences between each entity?
A: SPELL·C (Sole proprietorship, Partnership, LLC, Limited partnership, Corporation): Sole proprietorship: owner IS the business — unlimited personal liability for all debts and obligations, no formality required. Partnership (general): all partners have unlimited joint and several liability — creditors can pursue any partner for the full debt. LLC (Limited Liability Company): members' liability limited to their investment — the most popular entity for small businesses. Limited Partnership (LP): general partner manages and has unlimited liability; limited partners are passive investors with liability limited to their investment. Corporation: shareholders' liability limited to investment — the corporate veil protects personal assets unless pierced (FUFA: Fraud, Undercapitalization, Formalities ignored, Alter ego).
Q: What does FUFA stand for and when can courts pierce the corporate veil?
A: FUFA (Fraud, Undercapitalization, Formalities ignored, Alter ego): the four grounds for piercing the corporate veil — treating the corporation as a separate legal entity and imposing personal liability on shareholders. Fraud: using the corporate form to commit fraud on creditors or others. Undercapitalization: starting a business with insufficient funds to cover foreseeable liabilities — courts treat this as bad faith. Formalities ignored: failing to maintain corporate records (minutes, resolutions), commingling personal and business funds, not holding required meetings. Alter ego: the shareholder treats the corporation as their personal bank account with no real separation. Courts require two-pronged showing: unity of interest (disregard of separateness) AND injustice would result from maintaining the shield.
Q: What does CLOC stand for and explain the Business Judgment Rule?
A: CLOC (Care, Loyalty, Obedience, Candor): fiduciary duties of corporate directors and officers. Duty of Care: directors must act as a reasonably prudent person would in similar circumstances. Protected by the Business Judgment Rule (BJR): if a director acted in good faith, was adequately informed, and rationally believed the decision served the corporation's best interests — courts will not second-guess the business decision even if it turns out badly. The BJR essentially immunizes good-faith business judgment from liability. Duty of Loyalty: no self-dealing without disclosure and approval, no usurpation of corporate opportunity. Must disclose conflicts of interest to disinterested directors or shareholders for approval. Duty of Obedience: follow law and corporate charter. Duty of Candor: full disclosure to shareholders on material matters.
Q: What does UCC Article 2 govern and what are its gap-filling rules (GAPS)?
A: UCC (Uniform Commercial Code) Article 2 governs the sale of goods — tangible, movable personal property. It does NOT apply to real estate, services, or mixed contracts dominated by services. GAPS gap-fillers when parties leave terms open: Gap-filler for price: reasonable price at time of delivery (market price). Gap-filler for place of delivery: seller's place of business (or seller's location if no business). Gap-filler for time of performance: reasonable time. Gap-filler for shipment: seller's option to ship in any commercially reasonable manner. The UCC is more flexible than common law — it allows contracts to be formed even with open or missing terms as long as the parties intended to contract and there is a reasonably certain basis to grant a remedy. This contrasts with common law's stricter mirror image and definiteness requirements.
Q: What does SHIP stand for in antitrust law and how does per se vs. rule of reason analysis work?
A: SHIP (Sherman Act, Horizontal restraints, Interlocking directorates, Per se vs. rule of reason): Sherman Act Section 1 prohibits agreements in restraint of trade (requires two or more parties). Section 2 prohibits monopolization (can be one party). Horizontal restraints (between competitors): price fixing, bid rigging, and market allocation are per se illegal — no justification accepted, no economic analysis needed. Vertical restraints (between supplier and dealer): generally analyzed under the rule of reason — the court weighs pro-competitive benefits against anti-competitive harms. Rule of reason framework: (1) plaintiff shows anti-competitive harm. (2) defendant shows pro-competitive justification. (3) plaintiff shows less restrictive alternative exists. Clayton Act adds merger review and prohibits exclusive dealing arrangements that substantially lessen competition.