BUSINESS AND COMMERCIAL LAW 

 

Overview

Business law and Commercial law govern all aspects regarding the operation of a business and its formation and management.  It includes contracts, corporations, commerce, consumer transactions, business organizations, securities, patents, trademarks, trusts, immigration, labor laws, employment law, and bankruptcy.  Other areas included in commercial law are secured transactions, sales, debtor and creditor law, and negotiable instruments.

Areas of Business and Commercial Law

Secured Transactions

A secured transaction occurs when the borrower agrees that the lender may take his or her collateral if he or she defaults on payment of the loan.  Most lenders require more than a promise of repayment.  Collateral secures the loan by using property as security - A security interest is created by a security agreement.  Collateral is used as protection to pay the loan. 

Article 9 Section 9-109 details the structure and any issues that may arise between the borrower and lender in a security agreement.  This includes sales of accounts, agricultural liens, promissory notes, payment intangibles and consignments.

Uniform Commercial Code (UCC)

Most states abide by the Uniform Commercial Code (UCC) Article 2 for the sale, lease or distribution of goods.  It also pertains to warranties, contract formation and any changes that take place.

Warranties

There are several types of warranties.

The Warranty of Title

When goods are sold, the seller must ensure that the title to these goods is valid and has no liens or problems associated with it.

Implied Warrant of Merchantability

The goods are okay to sell or fit for sale.  This is discussed in Section 2-314.

Implied Warrant of Fitness for a Particular Purpose

The seller knows what the purpose these goods are used.  The buyer, on the other hand, depends on the seller’s expertise – these goods are suited for his or her purpose.  This is discussed in Section 2-315.

 

Express Warranty

The seller creates an express warranty when he or she makes an affirmation of fact regarding the goods; this becomes the basis of the bargain.  This creates the warranty that the goods will conform to the description made as part of the basis of the bargain.  This is discussed fully in Section 2-313.

Sales and Leasing of Goods

A sale is when the title of goods pass from the seller to a buyer for a price.  Article 2 provides rules for sales contracts.  It includes the formation, modification, performance and resolutions in case of a breach.  The leasing of goods is detailed in Article 2A of the UCC. 

Consumer Credit -

Debtor and Creditor Law

People who use credit buy or borrow today with a promise to pay in the future.  Credit comes in the form of credit cards or loans issued by a bank or financial lending company.  Some businesses offer their own line of credit; this credit complies with Federal and state debt collection and credit laws.

Federal statutes include The Fair Credit Reporting Act, The Equal Credit Opportunity Act, and The Truth in Lending Act, The Fair Debt Collection Practices Act and The Fair Credit Billing Act.

The Fair Credit Reporting Act (FCRA)

The FCRA is a Federal protection law that regulates the disclosure of consumer credit reports by credit bureaus.  Credit bureaus are required to investigate disputed items in credit reports.  The Act protects consumers from misleading credit report information that ruins the consumer’s credit.  It allows the consumer to look at his or her credit report free of charge once a year.  If there is incorrect information on the report, the consumer can ask the credit agency to correct or delete the information. 

The Equal Credit Opportunity Act (ECOA)

This is a Federal law that requires lenders to make credit available without discrimination against race, color, sex, age, religion, etc.  The lender is required to look at only future earnings and credit records.  The lender must notify the applicant in writing if there is negative credit action taken.  Applicants have 60 days to request this statement.  A credit application must be reviewed within 30 days of the application’s receipt by the lender.

 

The Truth-in-Lending Act (TILA)

This is a Federal law requiring lenders to provide information to consumers so they can compare the terms of various loans.  This information is highly regulated.  TILA regulates the proper way consumer credit can be advertised by lenders.

The Fair Debt Collection Practices Act (FDCPA) 

The Fair Debt Collection Practices Act (FDCPA)

This Federal law addresses inappropriate debt collection practices.  It promotes honesty in the industry. It forbids debtor harassment and watches out for third-party collectors, such as lawyers and collection agencies.  Original creditors are not regulated by the FDCPA.

The Fair Credit Billing Act (FCBA)

This Federal law is part of The Truth-in-Lending Act.  It allows consumers to question disputed open-end credit plan bills.  The borrower must bring any disputed issues to the creditor within 60 days.  The creditor has 90 days to correct the bill or notify the consumer why the bill is correct, showing supporting evidence to this.

Negotiable Instruments

A negotiable instrument is an unconditioned check, promissory note or bill of exchange that promises payment of a fixed amount of money to be transferred to another person.  It differs from a regular contract because it is transferable to other parties.  Negotiable instruments are made payable to a specific party and must be endorsed.  A negotiable instrument made payable to a bearer needs no endorsement.  A draft is a type of negotiable instrument.  It is the payment of money, such as a check.  A note is a promise to pay a certain amount of money.   UCC Article 3 deals with transactions involving negotiable instruments.

Formation and Management of a Business

Most businesses are classified into one of the following types.  There are advantages and disadvantages to each type.  A business owner should examine the personal liability ramifications and tax implications of each type before selecting what type of business to operate. 

Types of Businesses

Sole Proprietorship

A business owner, or sole proprietor, owns all the assets associated with the business and is responsible for all business liabilities associated with the business.  The owner is also responsible for paying taxes on all income and making all business decisions.  This type of business is the least complicated to run.  The owner has no protection from personal liability.

Advantages – Company is easy to set up and run; there is no double taxation on profits.

Disadvantages – You are the only owner and you are the only one responsible for any losses.

 

General / Limited Partnership

When two or more people become co-owners of a business, a general partnership is created.  Each partner is active in the management of the business, owns the assets, shares the profits and losses, is liable for business-related issues (debts and liabilities), and pays taxes on their individual tax returns.  Each partner is active in the daily management of the business.  Each partner is legally bound to any agreements the other partner makes regarding the business. 

In a limited partnership, at least one partner manages the business operations and at least one contributes capital and shares in profits; however, does not have strong management control.   A limited partner has limited liability – it extends only to his or her capital contribution.  A limited partnership requires the partners to file a certificate with the Secretary of State.  This type of partnership agreement can be complex.

Advantages – Flexible and few legal formalities; limited partner may be a lucrative capital investor

Disadvantages – Unlimited personal liability; responsible for the other partner’s actions; no control over the business

The Limited Liability Company

A limited liability company (LLC), is a combination of a partnership and corporation.   The requirements for an LLC are different in each state.   Usually the formation of an LLC is by one person.  The owner must file articles with the Secretary of State’s office.  He or she risks only the amount of money he or she invested into the LLC.  The owner reports profit and losses on the individual tax return.  The LLC is not a separate taxable entity.

Advantages – Risk only the invested money; rules are flexible

Disadvantages – Set-up can be complex; not a separate legal entity for tax time

Corporation

A corporation is a legal entity formed to conduct business that is separate from the owners or managers.  Corporations can enter into contracts, pay taxes separate from the owners, and take on debt.  Management operates the corporation, creditors loan it services, product or money, shareholders invest in the corporation with their money, and employees contribute their labor.  Corporations produce value and generate income.  The owners are protected from the corporation’s liabilities and creditors and risk only what they invested in the corporation. Articles must be filed with the Secretary of State’s office.  The corporation must write up corporate bylaws, hold a meeting with the board of directors and issue stock.

Advantages – Limited liability for the owners; corporation is a separate taxable entity

Disadvantages – Set-up is complicated and costly; management has complex responsibilities

Good Faith

Section 1-203 of the UCC discusses good faith.  Good faith is an honest effort to fulfill obligations under a contract without using fraud.   

Conclusion

Business and commercial law cover a huge area of legal issues.  The Uniform Commercial Code, or the UCC, governs the sale and lease of goods and much of the common law of contracts.  An experienced business and commercial law attorney can answer all of your questions.

Links to additional information

The Commercial Law League of America can answer any questions you have regarding the credit industry, creditor’s rights, debt collection, bankruptcy and commercial litigation.  Visit their website at www.clla.org

The Federal Trade Commission protects America’s consumers.  For a link to more information regarding the Fair Debt Collection Practices Act, visit the website at www.ftc.gov

For more information on the Uniform Commercial Code, visit Cornell University Law School at www.law.cornell.edu

The National Association of Credit Management is an advocate for business credit and financial management professionals.  The NACM is the primary learning and information resource center for commercial creditors in the United States.  The website is located at www.nacm.org