Question

Farmer Fred owns a dairy farm with 22 employees. The state passed a law which requires all employers with more than 15 employees to provide health insurance for the employees. To avoid this requirement, Fred sets up two corporations, each with 11 employees. Fred is the controlling shareholder and Chief Executive Officer of each corporation, and freely transfers money between the two corporations on an “as needed” basis. The state sues Fred personally for failing to comply with the law requiring insurance coverage. Will the state prevail? Why or why not? Be sure to discuss thoroughly the elements of any applicable legal doctrine and how the facts do or do not satisfy those elements.

Answer 1

The state will not prevail in this case. The reason being Fred is the sole proprietor of his business and he can take concerned decisions for his business.

Sole Proprietorship

• You are the sole owner of the company
• The owner will be solely responsible for all the decisions of the company
• Getting initial capital for the company is the sole responsibility of the owner and can be a bit tricky
• In this type of business, regulatory burden is quite light
• All profits go to the owner directly
• Liability is however huge on the owner
• Debts can prove very heavy on the owner
• For legal entities, business and owner are one and the same
• All assets and liabilities belong to the owner

In sole proprietorship, both business and owner are one and the same. Hence, Powers can be held responsible for the company’s debts.

If Fred decided to split his business and got it registered as 2 companies, both the companies are legal and so the State cannot sue Fred for violating the insurance law.