Question

Anthony is a chef who owns a small restaurant in Cleveland, Ohio as a sole proprietor. Because the business is struggling in the beginning, Anthony frequently puts money from his own personal account into the business account for the restaurant. After a while, business is picking up and he decides to expand by purchasing a food truck. In the beginning he is able to run the food truck during the day, and then open his restaurant just in the evening for dinner. Soon after opening the food truck Anthony starts receiving offers to have his food truck at different events in the evening. Since Anthony can’t be the chef at his restaurant and also run the food truck at the same time, he decides to bring another chef on board. He then hires Mario to run the food truck for him. One weekend, Mario is out working the food truck. A customer named Susan approaches him and tells him how much she loves the food and asks if he can cater her upcoming birthday party. Mario, excited to be bringing in additional business for the restaurant, readily agrees. Unbeknownst to Mario, Anthony already committed the food truck to catering another party for that same day. When Mario tells Anthony that he booked the food truck for the party, Anthony yells at Mario, telling him “I don’t pay you a salary to make business decisions of that kind when only I have the right to make those decisions! I’m the owner of this restaurant, not you, so I am the only one who should be booking the food truck. From now on, you have to check with me first before booking the truck for any more business!” Mario, embarrassed at his misstep, apologizes and says he understands. A week later, Mario is out again with the food truck. On his way to the normal lunch location where he parks to serve lunch to customers, he receives a text message and looks down at his phone to read it. When he looked up, he didn’t have enough time to stop and he accidentally rear-ended the vehicle in front of him. As a result, he received a traffic citation. When Mario reported to Anthony that he was involved in the fender-bender and that it was his fault, Anthony was upset, but told Mario that accidents happen, and that the new rule is that no cell phone use is permitted when operating the food truck. Business keeps increasing for the restaurant and Anthony is becoming well-known in the city. Anthony decides that he wants to grow his business by incorporating and gaining investors. Anthony incorporates his business and is the only shareholder, but intends to reach out to other investors. One day, Anthony fell on some hard times in his personal life. Due to some bad investments with what ended up being a pyramid scheme, Anthony lost most of his money. Embarrassed and desperate, Anthony deposits some money from the restaurant’s business account into his own account to cover his personal expenses. Anthony figures that he put enough of his own money into the restaurant in the beginning, and that he is entitled to be reimbursed for those contributions. After he takes money from the restaurant, one of the investors in the business sues the restaurant and Anthony personally, asserting that the business didn’t have enough funds to pay its creditors. Answer the following: 1) Discuss the business relationship between Anthony and Mario when Mario was first hired, including the law that applies. 2) Discuss the type of authority that Mario had when he agreed to cater the birthday party. Discuss whether or not the restaurant is obligated to cater that birthday party. 3) Assume that the person whose vehicle was rear-ended by Mario files suit against the restaurant. Discuss whether Anthony/the business is liable for the damage caused by Mario. 4) Discuss whether Anthony can be held personally liable in the lawsuit that was filed by the investor. Make sure to fully explain the law that applies.

Answer 1

Answer:

1) The business relationship between Anthony and Mario when Mario was first hired, including the law that applies is:

THE RELATIONSHIP BETWEEN ANTHONY AND MARIO was that of an employer and employee relationship.

When Mario was hired by Anthony, it was a transactional relationship i.e. a pure form of employee and employer in which the business decisions were taken by Anthony, Mario was a mere employee following rules and regulations.

The laws/rules followed are:

business license requirement, health department requirement, local food truck regulations, Food Standards Code, Fire certificates and recent legislation of Substitute House Bill 2639.

2) The type of authority that Mario had when he agreed to cater the birthday party and whether or not the restaurant is obligated to cater that birthday party is:

Mario portrayed Charismatic authority due to obedience and his abilities to handle the food truck.

Mario did not had the authority to take any business decisions on its own without consulting his employer who has just hired him .

YES,

the business was obligated to cater the birthday party as Mario has promised on behalf of the restaurant and customer see a business as a whole consisting of employer and employees working together with a mutual consent.

3) Assume that the person whose vehicle was rear-ended by Mario files suit against the restaurant. so Anthony/the business is liable for the damage caused by Mario or not:

YES,

Anthony is liable to pay for the damage caused by Mario as the food truck was owned by Anthony, again Anthony can sue Mario for negligence and carelessness.

Where employees cause damage to property or persons their employer can be held liable by the victim.

This is called the principle of vicarious liability and can result in the employer being sued for damages

4) Anthony can be held personally liable in the lawsuit that was filed by the investor or not:

NO,

Anthony cannot be held liable for using the money of the business as he has invested it and most importantly he is not an investor, rather he helped the business when it needed the most.

so now when he is in hard times, he can take back his money invested, it has nothing to do with the payment of creditors. It comes under the Investment Company Act of 1940.

Whenever personal funds are put into the business, the money would come from the “contributed capital” account.

The owner will also need to take money out of the business.

When the owner does this, it is called an “owner’s draw”.

Since it is a sole proprietorship business and the owner is going to pay personal income taxes on that money regardless of what happens to it, he's free to take it out of the company at any time.

so Anthony cannot be held liable by investors as an owner's drawing is not a business expense, so it doesn't appear on the company's income statement, and thus it doesn't affect the company's net income