Question

Fact Pattern You decide to start making tee shirts in your garage with two ELAC classmates, Moe and Curly. Your tee shirts are selling fast all over Los Angeles. Your tee shirts are unique because they feature animals in a cartoonish manner with cool hats walking down the Venice Beach boardwalk. Your tee shirts sell for $20 a piece. It costs you $5 to make each tee shirt. You, Moe, and Curly are selling shirts as a hobby and had no idea that this would become so popular. You, Moe, and Curly operate under no formal business entity. You handle the paperwork, Moe handles the money, and Curly is the creative designer.

You, Moe, and Curly attend the USC vs. UCLA football game and wear some of your shirts. Many people notice your shirts and like them. Fans ask do you have them with USC or UCLA colors and mascots on them. You, Moe, and Curly decide to try to figure out how to make this happen. Since you are an expert in business law, they agree that you can handle this project. You reach out to both USC and UCLA and speak with their Athletic Departments. Both USC and UCLA like your idea.

If USC agrees to give you permission to place the USC Trojan on your shirts and sale them. What kind of agreement should be signed between USC and you, Moe, and Curly? Which legal principle(s) applies to this situation? Define the principle(s). Explain the principle(s) and how it applies.

So far, you, Moe, and Curly have been selling shirts and keeping the profit, without operating as a formal business entity. However, UCLA will not enter an agreement with you to sell them shirts and use the Bruin logo unless your business operates as a corporation, limited liability company, or limited liability partnership. You decide that you will form a business entity. Which of the three business entities, that UCLA will work with, do you decide to form? Why will you form that type of entity? What tax treatment, personal liability, and formation costs will your new company have?

You, Moe, and Curly decide to hire Edward as an employee. Edward will assist with general tasks and help carry products during setup and breakdown at events. A few months after you have established your formal business entity (Husky Shirts) and registered Husky Shirts with the State of California, you decide to market your shirts at Power 106’s Summer Jam. Edward is working at the Summer Jam and gets upset with a potential customer, Annoying Aaron who is drunk. Annoying Aaron curses out Edward for two straight minutes. Annoying Aaron then begins to go on Instagram Live and continue to berate Edward. Edward has enough and punches Annoying Aaron. Annoying Aaron falls, hurts his back, fractures his arm, and scratches his leg really bad. Aaron needs stitches and a cast. Aaron goes to the doctor and then hires an attorney to sue Husky Shirts for $75,000. Will your company, Husky Shirts, be liable for the damage Edward did to Annoying Aaron? Why or why not? Will you be personally liable for the damage done to Annoying Aaron? Do you think that you should have a business agreement between you, Moe, and Curly governing how Husky Shirts will operate? what types of terms would you insert in that agreement? Do you think that your company, Husky Shirts, should have commercial liability insurance? Why or why not?

You decide to set up a website to take orders online for Husky Shirts. Customers can place orders by entering their name, address, email address, and credit/debit card information. Do you need any specific website policies on the Husky Shirts website? If so, which policies should Husky Shirts use and why?

Answer 1

The legal term of such a partnership is called a Sponsorship Deal. This deal highlights the terms of the contract, the accruing benefits and the liability of a sponsor and the sponsoree.

The best option according to me is that of a company. This is because in a company the shareholders are only liable upto the nominal value of the shares paid by them. This makes them free from the clauses of unlimited liability. Also, a company finds it easier to expand and bring in funds for expansion which is not the case with any form of partnership. The company is separate from the shareholders and will continue even if one or more of the shareholders decide to leave.  

Yes, the company will be liable to Aaron for damages because it forms a part of principle-agent relationship and Edward's actions are within the scope of employment. However, Aaron's inebriated behaviour may be a potential source of relief.

No, the owners are not personally liable as the company is distinct from its shareholders.