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Business and commercial law involves the regulations that business and commercial entities must follow. This includes the required procedures in the formation of a business, the fiduciary duties that directors, officers, and shareholders are bound to, and the instrumental laws that guide the day-to-day activities of business and commercial entities.

Formation of a business or commercial entity

When most individuals think of the formation of a business, they first think of a large corporation. Although corporations dominate in the commercial scene, most businesses are not classified as corporations. The most intimate business is a sole proprietorship. This business is maintained by a single individual and does not have to be formed under statutory law. The advantage of a sole proprietorship is that there is no paperwork to be filed with the state in which it operates its business; however, the downside includes the individual maintaining full personal liability of the business.

Commercial entities that are interested in obtaining limited liability must file with the state where they will be primarily conducting business. At the time of registration, the business must declare what type of entity is being formed. There are several types of entities and each varies as to the level of liability and tax treatment provided for the directors and officers. Examples of business entities include partnerships, limited liability companies, and close corporations.

Fiduciary duties in business and commercial law

A presumption exists in business and commercial law. Called the “Business Judgment Rule,” directors are presumed to be informed and act in good faith when making decisions affecting the company. A court will assume this presumption unless it is proved that fiduciary duties have been violated.

Fiduciary duties consist of a duty of loyalty and a duty of care. Directs, officers, and shareholders are required to follow these duties. The duty of loyalty requires a director to not self-deal or take a position that creates a conflict of interest with the corporation; she must always act in good faith. The duty of care requires a director to have informed oversight of corporate operations and obtain adequate information before making corporate decisions.

Shareholders also have a fiduciary duty to deal fairly and not exploit minority shareholders. Violation of fiduciary duties by directors, officers, or shareholders can be found to be a breach of contract and legal action can be taken.

Governing law of business and commercial entities

The law that governs a business or commercial entity varies depending on the type of entity. The Uniform Partnership Act and Revised Uniform Partnership Act guide both general and limited liability partnerships while the Uniform Limited Liability Company Act governs Limited Liability Companies. If a company has gone public and sells stock, then it is subject to the regulations of the Security Exchange Commission . A public company must comply with the Securities Act of 1933 as well as the Sarbanes Oxley Act of 2002.

The Sarbanes Oxley Act requires attorneys to report evidence of a material violation of securities law or breach of fiduciary duty to the company's CFO or even board of directors; it also permits the attorney, in certain circumstances, to disclose confidential information to the SEC without the consent of the client-company. The Uniform Commercial Code must be followed in all businesses involving the sale of goods. Furthermore, most businesses or commercial entities have internal controls such as articles of incorporation, bylaws, and organizational meetings.

By Delinda Tamagni           

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