Business Law

Citation metadata

Editor: Sonya D. Hill
Date: 2012
Encyclopedia of Management
Publisher: Gale, a Cengage Company
Document Type: Topic overview
Pages: 6
Content Level: (Level 4)

Document controls

Main content

Full Text: 
Page 82

Business Law

Business law forms the basis of the legal provisions that regulate the foundation, management, and performance of business activities and consumer transactions. Also known as commercial law, business law focuses on the interpretation of the rights and responsibilities of the parties involved in commercial transactions of varying magnitudes and proportions. Issues such as formation and registration of business, contracts, consumer protection, and property ownership rights feature prominently in business law. Business laws can be categorized into business incorporation and solvency laws, and transactional business laws.


The formation and insolvency laws determine the legal structure of a business; these include sole proprietorships, partnerships, limited liability companies, and corporations. Sole proprietorship is a business that is owned by one person. A sole proprietor is considered to be individually inseparable from the business and remains liable for debts incurred by the business. A partnership is a business that is owned by two or more people who undertake business with a common motive of making profits. Partnerships take the form of general partnerships or limited partnerships. Like a sole proprietorship, the owners of general partnerships are considered individually inseparable from the obligations of the business.

A limited liability company (LLC) is an entity that is owned by many people who are considered to be completely distinct from the business. Owners of an LLC are not individually liable to the obligations of the business. A corporation, like an LLC, is distinct from its owners, enjoys perpetual existence, is run by a centralized management that is different from the owners, and is flexible to the transfer of shares. Corporations are governed by the Model Business Corporation Act (MBCA) that provides the guiding framework for incorporating businesses in the United States. The MBCA is a creation of the American Bar Association that is used as a guiding framework for state-level business incorporation laws.

Advanced in 1950 and revised in 2005, MBCA's provisions on the creation and management of corporations are referenced by many states but not including California, Delaware, and New York. The act provides the guidelines for incorporating businesses and stipulates that a business comes into existence as a legal entity once a certificate of incorporation is issued. The MBCA

The Legal Structure of a Business
Sole proprietorship A business owned by one person.
Partnership A business owned by two or more people.
Limited liability corporation (LLC) Owned by many people who are considered to be completed distinct from the business.
Corporation Distinct from it's owners. Run by a centralized management that is different from the owners. Governed by the MBCA.

The Legal Structure of a Business The Legal Structure of a Business

Page 83  |  Top of Article

further requires corporations to identify registered agents and vest them with the responsibility of serving as their appointed legal representatives. Creditors are allowed to use these registered agents to track down companies that default on their debt obligations and file appropriate legal suits against such companies through these agents.

The MBCA elaborates on the powers and responsibilities of the corporate board of directors, sets the limits on the number of board members, and specifically recognizes the board as the managers of the corporation. The first board that is appointed at incorporation is endowed with the responsibility of managing the corporate affairs until such a time that shareholders endorse a new board. Issues such as conflicts of interests, rights of shareholders, and compensation of the board members are also addressed by the MCBA.

California, Delaware, and New York are favorite destinations for incorporation of businesses because they do not subscribe to the MBCA laws. Indeed, the non-application of the MBCA in these three states enables them to enact friendlier tax laws and incorporation costs.


Business laws in the United States are primarily implemented on the basis of the regulatory provisions of the Uniform Commercial Code (UCC). First published in 1952, the UCC defines the rights, limitations, and relationships that govern the conduct of the different parties that participate in business transactions. The UCC was promulgated with the objective of harmonizing the laws concerned with commercial activities and the sale of goods in all 50 states. The Cornell University Law School Web site explains that the UCC is divided into 13 core articles:

  • Article 1—General Provisions
  • Article 2—Sales
  • Article 2A—Leases
  • Article 3—Negotiable Instruments
  • Article 4—Bank Deposits
  • Article 4A—Funds Transfers
  • Article 5—Letters of Credit
  • Article 6—Bulk Sales
  • Article 7—Warehouse Receipts
  • Article 8—Investment Securities
  • Article 9—Secured Transactions
  • Article 10—Effective Date and Repealer
  • Article 11—Effective Date and Transition Provisions


Business laws differ according to the varying business activities that are undertaken by business organizations. The main types of transactional business laws as identified at the Cornell University Law School Web site include banking, bankruptcy, consumer credit, contracts, debtor and creditor, landlord-tenant, mortgages, negotiable instruments, real estate transactions, sales, and secured transactions.

Banking Regulations. Article 4 of the UCC forms the basis of the regulations that define the respective rights and responsibilities of each of the parties involved in banking depository, collection, and payment transactions. To this end, the Article ensures the clear definition of responsibilities for all the parties involved in depositing, collecting, and paying checks in the chain of banking transactions, including the depository bank, collecting bank, and the payer bank. The other key UCC provisions for banking as articulated in Articles 2A (leases), 4 (bank deposits), 4A (funds transfers), and 5 (letters of credit) govern the responsibilities of transacting parties on receiving and transferring checks as well as handling negotiable instruments such as letters of credit, certificates of deposits, and securities.

Sidebar: HideShow

Types of Transactional Business Law

Consumer credit
Debtor and creditor
Neogtiable instruments
Real estate transactions
Secured transactions

The federal banking regulations, entrenched in Article 12 of the Code of Federal Regulations, are enforced by the Federal Reserve through Regulation J and Regulation CC. Whereas Regulation J governs the clearance of checks through the Federal Reserve System, Regulation CC focuses on monitoring funds availability in the accounts of depositors and enforcing the procedures for handling dishonored checks. The Federal Reserve regulations also include the Expedited Funds Availability Act, which enforces limitations on the maximum periods that checks can be delayed by the depository banks before conveyance to depositors for withdrawal.

Page 84  |  Top of Article

Bankruptcy Regulations. Bankruptcy is a legal process that is instituted by creditors or filed voluntarily by debtors in the process of recovering bad or long overdue debts through court declarations that confirm the incapability of the debtors to settle the outstanding debts. The debtor is therefore called upon to surrender portions of his assets to the creditor(s) as settlement for the outstanding debts and accrued interest. In the event of a debtor owing several creditors, then the assets should be subdivided proportionately to all the affected creditors relative to the debt amounts owed to each of them.

The U.S. bankruptcy laws are strictly established and regulated at the federal level in accordance with the provisions of Title 11 of the United States Code and the United States Trustees Program. The uniform application of the federal laws on bankruptcy means that states cannot enact or adjudicate separate bankruptcy laws. States are, however, allowed to enact separate laws to govern issues that concern the relationships between creditors and debtors. Bankruptcy courts are the institutions that are charged with the responsibility of supervising the proceedings and administration of bankruptcy.

Liquidation bankruptcy and rehabilitation bankruptcy are the two main types of bankruptcy. Liquidation bankruptcy involves the collection and selling of the debtor's nonexempt assets through the supervision of an appointed trustee so as to proportionally settle the outstanding debts owed to creditors. Rehabilitation bankruptcy, on the other hand, allows the debtor to retain control over the assets but on the condition that proceeds from the business are used to settle all outstanding debts. This can be done through the appointment of a receiver manager to supervise the estate of the debtor. The acquisition and sale of the debtor's assets fully relieves him or her of the debt obligations, regardless of whether or not the value of the assets matches the outstanding debts.

The interests of the creditors are prioritized by the Bankruptcy Code and the debtor can neither sell any of the assets attached to the proceeding nor seek to separately settle any outstanding debts during the proceedings. The declaration of bankruptcy may also lead to the delay or invalidation of any recently instituted asset transfers that are still being processed. In 2005, the Supreme Court slightly tilted the provisions in favor of debtors when it declared that some of the debtor's assets may be exempted from attachment to the bankruptcy proceedings as per the provisions of Title 11 of the United States Code. In Rousey et ux v. Jacoway, the court declared Individual Retirement Accounts (IRAs) as exempt from attachment to bankruptcy proceedings or liquidations.

The bankruptcy regulations were also enhanced by the enactment of the Bankruptcy Prevention and Consumer Protection Act in 2005. The act provides numerous revisions of the procedures for liquidation or rehabilitation of debtors. The act also accorded the United States Trustees Program with an expanded mandate for certifying organizations that bear the responsibility of prebankruptcy filing credit counseling and that extend financial education to bankrupt debtors during the process of being discharged from debt obligations.

Consumer Credit Regulations. Consumers acquire credit for the purposes of financing those transactions that they cannot afford to settle fully at the time of the transaction. Such credit financing is facilitated through loans, mortgages, invoice factoring, or credit card accounts. Consumer credit is regulated by both federal and state laws that provide the guiding principles for the credit industry and offer consumer protection as well. The Consumer Credit Protection Act of 1968, for example, made it compulsory for creditors to make disclosures of their terms of credit. The act also regulates the activities of credit card companies, imposes restriction on the use of wages as security on loans, protects consumers from the unfair practices of loan sharks, prohibits any forms of discriminations in credit extension, and facilitates the continuous monitoring of the consumer finance industry through the National Commission on Consumer Finance.

The signing into law of the Credit Card Accountability Responsibility and Disclosure Act (CARD) in 2009 by President Barack Obama enhanced the credit card laws by introducing expanded limitations for credit card service providers and financial institutions. Such limitations included prohibitions on unfair credit card charges and mandatory inclusions of contract terms in language that is understandable and legible to consumers.

Debtor and Creditor Regulations. Debtor and creditor regulations come in handy when parties fail to honor their debt obligations to creditors in the normal course of business transactions. Unlike bankruptcy regulations that attempt to achieve proportional distribution of the creditors' rights over debtors' assets, debtor and creditor regulations prioritize the allocation of the rights to lien creditors before considering the other creditors. Lien refers to the right given by law to a person over the property of another that could be held in the form of a possessory lien, equitable lien, or maritime lien. Liens generally arise through inter-party agreements that are characteristic of mortgages and secured agreements.

Priority interest arises from statutory obligations such as taxes that require the prioritized settlement of given debts as per the provisions of the Federal Tax Lien Act. In the United States, for example, the Congress granted priority to the recovery of government funds spent on companies under the under the Troubled Asset Relief Program (TARP) of 2008 that was designed to address the subprime mortgage crisis. Debtor and creditor regulations also

Page 85  |  Top of Article

govern debt collection practices as per the provisions of the Fair Debt Collection Practices Act. The act emphasizes fairness by creditors in the process of attaching, garnishing, or placing debtors' properties under receivership in the efforts to recover outstanding debts. Attachment involves seizure of a debtor's property, garnishing involves collection of outstanding debts through wage deductions, and receivership involves the appointment of third-party trustees by the courts to a manage debtor's assets and convey the earning to creditors until such a time that the debts are cleared.

Landlord-Tenant Regulations These laws are applied in the management of both commercial and rental properties on the basis of federal and state laws. The federal laws that govern landlord-tenant relationships are founded in the Uniform Residential Landlord and Tenant Act (URLTA) and the Model Residential Landlord-Tenant Code. The federal laws generally focus on the prevention of discriminatory practices by landlords against their tenants and define responses that are expected by both landlords and tenants during periods of emergencies such as tornadoes, storms, or earthquakes. Most states draw their specific landlord-tenant laws from the two main federal regulation statutes.

Property laws and contract laws also form the core of the landlord-tenant regulations, with regards to the length of tenancy periods and procedures for renewing or terminating tenancies upon the lapse or breach of the tenancy agreements. Tenancy and lease periods on properties last for varying periods that may be as brief as one month or as lengthy as several years. The U.S. landlord-tenant laws grant the tenant exclusive rights over the rented property for both periodic and multiyear tenancy. As such, the tenant may impose restrictions of entry to the property by other persons including the landlord, and may even sublet the property, subject to the provisions of the contract agreement.

Contract Regulations. Contracts are legally binding agreements between two or more parties that undertake to fulfill their respective obligations as stipulated in the agreement. Contract regulations impose legally enforceable obligations on parties to a contract and failure by any of the parties to honor the stated obligations renders the party liable to the injured party. Designed to secure commercial relations such as sale of goods, transfer of interests, or employment of personnel, contract regulations are founded on common laws and state statutes. The parties to contracts may also apply private law to determine the nature and scope of obligations that are imposed on the contracts. The agreements reached under private law are generally prioritized over common and statutory laws. A properly prepared contract should fulfill the following conditions:

  • The offer and acceptance of the offer should satisfy legal requirements.
  • The intention to create a legally binding relation and the accompanying remedies should be stated clearly.
  • Adequate consideration in the form of the value to be surrendered by one party for the promise of the other should be demonstrated in the contract agreement.
  • The involved parties must demonstrate the capacity to enter a contract as per minimum age qualifications, competence, and soundness of mind.

Contract agreements can be processed either formally through written and signed documents or informally through word of mouth. Contracts are generally classified as express or implied contracts, unilateral contracts, bilateral contracts, valid contracts, voidable contracts, and contracts Uberrimae Fidei. Express contracts occur when the parties enter specific agreements about the terms of their relationship. Implied contracts do not carry any specific agreement between the parties, and the ascertainment of the existence of a contract involves taking into account the conduct of the parties.

A unilateral contract only binds one party, whereas a bilateral contract binds both parties. Many contracts, such as employment contracts, are bilateral in nature because they involve offer by one party and acceptance by another party. Valid contracts are enforceable by law at the option of both parties whereas voidable contracts are enforceable by law at the option of one party only. Voidable contract arises when one of the parties is dragged into a contract through undue influence, fraud, or misrepresentation. The aggrieved party therefore has the option of nullifying the contract.

A contract is considered to be Uberrimae Fidei if the full knowledge of all the material facts are restricted to one party and which the party must dutifully disclose to the other party. Insurance contracts, family settlements, contracts for sale of properties, and contracts of partnership are good examples of contracts Uberrimae Fidei. These contracts are based on utmost good faith, and the failure to demonstrate faith in disclosure is tantamount to breaching the contract. In the United States, contract regulations for the signing of contracts and allocating payment rights for agreements of security interest are founded in Articles 1 (General Provisions), 2 (Sales), and 9 (secured transactions) of the UCC.

Mortgage Regulations. A mortgage is a transactional undertaking that involves transferring one party's interests in immovable properties (real estate) to the custody of another party for purposes of securing a loan or settling

Page 86  |  Top of Article

other forms of debt obligations. The party transferring the property is the mortgagor whereas the party to whose custody the interests are transferred is the mortgagee. The federally applicable UCC articles and state laws on contracts and property provide the guiding framework for the transfer of the interests of a mortgage. The laws generally vest the rights to the transfer of interests in mortgages to the mortgagors and mortgagees.

The security of the mortgage payment is based on the mortgage money that consists of the principal value of the property and the accompanying interest on the money. The mortgage transaction is usually validated through a mortgage deed. The mortgage procedure involves the depositing of the property title deed by the mortgagor to the mortgagee to serve as security for the loan. The mortgagee returns the title deed to the mortgagor upon the full repayment of the loan. The mortgagor is usually granted an adequate period over which to repay the debt and redeem the property. In the event of the mortgagor defaulting, however, the mortgagee has rights to enforce a foreclosure.

Foreclosure is a process through which a mortgagee obtains a court order that extinguishes the mortgagor's equitable rights to redeem the property securing a loan. The borrower is granted a dateline for clearing the debt as per the provisions of the acceleration clause of the mortgage agreement. The failure to meet the dateline automatically prompts the commencement of an absolute order of foreclosure in a process that involves vesting the ownership rights of the property to the mortgagee's name. The mortgagee may then proceed to apply the provisions of the power of sale foreclosure in offering the property for sale so as to recover the outstanding debt.

The mortgagor is similarly endowed with the rights of property redemption upon the full payment of the principal borrowed sum and the interests. Under the common law, the mortgagor's right to the property is extinguished upon the expiry of the legal redemption date.

Negotiable Instruments. A negotiable instrument is an unconditional written document that is transferrable by delivery. This means that a negotiable instrument confers certain rights which are incapable of physical possession and which are only enforceable through legal action as opposed to physical repossession of anything. A check, for example, gives a person a right to the specified sum of money without giving the money physically until such a time that the check is processed. Negotiable instruments fall in two main categories of notes and drafts. Notes, such as CDs, promise payment at a future date, whereas drafts order the immediate conveyance of payments to the specified parties.

Bills of exchange, checks, promissory notes, dividend warrants, treasury bills, share warrants, and bearer debentures are main types of negotiable instruments. Other forms of transaction instruments such as share certificates, orders, letters of credit, and fixed deposit receipts are not negotiable instruments. Regulations that govern negotiable instruments are established in state statues and the federal UCC articles. All the U.S. states have adopted Article 3 of the UCC that specifies the legal procedures for effecting negotiable instruments. The United States also subscribes to the provisions of the UN Convention on International Bills of Exchange and International Promissory Notes.


The management of a business organization is a process that is characterized by many legal formalities that relate to ownership and operational structure as well as taxation. Legal issues such as trademarks, the relationships among founders of a business entity, personnel employment processes, and liabilities of contracts portend much significance to the future operations of the business. The business achieves distinctiveness through trademarks and creates proper procedures for handling probable future disputes among founders through proper documentation of the agreements among founders. Legal issues of employment focus on the rights of employees and their obligations to their employers.

Contract laws commit employees to agreements and covenants that are confidential and can restrict actions, such as disparagement. Agency laws, also known as tort laws, commit the employee to duties of loyalty, obedience, and care that expose the employee to legal action in the event of violations.

Business organizations must always seek to comply with all the provisions and limitations of the business laws that are applicable at the federal and state levels. The federal employment laws, for example, impose an express ban on the employment of illegal immigrants in the United States as per the articulation of the Immigration Reform and Control Act of 1986. It is therefore important for organizational managers to understand the dos and don'ts of business law provisions. Noncompliance to business law can lead to very costly court cases and penalties.


Blum, Brian A. Bankruptcy and Debtor/Creditor Examples and Explanations. 5th ed. New York: Aspen Publishers, 2010.

Burnsed, Brian. “Preview of Major Business Cases in Supreme Court's 2009–2010 Term.” Bloomberg Business Week, 24 September 2010. Available from .

“Business Legal Structures.” , 2010. Available from .

Page 87  |  Top of Article

Clarkson, Kenneth W., Roger LeRoy Miller, and Frank B. Cross. Business Law: Text and Cases—Legal, Ethical, Global and Corporate Environment. Mason, OH: South-Western Cengage Learning, 2010.

“Commercial Law.” Ithaca NY: Cornell University Law School. Legal Information Institute, 19 August 2010. Available from .

Cross, Frank B., and Roger LeRoy Miller. The Legal Environment of Business: Text and Cases—Ethical, Regulatory, Global and Corporate Issues. Mason, OH: South-Western Cengage Learning, 2011.

Diamond, John L., Lawrence C. Levin, and Anita Bernstein. Understanding Torts. 4th ed. LexixNexis/Matthew Bender, 2010.

“Employment Law and Duties to One's Former Employer.” , 2010. Available from .

“Guide to Business Law.” , 2011. Available from .

Mallor, Jane, James A. Barnes, Thomas L. Bowers and Arlen Langvardt. Business Law: The Ethical, Global and E-Commerce Environment. New York: McGraw-Hill, 2009.

“Model Business Corporation Act (MBCA).” . Available from .

Ross, Lee. “Supreme Court Leaves Alone States' Job Compensation Rules for Illegal Workers.” , 28 February 2011. Available from .

“Rousey et ux. v. Jacoway: Certiorari to the United States Court of Appeals for the Eighth Circuit.” , 2011. Available from .

“The U.N. Convention on the International Sale of Goods.” Lectric Law Library, May 1994. Available from .

U.S. National Archives and Records Administration. “Electronic Code of Federal Regulations: Title 12—Banks and Banking.” Washington, DC: GPO, 2011. Available from

“What Is Business Law?” , 2011. Available from .

Source Citation

Source Citation   

Gale Document Number: GALE|CX4016600038