Problem
1. Ann recently inherited $50,000 and has decided to use the money to open a muffin shop. She asked her friend Jerry if he would be interested in going into the venture with her. He said, "I don't have any money to invest with you, but I would be willing to work in the store and use my show business connections to bring in customers."
• Ann would like to take Jerry up on his offer. What is the type of entity you would recommend she open? In detail, explain why. Additionally, explain why you did not recommend the other entity types that exist.
• Will Jerry be deemed Ann's employee? Why or why not?
2. Ann and Jerry opened Muffin Morning. They leased a store where they both signed as co-tenants, purchased kitchen equipment, and entered into a contract with a supplier of muffin mix to deliver $1,000.00 worth of supplies at a time.
• Does the statute of frauds apply to the lease? To the contract with the supplier?
• Since Muffin Morning is a business entity, how could it execute these types of contracts? Explain in detail.
3. The business prospered. Ann and Jerry worked long hours in the stop. Ann spent most of her time behind the counter and dealing with the suppliers, while Jerry baked the muffins and entertained the customers with his comedy routine. Soon Muffin Morning was attracting more business than it could handle. Jerry and Ann discussed expanding the business. They needed more space and even if they didn't move to a larger store, they needed to hire someone to help make the muffins. Jerry was eager to obtain a business loan and build a new store, but Ann thought that was moving too fast. However, she agreed to hire an employee and they offered the job to Carl. Now with an employee to pay, the business needed to improve its cash flow. Without Ann's knowledge, Jerry went to the bank and negotiated a small line of credit to cover operating expenses.
• How was Jerry able to obtain a loan for the business?
4. When Ann learned that Jerry had taken out a loan, she was furious and the two had a terrible fight. Jerry told Ann that unless she was willing to go along with some of his ideas to expand the shop, he was going to leave. Ann told him to go. Ann and Carl continued to run Muffin Morning. One morning a few weeks later as Ann was serving a customer, he congratulated her on the opening of her new shop. She was shocked and immediately went to see what he was talking about. Another muffin shop, Muffin Morning Too, only three blocks from Muffin Morning, had recently opened. Ann walked into the shop to find Jerry behind the counter. She was shocked and unable to speak - instead, she turned and walked out.
Ann has regained her composure and now seeks legal advice. She wants to sever all ties with Jerry and wants to know how to proceed. She is also concerned about the obligation Jerry incurred for Muffin Morning with the bank and whether she has any rights to the new muffin shop.
• What is the best advice you can offer her based on what you have learned about business organizations and agency law? Explain in detail.