This memo is in regard to the recent assignment on research about business registration and independent contracting in Delaware as applicable to our client, Career Institute of America, Inc, herein referred to as CIA, as regards their business case.
Summary of facts
Our client, herein referred to as Career Institute Of America Inc., CIA, is a newly registered business entity under Section 405 of the “Not-for-Profit Corporation Law” (DoS, 2011). CIA is involved in online training of American auto industry students and offers online classes through contracted instructors. CIA does not want the contractors to be perceived as the CIA’s permanent employees but as contracted content providers.
Suffice to state that while Delaware’s Liability in tort and contract limits the liability of a contractor in a not-for-profit organization in case of breach of contracts, provision for-profit organizations provide more liability if a contractor and the contracting organization (All Law, 2011; Delaware Division Of Corporations, 2011). Previously the company had attracted a retraining grant from the United States Department of Labor. However, this type of grant is strictly awarded to not for profit organizations. CIA draws much of its profits from fees charged for online training. Furthermore, the company’s founder, who also is the CEO, is interested in retaining a majority stake.
In Delaware, a certain legal provision limits the CIA’s current status as a not-for-profit organization. Not-for-profit organizations only register for corporate purposes. Profits accrued for business cannot be distributed to directors or members. Upon dissolution, assets can only be re-distributed to another, not for profit organization (VCorp Service, 2011). The conflict of interest provision restricts the CIA’s CEO to transact any business on behalf of the organization (Gere, Vitrano and Schmeltz 2005). Furthermore, under the ‘Uniform Partnership Act,’ partnership with other corporations is highly restricted for not-for-profit organizations (HG Experts 2011; LII 2011)
Issues
With regard to this scenario, the following issues need to be addressed:
- What type of business organization should the CIA be?
- What should the CIA’s independent contracting agreement contain to be legally enforceable?
Law
Pursuant to the ‘General Corporation Law of Delaware’:
- Delaware ‘Uniform Union- Corporate Nonprofit Association Act,’ non-profit organization cannot transfer assets to directors or any member of the organization (Delaware Division of Corporations 2011).
- Cap 4 on Directors and Officers provides that for-profit organization can have one director who can also be the sole shareholder and holder of all offices within the organization (Ryan 2005).
- Business & Contractor Law of Delaware, the company, needs to consider certain basic provisions for the agreement to be legally enforceable (All Law 2011).
Analysis
Currently, CIA is registered as a not-for-profit organization. However, the company’ Chief Executive Officer and founder see CIA as his personal enterprise and would like to take the majority shareholding and control. This implies that the company should retain the not-for-profit identity it currently holds. Then the CEO is restricted to establishing such kind control on his business. Delaware ‘Uniform Unincorporated Nonprofit Association Act’ limits directors or members of a not for profit organization from having any form of shareholding in the organization.
Furthermore, any assets held by CIA cannot be transferred to the ownership and control of the CEO as long as CIA is a not-for-profit organization. As such, in regard to the attainment of the wishes of the CEO, the company needs to assume a different identity. Pursuant to ‘General Corporation Law of Delaware,’ the company CEO can gain control of majority ownership and stake, which includes control of assets currently held by the company. Cap 4 on Directors and Officers allows for-profit organizations to be directed by at least one director who can also assume sole ownership and proprietorship.
The company attracts profits from online fees charged to its students as well as operating two physical classrooms. However, it depends on external content providers for its curriculum needs. The company does not want the content providers to be perceived as its own employees and thus wants them to retain independent contractors identify. Pursuant to the ‘Business & Contractor Law of Delaware, ‘ CIA needs to sign an independent contractor agreement. To be legally enforceable, the agreement must identify the identity of both the contractor (content providers) and organization (CIA), including the physical address.
Other than the duration of time within which the contract is enforceable, the agreement needs also explicitly to identify the scope of work done. The agreements also need to explicitly state that the contractor is not an employee and thus cannot receive any employee benefits. Additionally, the agreement must contain the form and amount payable to the contractors. Lastly, terms and conditions of termination, including any penalties and compensations, must be contained therein (Find Legal Forms 2011).
Conclusion
In view of the current scenario, it is not in the best interest of the company and the CEO for the company to continue existing as a not-for-profit organization if it re-registers as a for-profit organization. However, the founder will be able to gain sol proprietorship and ownership. Furthermore, independent contractors’ agreement for profits organization gives the contracts more liability in case of termination of the agreement. Therefore, CIA should be re-registered as a for-profit organization.
Reference List
All Law, 2011. Independent Contractors Agreement. Web.
Delaware Division of Corporations. 2011. Title 6: Commerce and Trade. Web.
DoS 2011. Not-For-Profit Corporations FAQs. Web.
Find Legal Forms. 2011. Delaware Employment Agreement – Independent Contractor. Web.
Gere, S., Vitrano, P. and Schmeltz, S. 2005. Be Prepared: Not For Profit Legal Risks And Protections. Web.
HG Experts. 2011. Business Law – Guide to Business Law. Web.
LII. 2011. Partnership law: an overview. Web.
RealPractice, Inc. 2011. Independent Contractor Agreements. Web.
Ryan, Patrick S. 2005. Will There Ever Be a Delaware of Europe? Columbia Journal of European Law, Vol. 11, p. 187.
VCorp Service. 2011. Non-Profit Corporation. Web.