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Business Associations
Elon University School of Law
Haile, Andrew J.



FALL 2012




· A single person undertakes a business without any paperwork or legal formalities

· The default structure for a business with one owner

· The business and its owner are the same legal entity

Governing Law

· No specific governing law

· Subject to general rules of law and regulatory restrictions


· One person owns the business, makes all management decisions, receives all profit, and bears all loss


· The individual proprietor is personally liable for all obligations of the business, meaning even personal assets are exposed, because the owner and the business are the same entity

· The owner is liable for all claims against the business including those resulting from acts committed by employees within the scope of their employment


· The owner reports all income and deductible expenses on his individual income tax return

· Pass-through taxation- good for tax purposes because the business is only taxed once

Practice Point

· Don’t ever let someone leave your office operating as a sole proprietorship

· Puts the owner at risk for high liability


· Debt funding- loans taken from a lender

· Equity funding- an investment that a business receives for selling part ownership in the business (although no longer a sole proprietorship if more than one owner)

· Interest payments on loans are deductible on taxes, but debt is riskier- could go bankrupt if unable to pay creditors

Agency Law

· The sole proprietor is liable for acts committed by their employees committed in the scope of their employment as a matter of agency law


Definitions from the Restatement (Second) of Agency

· Agency is the fiduciary relation which results from the manifestation of consent by both parties when the parties agree that one person shall act on the other’s behalf and subject to his control

· The Principal- the person for whom the action is to be taken

· The Agent- the one who is to act

· Authority- the power of the agent to affect legal relations of the principalà the power to make the principal legally liable for acts done by the agent in accordance with the principal’s manifestations of consent to him

· Actual Authority is created by manifestations from the principle to the agent that the agent reasonably believes creates the authority to act on the principal’s behalf

· Actual authority may be expressed or implied

· Express Actual Authority- the principal expressly authorizes the agent to undertake an act on his behalf

· Implied Actual Authority- the agent needs to undertake an action in order to accomplish a task authorized by the principal

· An agent’s authority includes authority to do acts which are incidental to the requested act, which usually accompany it, or are reasonably necessary to accomplish it

· For example, if the principal asks the agent to make travel arrangements, the agent has implied actual authority to make flight reservations

· Apparent Authority- created by manifestations by the principal to a third party where the third party reasonably believes that the agent is authorized to act on behalf of the principal

· Inherent Agency Power- where authority arises from the agency relationship itself- by virtue of the agent’s position, the agent is assumed to have authority

· For example, the President of a corporation if deemed to have authority by virtue of being President

· Inherent agency power exists for the protection of third parties harmed through dealing with an agent. This only applies for the daily operations of the business (selling the business does not count) and it must be within the scope of the agent’s employment


· A principal may be found liable against a third party for acts of their agent if there was: actual authority, apparent authority OR inherent authority

· Side note- agents making contracts do not become a party to the contract

Hayes v. National Service

· Plaintiff sued her attorney for entering into a settlement agreement without her consent

· Court held that through principles of agency, the plaintiff was bound to the terms of the settlement agreement- her attorney had acted on her behalf as her agent

· As the principal, the plaintiff had not represented a limitation on her agent’s authority

Practice Point

· This was likely a Professional Responsibility violation- always promptly inform your client of any new substantive developments, otherwise, your client (as the principal), could be bound by your actions and you could be facing malpractice concerns

The Doctrine of Respondeat Superior

· Applies to master/servant relationships (aka employer/employee)

· The principal is vicariously liable for their agent

· Only applies where the employer has control over the day-to-day performance, or the details of the employee’s work

· The employee is distinguished from the independent contractor, who is hired to do a job, but is not told specifically how to do it

· Agents are either servants (employees) or independent contractorsà therefore, not ALL principals are subject to vicarious liability

· A master is a principal who controls an agent’s physical conduct in the performance of his service

· A servant is an agent whose physical conduct is controlled by the master

· An independent contractor is an agent who is NOT subject to a right to control with respect to his physical conduct

· A master is subject to liability for the TORTS of his servants committed while acting in the scope of their employment

Franchisor/ Franchisee Relationships

· A franchisee may be deemed a servant of a franchisor if: (1) the franchisor retains sufficient control over the franchisee’s operations, OR (2) the public cannot be expected to know that the franchise was owned and operated by the franchisee rather than the franchisor

· In either case, this can result in liability to the franchisor for the actions of the franchisee

· Example- Miller v. McDonalds- plaintiff bit into a sapphire stone

· Also, it doesn’t matter if the franchisor expressly stated in their franchise agreement that there is no agency relationshipà it depends on their conduct and the facts of the case



· UPA- A partnership is an association of two or more persons to carry on as co-owners a business for profit

· RUPA- If you’re sharing profits, this is prima facie evidence of a partnership unless an exception applies

· Like agency law, if the elements of a partnership are met, it doesn’t matter if there is an agreement that says that there is no partnership

· RULE from In Re Estate of Fenimore- “It is not essential that partners have the right to make decisions AND a duty to share liabilities, but at least one of these must be present AND there must also be an intent to share profits”


· No organizational document required; you could form a partnership without intending to

Governing Law

· There are 2 model acts:

(1) The Uniform Partnership Act (UPA)- 1914

(2) The Revised Uniform Partnership Act (RUPA)- 1997

· 35 states have adopted RUPA

· 15 states (including NC) still have a version of UPA

· UPA and RUPA are the default rules that apply to a partnership if they are not modified by a partnership agreement

The Partnership Agreement

· If the partnership agreement modified or waives the rules set forth in UPA or RUPA, the partnership agreement almost always

roperty rights of a partner are: (1) his rights in specific partnership property (2) his interest in the partnership and (3) his right to participate in the management

UPA § 8- Partnership Property

· (1)- All property contributed to the partnership or acquired by the partnership is partnership property

· (2)- Property purchased with partnership funds is presumed to be partnership property

UPA § 25- Nature of a Partner’s Right in Specific Partnership Property

· (1)- A partner is co-owners with his partners or specific partnership property holding as a tenant in partnership

· (2) explains the tenancy in partnership- each partner has an equal right to possess the property for partnership purposes, but not for any other purpose without consent of the partners, etc.

RUPA § 203- Partnership Property

· Property acquired by a partnership is property of the partnership and not of the partners individually

RUPA § 204- When Property is Partnership Property

· (c)- Property acquired with partnership assets is presumed to be partnership property

· (d)- Property acquired without partnership assets and with no indication of the partnership in the instrument transferring title is presumed to be separate property

RUPA § 501

· A partner is not a co-owner of partnership property which can be transferred, either voluntarily or involuntarily

· This reflects that RUPA adopts the entity theory, that the partnership, not the individual partners, owns transferable partnership property

· This is the opposite of UPA 25, that partners individually own partnership property as tenants in partnership- UPA adopts the aggregate theory


· If property is untitled and it is uncertain as to whether the property is partnership or separate property, the partnership agreement likely answers the question, if not, UPA and RUPA give presumptions- they try to predict the intent of the parties

Partnership Liability

· See UPA 13 and RUPA 305(a)

· Partnership is liable for the wrongful acts of a partner (1) when taken in the ordinary course of business OR (2) if that action is authorized by his co-partners, to the extent that they have authorized it

· Judgment creditors generally have to exhaust the partnership’s assets before enforcing a judgment against the separate assets of an “innocent” partner (RUPA 307(d) and case law in some states)

· Joint liability- a joint defendant may insist that co-obligors be joined as co-defendants with him in a single suit

· Joint and several liability- the plaintiff can sue one or more (but less than all) of the partners and recover the entire amount from only those partners sued

UPA § 15

· Contracts- partners are jointly liable for “debts and obligations” of the partnership

· NC- Even though we still have UPA, NC has joint and several liability for contracts

· Torts- partners are jointly and severally liable for torts “chargeable to the partnership”

RUPA § 306(a)

· Partners are jointly and severally liable in contract AND tort for obligations of the partnership