Business Associations Outline
1. The Sole Proprietorship
o Simplest form of business entity
o Individual owner (must be only one owner) conducts business and holds assets personally in his name.
o A sole proprietorship may operate under a trade name (NCGS 66-68)
o Individual proprietor is personally liable for all obligations of the business
B. Problems in Operating a Sole Proprietorship
o Agency Law
a. Restatement (Second) of Agency “RSA”– Contract Liability of the Agent
§ § 1 — Agency is the fiduciary relation which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and the consent by the other so to act.
· The Agent owes duties to the principal in discharging the act.
· Must be a manifestation of consent for the agent to act in the interest of the principal.
· There must be consent by the principal for the agent to act.
§ § 7 — Authority is the power of the agent to affect the legal relations of the principal by acts done in accordance with the principal’s manifestations of consent to him.
· The Agent is authorized to bind the principal on his behalf–given authority.
· Actual Authority (§ 26):
· Authority created by written or spoken words or any other conduct of the principal which, reasonably interpreted, causes the agent to believe that the principal desires him so to act on the principal’s account.
· Manifestations from the principal (P) to the agent (A) that the agent reasonably believes create authority.
· Apparent Authority (§ 27):
· Authority created as to a third person by written or spoken words or any other conduct of the principal which, reasonably interpreted, causes the third person to believe that the principal consents to have the act done on his behalf by the person purporting to act for him.
· Created by manifestations by P to a third party (TP).
§ § 140 — The liability of the principal to a third person upon a transaction conducted by an agent may be based upon the fact that :
· The agent was authorized (Actual Authority);
· The agent was apparently authorized (Apparent Authority); or
· The agent had a power arising from the agency relation and not dependent upon authority or apparent authority. (Inherent Authority)
§ 320 — Unless otherwise agreed, a person making or purporting to make a contract with another as agent for a disclosed principal does not become a party to the contract.
Restatement (Second) of Agency “RSA” — Tort Liability
Respondeat Superior liability applies to master/servant relationships
· Master/servant relationship is defined as the “master has the right to control the details of how the servant does the job.”
RSA § 2
· Master is a principal who controls or has the right to control an agent’s physical conduct in the performance of service. Master is subcategory of principal.
· A servant is an agent whose physical conduct is controlled or is subject to the right to control by the master. Servant is subcategory of agent.
· Independent contractor is person who is not controlled nor subject to a right to control with respect to his physical conduct.
RSA § 219 — A master is subject to liability for the torts of his servants committed while acting in the scope of their employment. With certain exceptions, a master is not liable for the torts of his servant when the servant is acting outside the scope of employment.
RSA § 220 — Factors for distinguishing a servant from an independent contractor
RSA §§ 228, 229 — Scope of Employment
Making the Sole Proprietorship Grow
Receive distributions of all or part of the money the business has earned.
Sell all or part of the ownership interest in the business for more than she paid for it.
Investors and lenders believe the entrepreneur will be more committed to the venture if she has invested her personal assets in it.
Debt or Equity
Debt- loan which she is legally obligated to repay
Creditors are not entitled to any control over the business
Equity- investment the business receives from selling part ownership in the business.
Equity owner has no right to repayment but gets a say in the operation of the business.
The General Partnership
· An association of two or more persons to carry on as co-owners a business for profit.
· Each ‘person’ has full status as a partner with unlimited personal liability for obligations of the partnership and full authority to exercise managerial control over the business (unless limited by agreement).
· Person can include other business entities
There are two model acts:
The Uniform Partnership Act of 1914 (UPA) and Revised Uniform Partnership Act (RUPA).
15 states (including NC) still have a version of the UPA. 35 states have RUPA.
of the other partners from any transaction connected with the formation, conduct, or liquidation of the partnership or from any use by him of its property.
· UPA also applies common law fiduciary duties.
· Duty of Care under UPA is set forth through the common law.
RUPA § 404 — The only fiduciary duties a partner owes to the partnership and the other partners are the duty of loyalty and the duty of care (as described in subsections (b) and (c)). Also, obligation of good faith and fair dealings under 404(d).
· RUPA specifically mentions good faith and fair dealings, whereas UPA does not.
· See RUPA § 103(b)(2)-(4) regarding authority to limit fiduciary duties of partners.
· If the partners do not contract away their fiduciary duties, the duty of loyalty is very similar to UPA’s standards.
§ NOTE: RUPA is more flexible in allowing the partners to develop their own agreement because they don’t have to deal with the common law as in UPA, which may not be waivable.
Liability of the Partnership
§ Joint Liability: The plaintiff must sue all partners together 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.
Liability of the Partnership
· § 13 — Partnership Bound by Partner’s Wrongful Act — A partnership is liable for the wrongful act of a partner, taken in the ordinary course of business or with authority of his co-partners, to the same extent as the partner taking the act.
· The partnership is liable for the partner’s acts.
· § 14 — Partnership Bound by Partner’s Breach of Trust — A partnership has to “make good the loss” caused by a partner’s misapplication of money or property, if the partner was acting within his apparent authority.
· RUPA § 305 — Partnership Liable for Partner’s Actionable Conduct — Similar to UPA