Corporations Hamann Spring 2017
Introductions
Choosing a Corporation
Corporations Become large by going public, stock becomes offered for sale to the public. No liability. Taxed twice – income and dividends.
S-Corp – subchapter S of the IRS code
must have fewer than 100 shareholders, small number of shareholders.
closely held corps. usually have relatively few shareholders
allows corp to be taxed like a partnership instead of corp.
owners of a small corp (100 or less) may choose to get benefits of protected liability and taxation.
C-Corp – subchapter C of the IRS code
big corps have hundreds of thousands of shareholders
Everything Else
Sole Proprietorship (default mechanism if you don’t file with state)
one person running business
there is liability to personal assets
taxed only once
Partnerships (default mechanism)
2 or more persons running a business
there is liability to personal assets
taxed only once
LLC – 1st statute enacted in 1977, nobody used that form for almost a decade, waiting for IRS to rule on tax treatment, started using in 1988.
LLP –
Limited Liability Limited Partnership –
Agency
Corporation is not a human being, must have agents. Sole Prop. has no agents.
Sources of Law
Restatement of Agency
Restatement 2nd
Restatement 3rd – very little case law
Case Law
most jurisdictions do not have statutes on agency – they began in the common law.
Creation of Agency Relationship (Elements)
consent – both parties must consent
can be written (express)
can be (implied)
NOTE: may also see master and servant in Restatement 2d v. principle and agent.
ex: ask someone to go down the street and purchase computer paper -> person fetching is acting as an agent. Don’t have to use the word agent.
ex: here’s $10, go down the street and get paper, no verbal communication, can be implied.
action by the agent on behalf of the principle
no benefit to agent clearly on behalf, however, can be a benefit even if agent is paid, must benefit the principle.
control – action is subject to the control of the principle
agent or independent contractor? Control and direction.
Independent Contractor – are the means or the result being controlled? Usually a question of fact.
Only the result controlled – then independent contractor
Means controlled – then an agent
ex: Walgreens employs a cashier, give her schedule, register to ring up on, how to scan items, what to do, etc. – agent.
ex: electrical engineer hired by Walgreen’s for their stores electric plans to see if they comply with city codes, and tells the engineer your job is to review the plans and if they comply to sign off on them. independent contractor.
ex: what if that engineer works exclusively for Walgreen’s 9-5pm? still independent contractor. agent
ex: what if that engineer was hired to review the plans on 3 stores only, and that engineer also reviews plans for someone else? independent contractor, because they work for more than 1 individual.
Easy Answer: when someone is a full time employee – always will be an agent for the principle.
what if instead of full-time employees Walgreen’s hires electrical engineer A – give him just as many plans to review as a full-time employee but doesn’t have an office anymore? Can go either way.
Why label someone independent contractor rather than an employee?
payroll taxes
benefits
liability
unemployment insurance
Whether someone is an agent or independent contractor is not determined solely upon their agreement. Courts will look at other facts.
ex: Omar owns 3 retail stores and he needs someone, Pamela, to make deliveries to deliver goods to customer homes. Hits a pedestrian in the cross walk – Omar liable? Is Pamela an agent?
working exclusively? probably agent
working with other companies? independent contractor
paid per delivery v. set amount? flat rate -> agent, per delivery -> independent contractor.
whether the references were checked goes to negligent hiring only, employer can be sued for tort of independent contractor, then investigation references is relevant for negligent hiring purposes.
Respondent superior or vicarious liability -> principle is not protected by reference check by employer because agency exists.
ex: 40 hours a week hired for deliveries, treated as an employee, one day, she’s done by 1pm and decides to drive down to the beach and get sun and hits pedestrian. Is Omar liable? No, outside the scope of employment, look at the scope of the employment, e.g., frolic and detour.
Public Policy – who should bear the loss?
Pamela drives the truck, who owns the truck? If Pamela owns the vehicle more likely to be IC, rather than agent.
ex: Pamela is driving Omar’s truck, 40 hours per week, he pays payroll tax, probably an agent, who is the pedestrian going to sue? Always liable for your own torts. Is the business also liable? Usually want to sue the principle – has more money.
Closely held corps – if tortfeasor is the owner, owner may have more money than the corporation.
Contract Liability (Authorities)
Actual – principle manifests to the agent that the agent has authority, does not require express authorization – can be implied, use of agent not required.
ex: Reginald owns a gift shop, orally tells S that if she sees some items that she thinks would be good for the shop she can purchase and R will reimburse. Goes to conference orders cards. Clearly expressed and communicated to the agent. R must accept them.
ex: Dean Darby says to X employee, doesn’t like desk, go to Macy’s and find a new desk. X goes to Macy’s and buys new desk. D reimburse X? Does find a desk mean buy the desk? Standard is what a reasonable person in the agents shoes would believe?
Apparent – when manifestation by the principle to a 3rd party.
ex: Dean calls Macy’s and says sending C to purchase desk. Then, says to C go to Macy’s and take a look at a desk for me. Reasonable person look at = purchase? Represented to the third party that agent was authorized.
Telling a 3rd party that an agent represents you does not establish actual authority – must be communicated to the agent.
ex: D says to C, go to Macy’s and pick out a desk, but make sure its under $1000. C goes to Macy’s and buys desk that costs $2000. When shipped, D refuses desk. No actual authority to make that purchase. From Macy’s point of view is that C had apparent authority.
limitation not told to the 3rd party – what happens? ex: real estate transactions.
ex: C frequently been sent to Macy’s by D, JMLS has always paid, new Dean comes in, but there is a new
y, and that Yardley had no authority to bind Jenkins to it.
Issue: Does a corporation’s president have the authority to bind the company to an oral pension agreement with an employee, if the agreement is not extraordinary in nature?
Holding and Reasoning: Yes. A corporation’s president has the authority to bind the company to an oral pension agreement with an employee, if it is not extraordinary.
In general, a corporation’s president has authority to bind the company by acts that arise in the usual course of business, but not for contracts that are extraordinary in nature. What constitutes an extraordinary agreement is not well defined.
In the context of employment contracts, a corporation’s president, as part of the regular course of business, may hire and fire employees and fix their compensation, and may choose to hire an employee for a specific, reasonable number of years.
However, employment contracts for life are usually considered to be extraordinary and beyond a president’s authority. Such contracts impede shareholders’ and future directors’ power regarding management policies, subject the corporation to substantial liability, and run for long, indefinite periods of time.
Jenkins argues that the pension agreement involved in this case is analogous to such a lifetime employment contract. However, the only quality that pension agreements share with lifetime employment contracts is that they run for long, indefinite periods of time.
Pension agreements do not impede director or shareholder control, or create a disproportionate amount of liability. Pension agreements are common fringe benefits in employment contracts, and courts usually find them to be binding and definite.
The pension contract in this case was not unreasonable, and was in fact beneficial and necessary for the corporation. Whether apparent authority exists is a question of fact that depends on many factors, including
the officer negotiating the contract,
the corporation’s usual manner of conducting business,
the corporation’s size and its number of stockholders,
the circumstances surrounding the contract,
its reasonableness,
the amounts involved, and
the contracting third party.
Here, Yardley was not only president, but chairman of the board, a substantial stockholder, and trustee and son-in-law of the major stockholder’s estate. The contract was made in the presence of the vice president, for a reasonable amount of time, to secure badly needed personnel, and limited the corporation’s liability under such a pension to $1,500 per year.
In this case, reasonable men could differ as to whether Yardley had apparent authority to make the contract with Lee. The trial court therefore erred in deciding the issue as a matter of law. Remanded to trial court to figure out the authority.
