Select Page

Business Associations
Santa Clara University School of Law
Yosifon, David G.

1.       When organizing and operating a biz – owners can choose a variety of forms
a.       Corporations
b.       Partnerships
c.        Limited Partnerships
d.       Sole Proprietorships
e.        Limited Liability Companies
2.       Influencing factors…
a.       Need for limited liability
b.       Free transferability of interests
c.        Continuity of existence
d.       Centralized mgmt
e.        Costs
f.        Access to capital
g.        Taxation
3.       Sole Proprietorship
a.       Simplest form of biz
b.       Indiv goes into biz as sole owner
c.        No formal requirements for the formation or operation
                                             i.      Ownership and mgmt can exist in the sole owner
d.       Owner is the Principal and can employ ppl as Agents to represent and work for her biz
e.        Owner is personally liable for the oblig of biz
f.        All profits and losses are the personal and part of her indiv tax return
4.       When deciding to go into biz w/ other people…either choose 1) partnership, or 2) corporation
a.       Corporation
                                             i.      Usually need an atty
                                            ii.      List of requirements to meet
b.       Partnership
                                             i.      Association of 2 or more ppl to carry on as co-owners a biz for profit
                                            ii.      Requires no formal action or written agmt
                                          iii.      Ppl acting together to run a biz might result in a partnership
1.       Advisable to have an agmt among partners or shareholders of a closely held corp to protect the interests of the ptys
                                          iv.      W/out an agmt – partnership law is generally more protective of all the owners than corporate law
c.        Partnership v. Corporation?
                                             i.      Consider: {each of these could be modified by contract}
1.       Limited liability
2.       Free transferability of interests
3.       Continuity of existence
4.       Centralized mgmt
5.       Costs
6.       Access to capital and taxation
7.       Major differences btwn partnership and corp:
a.       Partnerships – viewed as an aggregate that is composed of its owners
                                                                                                                     i.      Each owner personally liable for the debts of the partnership
                                                                                                                    ii.      Interests are not freely transferrable
1.       New partners can be added – but there MUST be a unanimous consent for changes in the makeup of the partnership UNLESS otherwise contractually agreed upon
                                                                                                                  iii.      If any change in partnership – there is a dissolution of that partnership
1.       Which limits the continuity of the biz
2.       E.g. Death or bankruptcy of one partner = dissolution of the partnership b/c the aggregate changes when the original partner is replaced by another
a.       Death precipitates the appointment of an executor
b.       Bankruptcy heralds the designation of a trustee
                                                                                                                  iv.      Partner may @ any time cause the dissolution of the partnership by merely deciding to end the relationship
b.       Corporations – viewed as a separate legal entity distinct from its owners
                                                                                                                     i.      Separate legal entity: able to incur its own liabilities
1.       Shields shareholders as owners from personal liability à aka. Limited Liability
a.       In most cases, shareholders will only lose their investment in the corp
b.       Primary reason why the corporate form is chosen for many businesses
                                                                                                                    ii.      Since shareholders are separate from the corp – they can freely transfer shares
1.       Different owners have no effect on the separate corporate entity
                                                                                                                  iii.      Death or bankruptcy of a shareholder, or desire of a shareholder to terminate ownership, does not affect the corporation b/c it’s a separate legal entity unaffected by changes in legal ownership
1.       Corps provide for perpetual existence
1.       Basic Issue of any Exam Question: Does an Agency Relationship exist??
2.       Agency: relationship that arises when one person (principal – P) manifests an intention to another person (agent – A), that the agent shall act on the principal’s behalf
a.       Rstmt Definition:
                                             i.      Agency: the fiduciary relationship that results from the mutual manifestation of consent that one person (A) shall act on behalf of an subject to the control of another person (P)
b.       Manifestation can be thru an express or implied agreement btwn P and A; or can be after the fact by P’s ratification of the A’s act
c.        If no agreement: agency can arise from principal’s conduct to 3rd ptys
                                             i.      Conduct that makes 3rd ptys believe that the P has appted someone to be his A (apparent or ostensible agency)
d.       Requirements for Agency: (see below also)
                                             i.      1) Principal must have the capacity to contract (agent does not need this capacity)
                                           ii.      2) Agency must be formed for a legal purpose
1.       No consideration necessary
2.       Generally no writing is required – except is Statute of Frauds or equal dignitaries rule applies
3.       Scope/Purpose of Agency
a.       Purpose:
                                             i.      Allows one person to appoint another to act for him in such a way as to effect legal acts and liabilities
b.       Scope
                                             i.      Most often seen in commercial settings
                                            ii.      Concerns the rights and liabilities created when one person “acts for another”
                                          iii.      Agency law encompasses:
1.       1) when one may act for another and to what extent
2.       2) the various duties that the ptys to the agency relationship owe each other
3.       3) contractual rights and liabilities of 3rd ptys who have dealt w/ the agent
4.       4) circumstances in which one person may be liable in tort for wrongful acts of another in his employ
 
Creation of Agency – Elements Checklist
Consent
Of both parties
Capacity
Principal must have contractual capacity
Agent needs only minimal mental capacity, not capacity to K
Writing seldom required
Check SOF and/or equal dignities statute; most likely required for land sale contracts
Proper Purpose
Not illegal or against public policy
**consideration is not required
4.       Requirements for Agency Relationship– Who Is an Agent?
a.       1) CONSENSUAL, but not necessarily contractual
                                             i.      b/c they are consensual in nature, normally arise by prior agmt btwn the P and A
                                            ii.      Consent can occur after the fact by ratification; and estoppel can serve as a substitute for consent
                                         iii.      AGENCY BY AGMT
1.       must be based on some indication by the P to A that P consents to A to act for the P must be stated
2.       some kind of manifestation of consent by A must be indicated
3.       Express; or implied from the conduct of the parties
4.       Gorton v. Doty [Idaho 1937] (p. 1)
a.       Request from father for damages re injury to son as a result of a car accident on a way to football game; Coach Garst uses Doty’s car to take some of the players to the football game; Doty tells Coach: “You might use my car provided that you drive”; Crashes car and Robert Gorton was injured
                                                                                                                     i.      Father brings suit seeking damages for the cost of the injury; Sues owner of the car (Doty)
                                                                                                                    ii.      Not enough $ to go after co

t influence over operations.
                                                                                                                  ix.      “Control” is used as the touchstone for the existence of an agency relationship. 
                                                                                                                   x.      The lender began to become involved in the day-to-day business of the borrower.
                                                                                                                  xi.      Agency deals with a set of conditions, not a single factor.
                                                                                                                xii.       
c.        Agent is only responsible for only what the agent is authorized to do
4.       Tort Liability
a.       Ratification may also expose the P to tort liability for the agent’s misrepresentations, etc.
b.       2) CAPACITY- person (P) apting an agent must have the capacity to contract
                                             i.      Minors – cannot validly appt another as their A, unless if it has to do w/ their necessities for life
                                            ii.      Incompetents – does not have capacity to K and cannot appt A, unless to take care of their necessities for life
                                         iii.      P must have the contractual capacity, but the agent does not….minors and incompetents cannot be Ps (generally) but can be agents
c.        3) NO CONSIDERATION necessary
d.       4) NO WRITING (general rule)
                                             i.      ordinarily, no writing is required to create an agency relationship
                                            ii.      so can be created by word of mouth, conduct or writing
                                          iii.      Statute of Frauds
1.       In many states, however, SOF requires an A’s authority to be evidenced by a writing signed by the principal if the auth conferred is to execute contracts for the sale of land
                                          iv.      If not in writing but required to be….
1.       If A’s auth is required to be in writing, any K executed by the agent is unenforceable against the principal, even though the K itself is in writing
a.       P’s Option
                                                                                                                     i.      K is voidable at the option of the P, rather than the other pty to the K
                                                                                                                    ii.      I f decides to accept the K, can subsequently ratify it in writing
                                           v.      Exceptions
1.       Corporate executives: an exec officer of a corp need not have written auth from the corp to act on its behalf – justified by the necessities of modern business practice
2.       Mechanical acts: written auth usually not required where the A acts mechanically (A does not have auth to enter into a K) but is only auth to sign P’s name on a K already made
e.        5) PROPER PURPOSE: an agency may be created only for a legal purpose – if illegal purpose or contrary to public policy, agency will be disregarded
                                             i.      P cannot delegate to an A acts that public policy requires the P to perform personally
5.       Liability of Principal to 3rd Parties in Contract