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Business Associations/Corporations
Santa Clara University School of Law
Klein, Thomas C.

AGENCY RELATIONSHIPS

GENERAL PARTNERSHIPS:

General Partnership:
Two or more Persons: Can really be a corporation or another entity
Co-Owners: Each person must be able to bind and act for the partnership
For Profit: Must not be for charity or another purpose
Distinguish from a joint venture, where a project only endures for a period of time
a. Easy and inexpensive to organize, no filings with state
b. Taxes are on the individual level (flow through entities)
c. Can organize profits/losses in accordance with any agreement made

Pros:

Cons:

Creation:

g. Agreement: Express agreement or operation of law from implied circumstances, ie:

i. The sharing of gross returns does not by itself establish a partnership (CA Corp. § 16202)
ii. The sharing of the profits of a business is presumed to be a partner in the business, unless the profits were: (CA Corp. § 16202)

1. Distributed for rent,
2. Outstanding debt (securing payment of loan or participating in business??),
3. Interest payments,
4. Annuity, etc.

h. Duration: If no term is specified, partnership is terminable at will of any partner
i. Capacity to become partner: All members must have capacity to contract and bind the partnership
j. Consent of other partners – Prospective partner must have the consent of other partners.
k. Conveying Partnership interest: Management rights ONLY follow if all agree

i. Exposure to legal liability is why all must agree
l. Intent of parties – intent of parties is determined from all circumstances

Creation by Agreement

m. Vary rights & duties under §16105
n. Unreasonably restrict right of access to books and records
o. Eliminate duty of loyalty (except ,may identify specific types of activities that do not violate duty of loyalty, or all partners may ratify a specific transaction)
p. Unreasonably reduce duty of care
q. Eliminate obligation of good faith & fair dealing
r. Vary the power to dissociate as a partner
s. Vary the right of court to expel a partner
t. Vary the right to wind up the partnership business

Legal Nature of Partnership:

Management of the Partnership:

Allocation of profits and losses:

y. PROFIT:
i. Three main ways to profit:
1. Receive their respective shares of profits taxed at each individuals tax bracket
2. If company sold, partners receive their appreciated value of their residual shares
3. If partner’s interest is bought out or transferred to a third party or a partner dies, his estate is compensated

z. FINANCING:
i. Capital Account: Internal bookkeeping of ownership interests for partnership. Each partners capital account goes up with profits, down with losses.

1. Capital accounts are adjusted according to the pro rata contribution of partners.
2. “Draw” reduces a partner’s capital account.

ii. Process:
1. Two partners put in capital assets (can be money OR services OR ideas OR hybrid).
2. Decide what capital assets are worth (important for services).
3. At dissolution each gets capital investment back.
4. Then, in absence of agreement, they spilt the rest 50/50; regardless of what capital investments of each were!

Fiduciary Duties of Partners:

aa. Delaware limits fiduciary duties to loyalty/care while CA does not
bb.
cc. Duty of Loyalty:

i. Account to the partnership and hold as trustee any property/profits
ii. Refrain from dealing on behalf of a party having an interest adverse to the partnership.
iii. Refrain from competing with the partnership before dissolution (the lease case)

dd. Duty of Care:
i. Refrain from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.

All duties should be executed with good faith and fair dealing concepts in mind
Agency Liability for Partners:

ee. Each partner is an agent of the partnership, through apparent authority, for the purpose of its business.

i. An act of a partner binds the partnership, unless the partner had no authority to act for the partnership, and the third party knew

1. But if partner authorized to do a duty outside his authority, binds partnership

Dissolution of the Partnership:

ff. Three major steps:
i. Dissolution: Designates the point in time partners cease to carry on the business together
ii. Termination: Point in time when all partnership affairs are wound up. Termination does not always follow from dissolution, have agreement specify otherwise to compensate other’s interest.
iii. Winding Up: Process of settling up partnership affairs after dissolution.

b. Three Options:
i. Sell company as a going concern
ii. Liquidate its assets
iii. In Kind Partition, only if:

1. No creditors
2. Nobody else would want to buy the assets
3. In kind was fair to all partners

c. What can trigger a dissolution: ALL do NOT violate agreement

i. Unilateral dissociation of any one partner
ii. Completion of term of partnership
iii. Death or bankruptcy of a partner
iv. The agreement of all partners to dissolve who have not assigned their interest
v. Expulsion of a partner
vi. Court order

d. Consequences of a Dissolution:
i. Triggering event violated partnership agreement: Remaining partners have right to continue
ii. Triggering event did not violate partnership agreement (term is up, death of partner): Can continue only if all partners agree
1. TO continue business, dissociated partner’s interest must be bought

CA Corp. §16301 CA Corp. § 16404, strict duties
w. UPA/RUPA assumes, unless stated otherwise in an statement of authority:

i. Equal Share of business: Each partner owns equal percentages of the partnership
ii. Equal Share of profits/losses: Each partner shares equally in profits and losses

x. Statement of Authority: Document that specifies the extent of authority for a partner to conduct ordinary business transactions.
Unless an agreement is made, 50/50 is presumed
u. Partnership is treated both as a separate entity of the partners and also as merely an aggregate of individual partners.

i. Partners are jointly and severally liable (LLP gets around this)

1. BUT, creditors first proceed against the firm assets before marshalling any of the partner’s personal assets
2. Partner can

ions for the principal and bind him to those decisions.

i. Did third party reasonably believe that the agent was authorized do these acts?

1. Principal must be partially/fully disclosed

ii. Scope: Authority to conduct a transaction includes authority to do acts incidental to the transaction, accompany it or are reasonably necessary to complete it.
iii. Exists to protect third parties who relied on the agent’s acts as binding the principal
t. Ratification: P is bound by the acts of A if A purported to act for P and either:

i. P affirms conduct by manifesting intent to treat A’s acts as authorized (express ratification)
ii. P engages in conduct that is only justifiable if P has such an intention to treat A’s acts as authorized (implied ratification)

u. Acquiescence
i. If A performs a series of acts not objected to by P, consent to performance of similar acts in future
VERY STRICT DUTIES

n. PRINCIPLE is liable to THIRD PARTY: If agent had actual authority, apparent authority, had inherent authority, or if principle ratified the act.

i. Case Split: Some courts even hold the principal liable for unauthorized acts of the agent
o. AGENT is liable to THIRD PARTY: If no agency exists, also on common law tort misrepresentation theory (Implied Warranty of Authority).

i. Agent is liable if P is undisclosed or partially disclosed (although P is also liable)

p. THIRD PARTY is liable to PRINCIPLE: If Principle would be liable to third party, except the third party is not liable to an undisclosed principle if the agent or principle knew the third party would not have dealt with the principle.

The basic costs to the principal of obtaining faithful and effective service from his agents, such as: The fiduciary relationship that 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 consent by the other so to act. (RS2d Agency §1).
h. Three Elements:
i. Principal’s control and/or influence over Agent
1. Mere power of principal to terminate is not enough for “control”

ii. Principal’s Consent to Agent acting on his behalf
1. Implied: Failure to object
2. Express: Contract

iii. Agent’s Acting on behalf of principal
1. Agent must be primarily benefiting principal and not himself

i. Scope:
i. A principle is liable for the acts of his agent which are committed within the scope of his agency.

j. Look at the CONDUCT of the parties and NOT THE INTENT