BUSINESS ORGANIZATIONS OUTLINE
Intro: BUSINESS BASICS
A. Legal Structures for Businesses
a. Business org – a set of contracts among a group of constituents (owners, executives, employees, lenders)
b. Internal affairs doctrine: Internal affairs of the enterprise are governed by default rules provided by state statute, except for sole proprietorship
c. Company – doesn’t mean anything, can be anything specific in business organizations
d. Transferability of ownership distinguishes public and private companies
B. Business Lawyering
a. Lawyers are advocates, not agents of the public, and do not owe a duty to the public at large
b. Movement in the profession to make lawyers gatekeepers for the public in public companies
C. Participants in the Business Organization
a. Owner – has a residual or equity interest and control
1. Residual/Upside – after pay off debts and fixed claims, what’s left over is called the residual or equity or upside
b. Lender – has a fixed claim, and may try to limit owner’s control
1. Employee lends their services to the company for a fixed claim
D. Selecting the Business Entity
a. What is required to form and operate the business?
1. Formalities
b. Who will manage the business and how will business decisions be made?
1. Management & Authority
c. To what extent will the investors be personally liable for the company’s obligations?
d. How will the business be financed?
e. How do investors receive a return on their investments?
f. What are tax consequences of forming a business?
Chapter I: SOLE PROPRIETORSHIPS & AGENCY PRINCIPLES
A. Sole Proprietorships
a. A single individual who holds himself out as a business
b. Sole control and management of the business
1. cannot divide control or becomes a partnership
2. must look after its own agents
c. Owns the business assets and is liable for any business debts
1. All of that person’s assets are at stake
2. No limited liability
d. Usually small, but no limit to the size
e. Modest capital needs that can be met from the owner’s resources and from lenders
f. Advantages
1. Ease
2. Lack of knowledge
3. Preference
4. Insurance or protection through contract
5. No formalities such as meetings or minutes
g. Disadvantages
1. Unlimited liability
2. Admission of new investors
i Investors have to give money directly to the person
ii Must join personally to profit share
h. Agency & Sole Proprietors
1. common law of agency controls
2. Proprietor = Principal
3. Employee = Agent
B. Agency Law
a. In general
1. The fid. relationship that results from the manifestation of assent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other to act.
2. Respondeat superior – master must be there to back up the servant’s errant activity (feature of employer-employee law)
3. Filler – fills in the cracks when every responsibility cannot be detailed in contract
4. Efficiency – agents allow the principal to accomplish more than acting alone.
5. Costs – Principal must supervise or monitor the activities of the agent
b. Formation
1. (1) Manifestation of consent by principal that agent will act for him/her
i Unclear what a “manifestation of consent” is, heavily litigated area
2. (2) Agent’s acceptance
i Explicit and implied consent
3. (3) Understanding that the principal will control the undertaking
i Agent must be subject to the control of the principle
c. Actual Authority
1. when principal gives agent permission to do something
d. Apparent Authority:
1. Principal’s manifestations to the third party that he consents to have the act done on his behalf by the person purporting to act for him.
2. Reasonable Belief – Some form of communication, direct or indirect, from the principal, must instill a reasonable belief in the mind of the third party.
3. Fennell v. TLB Kent (2d 1989)
i Attorney for Fennell negotiated and settled for $10k a racial discrimination case. Fennell claims that Attorney was not an agent of him and had no authority to settle case.
ii Context – phone call w/ judge
iii Held – Fennell made no manifestation to defendants’ counsel that the attorney was authorized to settle the case, resulting in no apparent authority.
4. US v. Teamsters (2d 1993)
i Teamsters were being prosecuted for a civil contempt action. Attorney signs a settlement agreement. Months later Teamsters claim that attorney did not have apparent authority.
ii Context – open court
iii Held – there was not only apparent authority but also actual authority.
e. Implied or Inherent authority:
1. Restatement 2d., Section 35
i “Unless otherwise agreed, authority to conduct a transaction includes authority to do acts which are incidental to it, usually accompany it, or are reasonably necessary to accomplish it.”
ii the authority that a agents of that kind normally have.
iii acting within the ordinary scope of employment
2. Contextual – attorney has inherent authority in court for client but not outside of court.
3. Koval & Koval v. Simon Telect (Ind. 1998)
i An attorney settled a case in an arbitration proceeding against the client’s instructions. Client tries to get out of it claiming that the attorney was not an agent with power to bind the principal.
ii Held – Client is bound by Inherent authority.
· Acting within the ordinary scope of employment, even though violated instructions given by client
· The third party must be ignorant of such violation
f. Hands-On Investor/Creditors
1. Agency Formation when
i (1) management of the debtor’s business either in person or through an agent,
ii (2) directs what contracts may or may not be made
iii Liability – for the obligations incurred thereafter in the normal course of business by the debtor who has now become his general assent.
2. Jen
ts and control
2. Fragility – any partner can withdraw at any time
3. Personal Liability – Partners are liable for partnership debts
i Partnership does not get out of the K (even if only one person negotiated K and others were not aware, others are responsible for the person’s actions)
b. Contractual
1. Partnership is a contractual agreement
i Contractual may be either expressed or implied in fact
ii A profit-sharing arrangement creates a presumption of partnership even if the parties did not intend to be partners
iii RUPA provides default rules in absence of agreement
2. Partnership Agreements
i can modify management and voting
ii RUPA fills in gaps that partnership agreement doesn’t cover
c. Agency – each partner is an agent of the others
1. Any partner can bind the partnership
2. RUPA provides for a statement of authority saying who has authority to bind the partnership, ostensibly gives public notice so that others should not rely on false perceptions
3. Close personal relationships
4. UPA and RUPA – incorporates these principles
5. 19 states still use the UPA; remainder, except Louisiana, have adopted RUPA.
d. Management
1. Equality – all partners have equal votes (unless altered by agreement)
2. Unanimity – Admission of a new partner requires unanimous consent
i including a conveyance of a partner’s interest that confers management rights on the transferee
3. Voting on partnership matters is per partner, not per dollar of invested capital, and not per share (because there are no shares).
e. Partnership Formation
1. 4 elements for partnerships:
i intent to associate
ii contribute something that promotes the enterprise
iii right of mutual control over the subject matter of the enterprise
iv agree to share profits
· altered by RUPA
2. A partnership may arise by operation of law when the parties have entered into an arrangement having the legal attributes of a partnership.
3. Implied / Operation of law
i Martin v. Peyton (NY 1927)
· Held – financial loan with oversight and leverage to fire management does not create a partnership, but comes very close to exercising too much control.
ii Holmes v. Lerner (Cal. 1999) (urban decay case)
· Held – the parties expressly agreed to associate as co-ownerships w/ intent to proceed with business
