Sole proprietorship
· Unlimited liability–own personal assets are vulnerable
· Sole proprietorship and general partnership are default business structures (forms) that can exist without any active effort on the parties’ part.
· Taxes: the sole proprietor is taxed only once
Partnerships
· Two or more persons operating a business for profit
· Liability is still unlimited (for a general partnership) but spread around more
· Taxes flow through to the individual partners–the partnership (the partners) is taxed only once
Corporations
1. A separate entity
2. Limited liability–shareholders’ personal assets are protected in any claim against the corporation. The shareholder’s investment (the corporation’s assets) is the only assets at risk
3. Shareholders are the owners
4. Shareholders vote in a board of directors, who manage the overall policy of the corporation
5. Board of directors vote in officers who discharge the daily corp. duties through employees
6. Corporations are taxed twice.
First, the profits are taxed. Then, in a corporation, some or all of the profits can be distributed to the stockholders in the form of dividends. These dividends are treated as income to the stockholders at a personal level, and it is taxed again. The counterview is that, in a corporation, there are two separate entities involved (corporation and individual shareholder).
If there are 35 or less shareholders (Sub Chapter S?), the corporation can have the profit flow through to the individual shareholders. Note that 35 or fewer shareholders is very similar to a big partnership (so, allowing flow-through is consistent here).
Note: a corporation is not a default business structure: there must be filing of articles of incorporation with the secretary of the individual state. A corporation has a citizenship based on where it is incorporated. The corporation must have a unique name, and the name must convey the business structure used via use of “Inc.,” “Corp.,” or “Limited.” This indicates to those dealing with the corporation the limited-liability nature of whom they are dealing with.
AGENCY
Definition of Agency:
1) person acting on behalf of another person, with the
2) mutual consent of the persons (consent may be to some actions and not to others).
The capacity to terminate the relationship at will is often cited as a key fact in identifying a principal-agent relationship
The employer-employee relationship is an example of a principal-agent relationship
General Points about Agency
Advantage of agency is to get more done.
Principal is the one who is using the agent, and the agent works on behalf of the principal.
Why should the principal be vulnerable to suit? Because the principal derives the benefit of the agent’s actions, and the agent is standing “in the shoes” (acting for) the principal–so, the principal is ultimately responsible for the agent’s action.
Note, no compensation or consideration is required to create agency, but there seems to be the need for some benefit to the principal. One reason for such is that, otherwise, we would be vulnerable to inadvertently creating agencies all the time.
A finding of agency may sometimes be driven by policy issues (encouraging people to be careful about to whom they give their car keys, etc.).
Elements of agency:
1) Acting on behalf of the principal;
2) Consent (e.g., a formal agreement);
3) Control (mere veto power does not create a principal-agent relationship).
Debtor-creditor relationships often feature a creditor exerting SOME control over the debtor. Too much control to save the loan might create an agency relationship
Ways to limit/control agency problems
1. Screen your partners better. Do not extend more credit when there are existing problems
2. Ask owner to sign a personal guarantee.
3. Avoid appearance of controlling the other entity–not appointing a manager to oversee the other entity’s daily operations. The exercise of veto power avoids the creation of active control. The assessment of the amount of control is a relative assessment–it is influenced by the chosen reference point.
The agent/employee is a fiduciary toward the principal because the agent is working on behalf of someone else, standing in the shoes of the principal, is an extension of the principal, etc. Historically, to function, it was necessary to trust one’s agents to get anything important done. Also, the fiduciary duty reflects the control that principal has over the agent.
Franchiser-Franchisee relationships
The court does not find an agency relationship when the franchisor does not control the franchisee’s daily operations, and uses guidelines rather than directives. In some circumstances, the franchise agreement allows the franchisor to “debrand” the franchisee–this sounds like termination at will (a unilateral termination), which is usually interpreted as evidence of substantial franchisor control over the franchisee. A provision for random regular inspections also represents some level of control.
In franchisor-franchisee cases, the control over hours of operation and control over nature of business are often important factors in determining whether it is a principal-agent relationship (employer-employee relationship).
The capacity to terminate the relationship at will is often cited as a key fact in establishing a principal-agent relationship.
AGENCY–AUTHORITY (Does the person who entered into the agreement have the authority to do so?)
Alw
e, the court’s rule was that if someone interferes with the employee’s ability to perform his duty, and the employee responds to that interference, that response may be within the employee’s scope of employment (baseball pitcher case).
AGENCY—FIDUCIARY DUTIES
Two kinds of fiduciary duties:
1. Duty of care (reasonable business-person standard)
2. Duty of loyalty–operating in good faith, with fair dealing.
Fiduciary obligation of agents:
Liability when there is:
a) failure to disclose a business opportunity to principal;
b) agent engaging in a competing business activity
Agent disclosure is critical because the agent acts in the shoes of the principal (both should have all the information), and agent can bind the principal. These factors favor commerce–for these reasons, disclosure is important. After disclosure, the principal can take the opportunity in some fashion (outsource, subcontract, etc.), or give it to the agent.
Breach of fiduciary duty cases do not require a contract.
Breach of duty of loyalty often is spottable when there is a conflict of interest.
Violations of agent’s fiduciary duty of loyalty–factors to consider:
where it occurs
whether it is an active or passive act by the agent
whether there is an implication of competition b/c of same line of business
is the opportunity general knowledge or does it derive from some feature of the employer?
Ratification: a purported agent acts on behalf of a purported principal, who affirms the purported agent’s act.
PARTNERSHIPS
Definition: Two or more people associating to carry on a business as co-owners for profit
Sharing of gross returns does not, by itself, establish a partnership
Receipt of a share of the profits of business is prima facie evidence that there is a partnership, unless:
UPA Section 7: Rules for Determining the Existence of a Partnership.
In determining whether a partnership exists, these rules shall apply:
(1) Except as provided by section 16 persons who are not partners as to each other are not partners as to third persons.
(2) Joint tenancy, tenancy in common, tenancy by the entireties, joint property, common property
