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Business Associations/Corporations
SUNY Buffalo Law School
Mutua, Athena D.


I. Introduction to Business Associations

A. Five Kinds of Business

1. Sole Proprietorship

2. Partnership

3. Corporation (where emphasis of class will be)

4. Limited Partnership

5. Limited Liability Company

Freer Tip: These same business structures will overlap a lot. For example, Agency; Fiduciary Duties; Meinhart v. Salmon

For the owner, the two most important differences in these various business structures are (1) tax treatment of the business’ profits and (2) liability exposure of the owners of the business’s debts and other potential liabilities.

B. Always Ask Same QuestionsF for Each:

1. What is it? (e.g., Partnership, Corporation, LLC)

a. Is this business structure an entity in the eyes of the law?

i. This has huge ramifications for liability and tax issues.

b. Not a terribly important question.

2. How do you form it?

a. Conduct: Some businesses are formed simply by conduct.

i. Ex.: sole proprietorship or partnership.

(a) Can be formed by doing business, even if you don’t intend or know that that is what it is.

(b) Can be created by accident or default.

b. Filing Documents: The corporation/LLP/LLC are formed by filing documents with the state, i.e., not by conduct.

3. Who owns/runs the business?

a. Distinguish b/w the different types of business.

b. Ex.: w/ corporations, the owners are its shareholders, but they DO NOT run it. The management is separate. But OTOH, with a general partnership, the same person who owns it is the one who runs it.

4. Who gets the profits?

5. Who bears the risk of loss?

a. Is the owner personally liable? Tort liability?

b. Again, distinguish business forms – entity liable or the individuals?

i. Corporation: in theory, it is liable, not the people who run it.

ii. Partnership: partners are liable.

c. Flag taxation b/c there is a possibility of double taxation.

C. Why Does Someone Own a Business?

1. Premise: To make money

a. Create value and wealth: the defining characteristic of a business is that the economic activity is organized for the purpose of earning a profit.

b. Even if for profit, however, that is not necessarily the ONLY goal of the business. Business could have a goal of philanthropy.

2. Notion of Corporate Philanthropy – serious debate over this.

a. Law & Economics School: people should not do this.

i. The business is there to make money for its owners, and its owners can decide what to do with the money. The people running the business have no business doing that b/c it doesn’t belong to them – it belongs to the owners.

ii. Milton Friedman – Agency Relationship: the manager is the agent for the owners of the corporation (principal). Thus, the agent is working for the S/H and the S/H’s only want money.

(a) Corporate exec is a principal in her personal life. She can take her own personal money and give it to charity.

(b) Only social responsibility of the business is to increase profits.

b. Contrary Argument: businesses are very powerful parts of community and owe social responsibility to the community.

i. Ex.: Ben & Jerry’s. Could be seen as breaching a fiduciary duty b/c it is giving away part of its profits to charities. Yet, you can always sell your stock if you don’t like their policies.

ii. Can be defended by the entity theory – b/c the corporation is a separate legal person w/ individual rights under the law, it is therefore appropriate to expect and even demand that corporations be good citizens.

c. Case Law is clear: businesses can make charitable contributions:

i. AP Smith v. Barlow (NJ)

(a) Board of Corp. voted to give away donation to Princeton. The S/H’s sued the Board, claiming the donation was ultra vires (MBCA § 3.04) (outside proper power of the Corp.) The Ct found in favor of the Board, thus finding the act intra-vires (act that Corp. has a right to do).

(b) Courts use to uphold gifts based on how it was of benefit to the corporation. But [the prevailing attitude] now is: it is the corporation’s responsibility to support the community.

ii. Still are limitations on corporation’s ability to give away money:

(a) Amount given: At some level, you cannot give away everything. At that point, defaulting on your obligation as a for profit corporation.

(b) Cannot make donations indiscriminately or to a pet charity of the corporate directors in furtherance of personal rather than corporate ends.

d. Notice: the difference in what form of business we have:

i. Sole proprietorship: I own it and make a charitable contribution. Not a problem b/c giving away my own money; acting as principal.

ii. Corporation: stark contrast; the board of directors makes the decision to give away money, and the money comes out of the shareholders pockets; acting as agent.

3. Today, statutes allow contributions w/o having to show benefit to corporation. MBCA § 3.02(13).

a. Reflects idea that corps. should be free to be socially responsible.

b. But statutes don’t compel them to give money.

4. Rule: thus, a corporation’s management can do something even though it is opposed by the owners (shareholders).

D. How Does an Owner of a Business Make Money?

1. Distributions out of the business (dividends, partnership draw);

a. Payment from the business out of money it is making.

2. Sale of Ownership Interest at a profit

a. Ex.: stock market

3. Salary – if you own the business.

E. How Does An Owner of a Business Know How Much Money the Business Has Made and How Much It Is Worth? – (need to look at the FINANCIAL STATEMENTS)

1. Publicly traded corporations: market cap, etc.

2. Private: hire people to look at documents.

a. Every business should have accounting records

3. Sarbanes-Oxley

a. Applies ONLY to big publicly-traded corporations – provides financial accountability. Independent auditing.

b. Impetus was Enron’s off-balance sheet accounting.

4. Overall Principles

a. Matching: costs or expenses should be “booked” in the same time period as those revenues those expenditures held gain.

b. Conservatism: the data should be conservative, devalue assets, overestimate costs and liabilities.

c. Expense: buy it and use it all up over one year (salaries, Cost of Goods (COGS), G&A (overhead))

d. Depreciation: accounts for costs that you pay for today but use for more than a year – depreciate these costs.

i. Only care about straight line depreciation in this class: take the number of years of useful life and divided it into cost of item. Then, deduct this much each year from the income statement as depreciation.

5. Income Statement (is the company making money?): computes profit during a given period based on data about revenues (income) and cost.

a. Factors in straight line depreciation – (the machine gets less valuabl

esults 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.

b. (2) The one for whom action is to be taken is the principal.

c. (3) The one who is to act is the agent.

4. Thus, from this definition, note these three requirements for agency:

a. Fiduciary Relationship: WILL BE ON EXAM!

i. Agent owes duties to Principal: ex. – duty of loyalty, duty of care.

b. Manifestation of Consent by one person (P) to another (A) that the other (A) shall act on his behalf (P) and subject to his (P’s) control.

c. Consent by the other (A) to act.

i. Conduct manifests that one will do something for another who is in charge.

5. Always Ask: does this agent who works for this principal bind the P to the third party?

a. Answer: only binds if the agent has AUTHORITY. See below.

AUTHORITY (three kinds, all important, and ALWAYS TAKE IN THIS ORDER!!!)

6. RSA 7. Authority

a. “Authority is the power of the agent to affect the legal relations of the principal by acts done in accordance with the principal’s manifestations of consent to him.”

7. IMPORTANT: note with all of these that the manifestation doesn’t have to be words – ANY OTHER CONDUCT.

8. ACTUAL: (first on exam)

a. RSA 26. Creation of Authority: General Rule. “[A]uthority to do an act can be created by written or spoken words or other conduct of the principal which, reasonably interpreted, causes the agent to believe that the principal desires him so to act on the principal’s account.”

b. Freer: the point about actual is that it is created by manifestations by P to A, NOT to the TP. A can never manufacture her own authority! P must give the authority.

c. Note: pay attention to “reasonably interpreted.”

i. Ex.: P gives note to wrong stockbroker, but stockbroker can reasonably interpreted note as giving him the authority to purchase the stock.

d. Three Requirements:

i. Manifestation attributable to P;

ii. This manifestation must reach A in some way;

iii. A must have a reasonable belief that P wants him to do this.

e. Subsets of Actual Authority:

i. Actual Express Authority: P tells A what to do. Created by some sort of expression (words or conduct) from P to A.

(a) Ex.: E tells his chauffeur, F, that F has authority to have car serviced at R. F takes the car to R for servicing.

ii. Actual Implied Authority: an agent has the authority to do what is reasonably necessary to get the assigned job done, even if P did not spell it out in detail. Interstitial authority.

(a) Ex.: F asks his assistant to make travel arrangements for him. Although he does not say anything specifically about airline reservations, his assistant has actual implied authority to make such reservation for him.