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

Professor Mutua
Tuesday, February 05, 2008
Case: AP Smith (page 6)
In the business of distributing fire hydrants, etcetera
The business decides to give away some money, $1500 to be exact. However the shareholders are not happy with this decision. Shareholders feel that the money should be used to reinvest in the business.
Are there other legitimate uses for the money?
Who is giving the money away? The board of the Directors.
In the business world, there are legitimate uses for property. Who gets to make the decisions about these uses? What are some of the legitimate uses for property?
What does the Court say?
Analysis: This entity has thousands of shareholders or a situation in which there seems to be more shareholders than there are directors. This group has some authority as representatives. What does representative mean in this case
The Board of Directors is charged with operating this business in its best interest on behalf of its owners. They act as agents of the corporation but they are not the legal agents of the corporations. They are vested with governing the corporation.
Who did they give the money to? To Princeton. Why does this seem problematic? The President went to Princeton. The problem is he is using other people’s property to facilitate his interest. One part of this is whether he has mixed loyalty? Does his gift to Princeton advance the interests of the corporation? Aren’t there better uses for the money? The donation might be in the best interest of the corporation because it creates goodwill. Are there other ways? It might facilitate a steady supply of labor, if it is given to the right people. Therefore it might be legitimate.
Somehow we have this sneaky suspicion that Princeton is not training the people who will work at the corporation and it might not benefit from this, beyond creating goodwill.
The question becomes, Should you be allowed to take other people’s money and give it to whomever you like?
Milton-Friedman talks a lot about class issues. Is this decision reflecting a class issue?
In Business Structure Law, you have these rules about ownership and control when you have these institutions that separate ownership from management and control. (Half the course will be spend talking about loyalty, i.e. fiduciary duties)
Wrapping this up: The court says that the corporation can make donations to private entities. These donations must be in the best interest of the corporation.
Class Organization
Thursday, February 7, 2008
Milton Friedman sees businesses as a series of arrangements
The law also treats most of these entities as separate legal entities
Issues of Liability: How is the entity treated regarding tax liability?
Sole Proprietorship
                                                              i.      The business is the owner and the owner is the business.
                                                            ii.      It is a residual category. This happens when you engage in business and do nothing else but engage in business. There is no incorporation or filing of anything.
                                                          iii.      Legal Form: There is no need for a lawyer
                                                          iv.      Ownership: The person who started the business owns the business.
                                                            v.      Earn the Profits: The owner
                                                          vi.      Bears the Losses and liability: The Owner. In this case, the person suing can access anything the owner has. The owner is subject to full liability.
                                                        vii.      Liability to Creditors: The owner
                                                      viii.      Manages the businesses and Makes the Decisions: The Owner
                                                          ix.      Pays the Taxes: The Owner
                                                              i.      Create value for the owners of the business (those who put their resources into the business)
                                                              i.      One theory : Create value for the owners of the business (those who put their resources into the business)
                                                            ii.      Other Theories: Obligations to owners, employees, consumers and community as social citizens.
Problems with establishing a Sole Proprietorship
                                                              i.      Agency Law: Who is liable for the actions of the agents? When the principal authorizes his agent to act on his or her behalf, the principal is liable for the act. In agency law, the core is placing the liability on the person who is in the position to make decisions. There are three elements to an agency relationship.
1.      Fiduciary Relationship – a relationship of trust but certain types of duties. Duties of care, to obey, etcetera.
2.      Manifestation of Consent – An agency relationship can be established through conduct. This becomes very important. You don’t necessarily have to think about the conduct.
3.      Consent of Agent
                                                            ii.      There are five ways to establish a agency relationship and three parties to the agency relationship:
                                                          iii.      PARTIES: Principal, Agent, Third Party
                                                          iv.      WAYS TO CREATE AGENCY RELATIONSHIP:
1.      Actual Express Authority – express communication between Principal and agent.
2.      Actual Implied – Authority to do those things that are necessary to carry out the Principal’s express requests. SOMETHING ABOUT?? The XX is not liable for the actions of YYY because they are not a party to that contract. The Law: If the P gives instructions and does not give specific information, the A can carry out that broad authority in a way that makes sense. The fact that P did not lay it out thoroughly does not take away the liability of the P to the disclosed parties. IA is necessary to carry out reasonable instructions. IA is implied from express authority. It can be implied from custom, usage or acquiescence.
3.      Apparent authority – The holding out (manifestation) of a communication between the Principal and the third party, not necessarily between the Principal and the agent. You also have reliance by the third party. Example: If Roslyn is standing beside Professor Mutua and states that she is the professor’s agent, and the Professor does not say anything. Suppose the next day R goes to the bookstore and makes a transaction under the professor’s name. Is the Professor liable as the Principal? What value do we give R’s statement? Is R an agent of Professor Mutua? Does her statement create the relationship? No. The mere interaction of Professor Mutua and the third party (the employee at the bookstore). Her statement in and of itself creates no relationship. However, the fact that Professor Mutua is standing there while R relates to the third party that she is her agent, is the conduct creating the relationship in this context. What Professor Mutua has done is create apparent authority. It appears (to the third Party) that Roslyn has authority.
4.      Inherent Authority – Where there is no communication between the Principal and the Agent.
a.       Scenario: Someone exceeds their authority. But it may appear to be inherent. For example, PM’s father buys snow blowing equipment, which may have not been authorized by her father.
5.      Ratification – If P decides to adopt the contract that has been enforced by the Agent, then he has given authority to the terms and therefore created a relationship.
                                                            v.      NO COMMUNICATION BETWEEN P AND AG means NO APPARENT AUTHORITY.
                                                          vi.      Simply saying that one has authority to do a thing is not enough to establish an agency relationship.
                                                        vii.      When Making an Argument:
1.      Make your argument
2.      State the reasons for your position.
PROBLEMS: Liability of the sole proprietor for contracts of his employee.
Propp hires Agee as cook. Is AG obligated to pay for food?
Apparent authority. How would you justify your answer from a policy perspective? The P had the obligation to go to the TP to change the apparent authority, if P so desires. The burden is on the person who is best able to change the position.

ower is obligated to repay the debt. The bank is only entitled to the principal and actual interest. The debt is more risky for the business.
Case of Audrey and her brother. Court determined that she was a partner in the business.
The 1997 Act (Revised Partnership Act)
Section 202: The receipt is prima-facie evidence that that person is a partner in that business. But no such inferences shall be drawn if those payments were made in installments as interest on a loan, where the amount may vary.
Partnership: Two or more owners carry on as owners as a business. They share profits and losses. Partnership requires no legal form. It is a residual category of a legal structure. Forming a corporation rules out the possibility of the entity being a partnership.
Can a business be both a SP and P? No. Can one person form a partnership? NO. Can a corporation be a partnership? NO.
Can a corporation serve as a partner in a partnership? YES. Section 101.10: A Person includes a corporation, partnership, etcetera (it can be grounded in the statutes)
What is the source of law of the obligations of the Partnership? The Partnership Agreements, State Statutes, Case Law.
Problems on Page 85:
–          Question 1:
–          Default Rule: Partners share profits equally. So unless I establish in an agreement otherwise, then the default rule will supersede.
–          Your job as an attorney is to represent a partnership agreement. This avoids conflicts in the future.
–          Question 2: Propp, Agee and Capel need their own lawyer. As an attorney for all three parties, whose interest do I really represent? The attorney needs to look out for the interest of the entity. What happens when one party goes off and does something against the institution’s interest? You sue that person.
–          Question 3: (1). The Partnership agreement governs a partnership. In the event there is no agreement or the agreement does not cover an issue, the default rules cover the agreement. (2).You may agree to anything in your partnership agreement, but you may not eliminate the fiduciary duty. You can modify, define or alter them but you cannot eliminate them. These fiduciary duties: Care, Good Faith, & ONE MORE.
–          Section 103: Effect of Partnership Agreement. P. 51
Partnership Problems
–          Partnership Property: The P itself can own property. The individual partners do not own property. Both the UPA and the revised Partnership act see this …The property that belongs to the P does not belong to the individual partners. (Section 203, 204). Something is P property if it is acquired in the name of the P. But also, property transfer to a partner constitutes property of the P, if the partner is acting within the capacity of the partnership. If you are intending to transfer property to the partnership, then it constitutes property of the P. If the partnership is named as the holder of the property then it is P property.
–          Section 204 (p. 52):
Questions: Page 87
–          TWO: It was not brought w/ partnership monies. An issue arises because there was no act by P to transfer the cooking equipment to the PS by P. What do you think about the P using property that belongs to Propp? Either is becomes property of the P, OR Propp leases it to the partnership.
–          THREE: Whether cash and credit cards receipts are P’s property?
–          FOUR: The new tables and chairs acquired after the formation of the PA under § 204 because BB is a PS so BB brought the chairs.
FIVE: Yes BA is PS property because although the funds are provided from C