Business Basics for Lawyers
1. Business Organizations.
Proprietorship: most common way of business operation. Ownership resides in one person, but can consist of more than one person.
Formation: just start operating, but smart to keep separate books for the business;
Duration: as long as owner lives, or decides to retire or decides to step aside;
Efficiency/Management: very efficient, no issues with extra paperwork;
Liability: unlimited, personal;
Transferability of ownership: owner owes the entire interest, can sell if he wishes to;
Relationship between owner and employees: government by principles of agency;
Taxation: pass through, reportable at schedule C of personal tax return.
General Partnership: where two or more people decide to operate business;
Formation: can be created:
ü By written agreement
ü By actions of the parties
Duration: until one party withdraws or dies;
Efficiency/management: coequal; if no written agreement exists; otherwise the profit and loss sharing will be constituted per agreement;
RUPA: if there is no agreement, these are the rules to be followed by the partners by default, but first it has to be adopted by the state where the partnership was created.
Liability: unlimited to all the partners;
Taxation: pass through, reportable on personal tax return; each partner gets K1 form;
Partners are not agents to each other only to a third party on behalf of the partnership; each party has actual and apparent authority.
Limited partnership: is a partnership where partners could be either general or limited but it has to have at least one general partner who has unlimited liability where limited partners are limited only to amount of their investment;
Formation: have to be filed with the state using certificate of limited partnership, which lists who the parties are
Management: Managed by general partners; limited partners could be able to select the general partner; has to be filed with the state; General partner owes fiduciary duty to the partnership;
Liability: general partners- unlimited; limited partners – up to the amount of their investment
Duration: as long as there is at least one general partner or until the agreement between the parties state otherwise or until requested by the state to dissolve;
Taxation: pass through entity.
LLC (limited Liability Company): is the United States-specific form of a private limited company. It is a business structure that combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation. An LLC is not a corporation; it is a legal form of a company that provides limited liability to its owners in many jurisdictions. LLCs do not need to be organized for profit. In certain states businesses that provide professional services requiring a state professional license, such as legal or medical services, may not be allowed to form an LLC but may be required to form a very similar entity called a Professional Limited Liability Company (PLLC).
Today mostly limited partnership are replaced by LLCs. Issues with LLCs:
ü More appropriate for small nonpublic businesses
ü Stock exchange won’t accept LLC interest
ü Uncertainty regarding law applicability.
Corporations: is a separate entity with its own rights and independent of its shareholders; could be C or S subchapter;
Formation: articles of incorporation; create bylaws that could be modified later on;
Management: centralized management; managed by BOD: A board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. The responsibilities of the board include:
ü governing the organization by establishing broad policies and objectives;
ü selecting, appointing, supporting and reviewing the performance of the chief executive;
ü ensuring the availability of adequate financial resources;
ü approving annual budgets;
ü accounting to the shareholders for the organization’s performance;
ü setting the salaries and compensation of company management;
Lability: limited unless corporate veil is pierced;
Duration: perpetual life, unlimited unless goes bankrupt, is merged with another company or being dissolved, free transferability;
Taxation: double in case of C corp.; treated as partnership in case of S corp.
– characterized by separation of ownership & control
– Shareholders = owners
– Board of directors = elected by shareholders and have fiduciary duties to them
– Board hires CEO/Pres
– Employees can also be owners (Stock options)
– Equal management amongst the owners (absent a contract changing relationship)
– No board though there can be something centralized
Limited Liability for Owners
– Liability limited to the amount invested in the corporation
– With respect to owners – has nothing to do w/directors who have a whole other set of liabilities coming from breaches of fiduciary duties
Theories of authority for agency: An agent can have the power to bind a principal through:
ü Actual authority (express and implied)
ü Apparent authority
Agent’s power to bind the principal to 3rd parties and to bind third parties to the principal is the most important consequence of agency
Actual Agency/Authority: Principle → Agent
Principal must manifest consent to have agent act on the principal’s behalf w/respect to some task or goal.
Creation of actual authority requires:
(1) Objective manifestation by the principal
(2) Followed by agent’s reasonable interpretation of that manifestation
(3) Which leads the agent to believe that he is authorized to act for the principal
Principal’s inaction can constitute a manifestation when silence reasonably interpreted indicates consent. Scope of agent’s actual authority is determined by principal’s objective manifestation and the agent’s reasonable interpretation of that manifestation
Implied/Incidental: anything incidental to the task you have agency for:
Within the scope (reasonableness comes in) It is implied in your request that you should do what a normal person would do to take on that request. Using reasonably implied authority to complete a request. If principal is undisclosed, 3rd party can insist rendering performance to the agent or escape K entirely
Inherent Authority: Principal → Agent
Authority normally vested in person w/that title. Sometimes used in place of implied authority, and sometimes more like apparent. Do not default to it. Even if principal is undisclosed they can still be liable. Principle is usually charged w/the costs of whatever agent did w/i inherent scope. This power arises only if required for the agent to exercise some actual authority granted by the same principal. Thus, if a principal grants power to do X, and X requires doing Y, then the agent acquires inherent authority to do Y on behalf of the principal.