Select Page

Business Organizations
Touro Law School
Crincoli, Shayna

Business Organizations I
Fall 09
General Overview
Thematic Point 1:
·          The laws of business organizations are not just those of partnerships or corporations. Businesses are effected by:
o       Commercial law
o       Labor law
o       Contract law
o       Tort law
o       Tax laws
Thematic Point 2:
·         The allocation of risk and control ought to be positively correlated
o       The more control you have, the more risk you should bear
·         The greater the risk, the greater the return should be. Problems arise when control is separated from risk or risk is separated from the return
·         Constraints on Business Arrangements
o       Business organizations are created as a “nexus of contracts” that serve as defaults.
o       Parties are free to create different rules/expectations, subject to the following limitations
§         Conflict of interest
§         Government regulation
§         Failure of imagination
·         Sole Proprietorships
o       Is the default business organization that is owned by a single individual and not case in a special legal form
o       The differences between the legal organization and the individual are
§         Separate identity/name
§         Use of agents to act on behalf of business
·         General Partnership
o       A general partnership is the default business organization once you have more than one owner
o       Can arise by law without the parties even realizing it
o       Other forms of partnership or business entities typically require a formal act for creation
Thematic Point 3:
·         Individuals/Owners will often want to limit the extent to which they can be held personally accountable for the obligations of the business entity
·         Individuals/Owners will often want to limit the extent to which the business entity can be held accountable for the obligations of one of the other owners
·         Various business forms seek to achieve these goals of limited liability
o       LP
o       LLC
o       LLP
·         Restatement (3d) of Agency
o        the fiduciary relationship that arises when one person (a “principal”) manifests assent to another person (an “agent”) that the agent shall act on the principal’s behalf and subject to the principal’s control, and the agent manifests assent or otherwise consents so to act.
o       Translation
§         Agency is a 3 point checklist. We need:
·         Manifestation of consent by P to Agent that Agent shall act:
·         On P’s behalf
·          Subject to P’s control AND
·         Agent consents to
·         Agency relationship between P and A
·         A’s dealings with third party (T)
·         Create legal liability of P to T (and vice-versa)
do so
·         Example of an Agency Relationship
o       Gorton v. Daly
§         Agent: G Principal: D Third Party: X
§         There was no formal contract, it was a gratuitous loan
§         Presumption is for car owners
·         When you lend your care, that person becomes your agent
§         Proof of agency relationship
·         Condition precedent: D told G “if you drive the car, you can have it.” D directed G to drive the car.
o       Condition precedent is seen as the control of Principal
o       Following the condition precedent is the consent
§         Presumption for car owners is that Car owners have insurance and will take responsibility for their car and anything that happens to it.
·         If the Principal asks the Agent to do something and the Agent does it wrong or fails, the Principal is still responsible because they are acting within your behalf.
o       Agent has a broad scope to fulfill the request
·         Restatement of Agency 140: Security Holder Becoming A Principal
o       A creditor who assumes control of his debtor’s business for the mutual benefit of himself and his debtor, may become a principal, with liability for the acts and transactions of the debtor in connection with the business
§         Depends on how much control the creditor has over the debtor’s business
§         Analyze the control factor
o       Example Case: Gay Jenson Farms v. Cargill
§         P took over control of A’s company because they were financially unstable. They exerted too much control and by default became the principal. P assured the other creditors they would be paid. This was their biggest mistake
·         Options for a creditor before becoming a principal by default
o       Do nothing and let it play out
o       Assume less control to ensure they will not become a principal
§         Do not become involved in daily activities
o       Assume more control do things they way the creditor wants and become the principal
§         Buy Company out
·         A savvy creditor should:
o       Receive financial information and reports
o       Counsel on discrete mat

g the building. Ann hires a janitor to clean the building. Is Paul bound by the employment contract with the janitor?
o       Ann has actual authority
o       If Ann believes this is what she is suppose to do as a manager then she has the authority to do so as a manager
·         Hypo: Paul specifically instructed Ann not to hire a janitor, but local custom gives apartment managers the power to hire janitors. Would Ann have authority?
o       No authority b/c Paul said she did not have the authority to do so
o       If she hired janitor anyway then there is apparent authority and he is liable to the janitor. It looks like she has authority from her position
§         Needs manifestation 
Apparent Authority
·         Restatement 2.03 Apparent Authority
o        The power held by an agent or other actor to affect a principal’s legal relations with third parties when a third party reasonably believes the actor has authority to act on behalf of the principal and that belief is traceable to the principal’s manifestations
o       Key Point
§         The third party has a real belief that the agent has authority based on some manifestation of the principal
§         based on some manifestation of the principal
·         Case Emphasizing Apparent Authority
o       Attorneys are agents
§         They act as a special fiduciary for their client
o       A principal is bound by an agents apparent authority which he knowingly permits the agent to assume control or actions by the agent
o       A court will presume that the Council of record has authority
§         This helps facilitate negotiations between the opposing attorneys
§         Puts a burden on the client to make sure that the attorney is going along with their wished
o       Evidence of agency relationship
§         S and N had a business relationship for over 20 years
§         S was involved with the settlement for a long period of time
§         N told S to get the deal done