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Business Organizations
UMKC School of Law
Luppino, Anthony (Tony) J.

BUSINESS ORGANIZATIONS OUTLINE
Luppino– Fall 2011

AGENCY LAW
à Rules in place when someone says they’ll do something on someone’s behalf
à Essential to understanding of personal relationships within business context

Agency Rules
Agreement need not be in writing unless the underlying thing you want the agent to do needs to be in writing (Equal Dignities Rule)
Can be gratuitous – need no compensation
Has to be consensual between agent/principal
Can be terminated by either party

Terms:
Person – may be individual, organization, etc. and agency relationship doesn’t have to be between two humans
Agency – the fiduciary relationship that arises when one person (a “principal”) manifests assent to another person (an “agent”) that the agent shall (1) act on the principal’s behalf and (2) be subject to the principal’s control and (3) the agent manifests assent or otherwise consents so to act
Fiduciary relationship = where someone owes someone a duty
Agent – a person having a relationship with a principal – acts on the principal’s behalf and subject to the principal’s control
Co-agent – more than one agent having relationships with the same principal (2 or more agents, 1 principal) – still appointed by principal or by an agent authorized to appoint a co-agent by the principal
Dual Agent – an agent who acts on behalf of more than one principal with regard to the same transaction (1 agent, 2 or more principals)
Joint Principals – more than one principal in which an agent acts on their behalf in regard to a transaction
Principal – a person having a relationship with an agent – has control over the agent and the agent acts on his/her behalf
Fully Disclosed Principal – when an agent and third party interact, the third party (1) has notice that the agent is acting for a principal and (2) has notice of the principal’s identity
Principal is liable; agent is not liable for the contract
Undisclosed Principal – the third party has no notice that the agent is acting for the principal
Both principal (as long as there was actual authority) and agent are bound to the contract, but agent may have a claim back against the principal
Unidentified Principal (partially disclosed) – the third party has notice that the agent is acting for the principal, but does not have notice of the principal’s identity (agent doesn’t tell them)
Both principal and agent are bound to the contract
If agent and 3rd party agree agent isn’t liable, then agent isn’t liable
Employer/Employee (master/servant):
Master – a principal who employs an agent to perform service in his affairs and who controls or has the right to control the physical conduct of the other in the performance of the service
Servant – an agent employed by a master to perform service in his affairs whose physical conduct in the performance of the service is controlled or is subject to the right to control by the master
Independent Contractor – A person or business who performs services for another person under an express or implied agreement and who is not subject to the other’s control, or right to control, the manner and means of performing the services; not as an employee
Respondeat Superior – an employer is liable for torts committed by employees while acting in the scope of their employment
If minor deviation from employee duties, might not negate scope of employment
If major detour from employee duties, not within scope of employment

Types of Authority
Actual Authority – at the time of taking action that has legal consequences for the principal, the agent reasonably believes, in accordance with the principal’s manifestations to the agent, that the principal wishes the agent to so act
This is the deal between the principal and the agent
The principal communicates directly with the agent
There may be an express agreement with limits imposed
Reasonable
Agent’s interpretations of the principal’s manifestations is reasonable if it reflects any meaning known by the agent to be ascribed by the principal
If the agent does not have knowledge, reasonable is what a reasonable person in agent’s position would interpret the manifestations in light of the context
Forms of actual authority that broaden its Scope (the scope of the agreement need not be absolutely expressed):
Implied authority (authority intentionally given by the principal to the agent as a result of the principal’s conduct, such as the principal’s earlier acquiescence to the agent’s actions)
Incidental authority (authority needed to carry out actual or apparent authority)
Inherent authority (authority of an agent arising from the agency relationship)
Apparent Authority – 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
The principal communicates directly with the third person
The principal sends signals out to 3rd party indicating that agent can act on principal’s behalf
Reasonably believes = what a reasonably prudent man, using diligence and discretion, in view of the principal’s conduct would suppose the agent has to possess
Need to protect unsuspecting 3rd parties, but using a reasonable 3rd party standard
Ways to create apparent authority (Certain manifestations from principal to 3rd party such that reasonable for 3rd party to believe agent can bind principal):
Direct, express statements – principal’s direct communication with the 3rd party
Position – there is apparent authority when the principal knowingly puts the agent into the position where people are reasonable to think he has the authority to act for the principal
Prior acts – there is apparent authority when the principal allowed the agent to carry out prior similar transactions or acquiesced to the agent’s prior similar acts
Remember – Hamilton Hauling – what the agent says does NOT matter at all – it is totally immaterial that the agent tries to claim certain authority


Some Common Agency Law Issues

Categories
Authority – who has authority to make decisions/actions?
Liability – who is liable for stuff that happens during the scope of the relationship?

1)      How is agency relationship “manifested”?
(a)   When the principal manifests assent (through written or spoken works or other conduct) to 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 consents to it.
(b)   The agency relationship arises only when these elements are met – but doesn’t arise simply by labeling or calling something an agency
2)      How are actual and apparent authority manifested/evidenced?
(a)   Actual – what the principal conveyed to the agent through written/spoken words or actions (and what agent got from that)
(b)   Apparent – when a third party reasonably believes the agent/actor has the power to act on behalf of the principal and that belief is in accordance w/ the principal’s written/spoken works or actions (what Agent could have reasonably implied from that – Implied, Incidental, and Inherent Authority)
3)      What is the scope of the agent’s actual authority?
(a)   An agent has the actual authority to act in accordance w/ the principle’s manifestations and acts in order to achieve those objectives, as the agent reasonably understands them
4)      What is the effect of an agent’s belief as to the scope of her authority?
(a)   An agent’s interpretation of the principal’s manifestations is reasonable if it reflects any meaning known by the agent attributed to the principal and, if the agent does not know the meaning, then as a reasonable person in the agent’s position would interpret the principal’s manifestations in light of the context/circumstances
(b)   An agent’s understanding of the principal’s objectives is reasonable if it accords w/ the principal’s manifestations and the inferences that a reasonable person in the agent’s position would draw from the circumstances
(c)    If an agent reasonably believes he/she has the authority to act on the principal’s behalf (and it accords w/ the principal’s manifestations), then he/she has the authority.
5)      What duties do agents and principals have to each other?
(a)   Principals owe agents reasonable compensation (unless can prove gratuitous); duty to reasonably cooperate, pay reasonable expenses, duty to cover reasonable indemnities
(b)   Agents owes principal duty of reasonable care and duty of loyalty (Ex: buy me land for $ – agent can’t buy for less then that and then sell to agent for more);
6)      What is the scope of the agent’s apparent authority? 
(a)   The power to affect a principal’s legal relations w/ 3rd parties when a 3rd party reasonably believes the actor has authority to act on behalf of the principal and that belief is traceable to the principal’s manifestations
(b)   Hamilton Hauling – Express statements, position, or prior acts…
7)      What is the effect of a third party’s belief as to the scope of an agent’s authority?
(a)   If a 3rd party believes the agent has authority to act (and the belief stems from the principal’s manifestations), then the agent acts on behalf of the principal…and the Principal is bound.
8)      When do an agent’s acts bind the principal to contractual or other obligations or duties and/or affect the principal’s property rights?
(a)   If agent had actual or apparent authority, principal is bound
(b)   When they are made with a reasonable belief (either in accordance w/ principal’s manifestations as the agent sees them or according to what a reasonable person would see) that he/she is acting in accordance w/ the principal’s desires
9)      When is a principal liable for torts committed by an agent?
(a)   While the agent is acting in the scope of his/her employment.
(b)   If agent is an employee, P’s liable under respondeat superior
(c)    If minor deviation from employee duties, might not negate scope of employment
(d)   If major detour, not within scope of employment (employer not liable)
(e)    If agent merely an Independent Contractor – P not vicariously liable for torts unless inherently dangerous business – or if P negligently selected the Independent Contractor

What makes somebody an employee of someone else or is the person merely an independent contractor?
Key notion is CONTROL
Trying to separate employees/servants (respondeat superior) from independent contractor (generally speaking, someone who hires contractor is not liable for acts of independent contractor UNLESS inherently dangerous activity)
Also, tax liability different for employees and independent contractors
Factors to consider: Whose equipment is being used, general instructions à not an employee, supervising project à more like an employee, work just for me (employee) or for other people (independent contractor)

10)  How is an agency relationship terminated and what are the effects of such termination?
(a)   After certain time period; until a certain event happens; change in circumstances so objective of business can no longer be performed; A or P breaches fiduciary duty; either party may unilaterally say I’m ending this (BUT…*that party MAY be liable for damages – even though no more relationship); death:  terminates – but quirky rules
(b)   Actual Authority:  It is terminated if 1) the agent renounces his/her authority by a manifestation to the principal, or 2) if the principal manifests intent to revoke the agent’s authority
(i)     Effective when other party receives notice.
(ii)   Effect:  agent no longer controlled by/responsible to the principal, and principal no longer controls agent’s actions (actual authority gone)
(iii) Termination of actual authority doesn’t terminate apparent authority held by the agent (so 3rd parties may still reasonably believe agent acting on behalf of principal)
(c)    Apparent Authority:  Terminated when it is no longer reasonable for the 3rd party to believe that the agent continues to act on behalf of the principal)
(d)   Effects:  no longer any reason that the agent acts on the principal’s behalf

Questions to Ask
1. Was there in fact an agency relationship between the alleged principal and agent?
à Is there a fiduciary relationship in which the parties manifested assent that the agent acts on behalf of and is subject to the control of the principal – employer/employee, principal/agent
à Not an independent contractor (not subject to control)

2. Was there actual authority?
à The agent reasonably believes, in accordance with the principal’s manifestations to the agent, that the principal wishes the agent to so act . . . comes from principal’s direct communication with the agent
à Principal has given agent clear authority to do something
à Sometimes can be implied/inherent/incidental (forms of actual authority)
à Are there restrictions to the agent’s authority

3. Was there apparent authority?
à A third party’s reasonable belief that the principal expressly/impliedly granted the agent the authority to do something
à Could be by direct statements from principal, by agent’s position, or by principal’s prior acts
à What the agent says/claims does NOT matter at all – is totally immaterial

Hamilton Hauling, Inc. v. GAF Corp.
à Issue: whether John Bajt, an agent of GAF, had the authority to execute a K on behalf of GAF, which required GAF, a manufacturer, to purchase a minimum of over $800,000 of raw materials annually from HH for a 10-year period
à HH theory throughout the trial that Bajt bound GAF because he acted with apparent authority
Facts:
Bajt was GAF’s purchasing agent – conducted all negotiations and sales transactions with various vendors for the purchase of raw materials for the KC plant
In prior year, purchased $6 mil worth of raw materials
None of the purchases were by any document other than a purchase order pursuant to Bajt’s actual authority
Buyers at Bajt’s level had authority to make purchase orders not exceeding $25,000 in amount or one year in duration
In all his years with GAF, Bajt never entered into any long term K except the one at issue
HH and Bajt (on behalf of GAF) entered into a K to purchase 26,000 tons of wood chips annually from HH at a minimum cost of $800k
After firing Bajt, GAF disclaimed any knowledge of the K and denied the authority of Bajt to have made such a K on its behalf
Holding
No actual authority (stated GAF policies prohibited Bajt from entering into this agreement and he had never entered into this type of agreement before)
No apparent authority because HH didn’t have any indication that GAF gave Bajt the authority to make this type of K (actually had reason to believe that Bajt didn’t have the necessary authority) à Different ways of principal manifesting apparent authority to 3rd party. Could be by direct statements from principal, by agent’s position, or by principal’s prior acts, but none of these apply to this case
Does NOT matter that Bajt had told HH he did ha

= REVENUES – EXPENSES
Statement of income or profit/loss is a right hand entry on the balance sheet
Income Statement – describes the results of operations over some period of time: daily, monthly, etc.
When you have income, it is reflected on the balance sheet as assets (cash) & equity (earnings)

Accounting Principles
Financial accounting assumes that the business that is the subject of the financial statements is an entity à equity referred to in that business’s balance sheet will be limited to the person’s investment in that single business
All entries have to be in terms of dollars à A liability in the balance sheet sense is a recognized debt or obligation to someone else, payable either in $ or something reducible to $
A balance sheet must balance (sum of left hand side must equal the sum of the right hand side)
Every transaction that a business enters must be recorded in at least two ways if the balance sheet is to continue to balance (double entry bookkeeping)
A balance sheet records a situation at one instant in time – every transaction creates a different or new balance sheet when the transaction is recorded

Vocabulary

Assets – things you own (can be tangible or intangible)
à Usually shown on balance sheet at either historical cost or FMV (have to determine which way shown)

Historical Cost – what you paid for it in the past

Fair market value – what it’s worth at a particular time in an open market
à Take into account depreciation, appreciation

Liabilities – obligations owed
à obligations you have to pay to someone in their capacity other than as owned

Equity – what you own (ownership or net worth)

Balance sheet – tells you things about company (assets, equity, liability) at some point in time; trying to figure out those 3 things – and ultimately what’s left for the owners’ equity
à Problem:  if assets aren’t FMV, don’t really know what’s left for owner’s equity
à Balance sheet doesn’t represent true picture if not FMV

*Double-entry bookkeeping –
à Always at least 2 entries for every action:
(i)     Add to left AND right side
(ii)   Assets always have to equal liabilities and equity
(iii) Ex:  if go to bank and get $1,000 loan…
§  Add $1,000 to liabilities
§  Add $1,000 to Cash (assets)

Revenue – amount customers pay you

Expenses – amount pay out

Net income/loss – Income = Revenue – Expenses
à *Net income and cash flow are not necessarily the same thing
à Capital contribution does not figure into income
à Loan proceeds do not figure into income
à Distributions do not figure into expenses
à Repayment of loan proceeds = not an expense
à Depreciation = non-cash charge/expense

Cash flow –
à *Net income and cash flow are not necessarily the same thing
à $ going into and out of the business venture

Concept of Profit/Loss – Principles
à Determine if you made $ in a given income period – companies must have an accounting year
à Accounting assumes the business will go on indefinitely (if business is in trouble…need a whole different set of principles)
à Each business must adopt a fiscal or accounting period and must report the results of operations for that period
Calendar year
Fiscal Year
à Need to create a logical relationship b/t the revenues and expenses that are taken into account in determining profit/loss for that period
Usually…costs associated w/ the creation of revenue should be matched w/ that revenue
Other costs arising from the passage of time are allocated to the accounting period on the basis of that time – not the time of receipt
à When the revenue is received:
Usually…revenues are realized when the business becomes unconditionally entitled to their receipt, not when payment is made
Ex:  sale of goods:  when goods are shipped…not when K is entered into or when payment is made
Ex:  property:  appreciation in value is charted when gain is realized by sale or disposition

Calendar year – a reporting period beginning on Jan. 1 and ending on Dec. 31

Fiscal year — a reporting period that the business chooses that ends on a date other than Dec. 31 and may vary in length from a period of exactly 12 months

Cash v. Accrual accounting – Methods of Accounting
à Cash:  Income recorded when you receive the amount; expenses recorded when you pay the expense
Simpler, used more often for tax purposes
àAccrual:  income is recorded when the sale occurs, and expenses are counted when you receive the goods or services, rather than when you receive payment or the goods
Tends to give investors and creditors a better sense of the financial health of the business

PARTNERSHIP ACCOUNTING
à Business of the partnership is distinct from the financial affairs of the individual partners
à A partner’s capital account essentially sets forth the partner’s ownership interest in the partnership – “that account equals the capital contributed by the partner less the amount of any distributions to the partner plus the partner’s share of the profits less the partner’s share of the losses”
à It is not essential that the partnership actually maintain a formal capital account for each partner but all except the most informal partnerships do so

Capital Account = Capital Contributed – Distributions + Partner’s share of profits – Partner’s share of losses
Sets forth the partner’s ownership interest in the partnership
Equals the capital contributed by the partner less the amount of any distributions to the partner plus the partner’s share of the profits less the partner’s share of the losses
When a partner has a negative capital account, they must pay the partnership that amount
Capital accounts – (partnership context) — Sets forth the partner’s ownership interest in the partnership
à Increased by:
The amount of cash and FMV of other property you contribute,
Your share of profit business earns;
à Decreased by:
Distributions business distributes to you;
Your share of losses