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Business Organizations
UMKC School of Law
Downs, Robert C.

3 Types of Principals:

Apparent Authority vs. Actual Authority
Salary vs. Draw
Liability- Principal Liable if:
– Acting in scope of business
– Unjustly enriched by agents actions must make restitution
– 3rd party detrimentally changes position &
o p intentionally or caused party to believe agent had authority
o p knows 3rd party believes it’s an agency relationship & don’t clarify
– Power of agent can be renounced by principal/agent
Joint Liability- joint & several

Types of Entities:
1 sole proprietorship
2 general partnership
3 limited partnership
4 limited liability partnership
5 limited liability limited partnership
6 limited liability company
7 S-Corporation
8 C-Corporation

Flow through taxation except C-Corporation which is a taxable entity, double taxation occurs, Sole proprietorship- individual taxed

Unlimited Liability- Sole proprietorships and general partnerships

LLP, LLC, LLLP, C & S Corps- must file w/secretary of state
Fragile- dissolution at any time
– general partnership
– sole partnership

LLP- must have at least one general & one limited partner, partners have no general partners personal liability doesn’t exceed the assets of the partnership, unincorp. Entity, not typically liable for debts of LLP, limited partners do not have personal liability, can transfer the right to ecoomic interest w/permission of others but can’t transfer right to participate in management
LLLP- Has General & Limited partners, but neither have personal liability, otherwise same as LLP
LLC- partners called members, can have general partner be a corporation, provides limited liability to all participants, active & not, provides the benefits of incorp. w/out limitations and rules applied in corps, managed like LLP, sometimes duration is limited by state, possible to sell interests and transfer, members typically not liable for debts of LLC

Corp vs. S-Corp
Both- must file w/sec. of state, sell shares of stock to raise capital, formal w/management by board of directors elected by shareholders –
a. Shareholders- owners, appoint directors
b. directors – manage, oversee co, hire officers
c. Officers- employees of the Co. who hire other employees
shareholders not typically liable for debts of corp

Corp- incorp. Results in the creation in a new legal entity- a fictitous person, w/sole responsibility for its debts, taxable entity- double taxation, shares of stock easily transferable

S-Corp- smaller where can only have up to 100 shareholders, can transfer w/consent, flow through taxation,

Need for Written agreement
Sharing of Profits & losses
– Richert v. Handley
o If no express agreement to the contrary, each partner liable for a partnership’s losses in an amount proportionate to his share of the profits
Law Firm Partners – 2 types:
– Income- salary, usually not liable for debts
– Equity- share in profit, owners of firm
Compensation factors
– Retirement policies
o Bane v. Ferguson
No liability attaches to dissolution of par

state solvency proceedings

Partnership Accounting
Capital Account- sets forth partners ownership interest in partnership adjusted periodically
Balance Sheet- snapshot in time, but by the time you see it, its out of date & incorrect
-typically due at end of year but company’s do them regularly
-check profits-> check net worth (assets, liabilities, etc.)
-Public companies must put balance sheet out quarterly

2 ways:
– Fiscal Year
– Annnual Year

1st want to know if #’s are accurate
– want accountant financial statement
– even more liable – audit by accountant- tries to vertify by some degree of accuracy some of it
– If accountant did financial statement accountant will include in his not if any litigation is taking place on balance sheet it will not say unless have judgment against them.

Midterm #2
Internal Affairs Rule- few exceptions but the state in which a corp is incorporated in governs problems related to the corp.

Piercing the Corporate Veil

Issue- Whether a shareholder should be held personally liable for a corporate obligation? (corp. not going away, and shield may still work on other creditors even if veil broken)

Can apply to both corps & LLC’s

Veil Piercing Factors: