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Business Organizations
UMKC School of Law
Downs, Robert C.

BusOrg Outline

Intro to business entities

Classification of businesses: 1. closely held and 2. publicly held-dividing line is whether a public market exists for ownership interests
A single owner can own a sole proprietorship, LLC or corp
Every kind of partnership requires more than one person
Tax purposes:
C corp is subject to tax at entity level: double taxed b/c may be taxed on dividend distribution
Entity treated as partnership doesn’t pay tax at company level
Pass through or flow through: treated as partnership for taxes doesn’t pay tax at entity level, owners pay
S corp generally don’t pay entity tax
Sole proprietorship and general partnership are the only business forms for which nothing must be filed
Main exceptions to limited liability of owners:

general partners or sole proprietorship
own personal wrongdoing
veil piercing
contractual liability, personal bank loan for corp
stat, IRS

A. agency

Definition: fiduciary relationship when the principal manifest consent from another to act on principle’s behalf subject to principal’s control
Consent: may be manifested through written or spoken words or other conduct from which one may infer consent
Co-agents: superior co-agent has right to direct subordinate agent

Disclosed principle

Undisclosed principal

Unidentified principal

Dual agent
acts on behalf of more than one principal w/regard to same transaction, who are joint principals
Notice: know it or has reason to know it or should know it

Actual authority
Scope: actual authority to act how principal wishes or to do what is necessary or incidental to achieving principal’s objectives as agent reasonably understands

Apparent authority

Respondeat superior
Principal who doesn’t manifest intent that agent have authority is liable to third party who acts on that belief if 1. principal carelessly caused belief that agent had authority or 2. didn’t take reasonable steps to notify them of the facts
An undisclosed principal can’t rely on instruction given an agent that would reduce the agent’s authority to less than what a third party would reasonably expect
Principal may have to pay restitution if unjustly enriched by agent’s acts, such as purchasing more inventory than he had authority to do
Termination of actual authority doesn’t alone terminate apparent authority, apparent authority is terminated when it becomes unreasonable for a third party to believe agent has authority

Independent contractor

Independent contractor

B. forms of businesses

Proprietorship
General partnership

Limited liability partnership
Failure to file at proper time or place results in creation of a general partnership, may avoid liability by causing an appropriate certificate to be filed or by filing a certificate w/drawing from future equity participation
Traditionally very easy to inadvertently become a general partner by taking any part in control of the business
New stat says if limited partner participates in business he is only liable to persons who transact w/the business reasonably believing him to be a general partner
Also liable to creditors who extend credit to limited partnership w/o knowledge of limited partner

Limited partnership w/a corp general partner
If corp has nominal assets limited partnership becomes a de facto limited liability entity like a corp

Limited liability limited partnership

Limited liability companies

Corporation
Two disadvantages are 1. fed tax and 2. mandatory requirements that may increase the cost of operation
Limited liability for all investors and participants whether passive or active
Shares are personal assets that may be seized by personal creditors
Three layers:

shareholder who are viewed as ultimate owners
board of directors who are managers of corp affairs
officers who implement decisions of the directors

May be personal or corp liability if one engages in fraudulent or neg conduct or if personal guarantee are made for inventory purchased on credit

intro to agency

One may be an agent w/o comp-basically a consensual relationship in which one person agrees to act for the benefit of another
Artificial entities such as a corps, trusts estates may act as principals or agents
Partnerships each partner is an agent of the partnership
Sec 9 of UPA every partner is an agent of partnership, even if partner doesn’t have actual authority to bind partnership may be binding through apparent authority-but subsec 2 states if an act is extraordinary event may not be binding, standard for reasonability
Jointly severally (both or together)

A. fiduciary duties

Agent is accountable to principal for any profits arising out of transactions, if he breaches by acting to benefit himself or someone else is may be liable
Agent may not compete w/principal concerning the subject matter of the agency, must act to preserve and protect prop in his care
Agent also has a duty to volunteer info to principal, not the same as arms-length negotiations between parties doing business
Agent also has a duty to act reasonably and carry out act w/reasonable care and competency
Principal has a duty to fulfill commitment to agent, not interfere w/work and may have to comp agent for expenses incurred

B. right to control: independent contractors and servants

Difference is the degree of control between the two
Master employs an agent to perform service in his affairs and who has the right to control the physical conduct of the other

Independent contractor
Distinctions between an IC who is an agent and one who isn’t depends on the degree and character of control exercised by the IC

C. responsibility of principal for his agent’s torts

Master is liable for torts committed by a servant w/I the scope of his employment while principal isn’t liable for torts committed by an IC

Respondeat superior, vicarious liability

Agent may affect principal’s rights and duties when agent is acting in direct violation of principal’s instructions or beyond scope-depends on source of authority

Actual

Apparent

E. inherent and incidental authority

Inherent

Incidental

F. implied authority

May be inferred on the basis of prior conduct, may be implied actually or apparently

G. disclosed and undisclosed principals

Disclosed

Partially/unidentified,

Undisclosed

H. termination of agency relationship

Terminates when:

objective has been achieved
agent dies or become incompetent
when either party decides to end it
if agency is based on k may end when there’s a breach

I. Barton v. Snellson

F: comes from a motion to enforce a settlement agreement
I: whether the attorneys had authority to bind Barton, principal, to settlement
R: implied authority is inferred from the authority expressly granted, incidental and necessary to carry out the express authority
R: in Mo an attorney’s implied authority is limited to procedural matters, doesn’t extend to substantive rights
R: attorney must have express, actual, authority to bind client to settlement agreement
R: in Mo the expressed rep by an attorney that his client has agreed to settle creates the presumption of express authority, exception to ordinary agency law
Exception to general rule

J. Hamilton v. GAF

R: when a principal by his voluntary acts places an agent in a situation that a person is justified in presuming that the agent has authority the principal is estopped from denying the agent’s authority
R: “holding out” of the agent’s authority may be by action or inaction, may directly communicate authority to a third party or knowingly permit the agent to exercise such authority
R: three ways to create apparent authority

intentionally causing 3rd party to believe agent has authority or if he should have realized that his actions would create such a belief-may be created by info directly received from principal or from 3rd persons who have heard of the agent’s authority through authorized channels of communication
by position or prior acts
by acquiescing of the principal to prior acts of agent

H: no evidence to show GAF knowingly permitted Bajt to enter into k-Bajt’s unauthorized reps are totally immaterial to apparent authority

intro to partnership

C. sharing of profits and losses

Profits may be divided in a number of ways:

1. share on a flat percentage basis w/o regard to any other factor: profit ratio may be in partnership agreement, by issuing partnership unit and determining profit or loss ratio by dividing the number units owned by that partner by the total number of units outstanding
2. partners may be entitle to a fixed salary treated as cost subtracted b/f profit or credited to amount partner is due after division of profit
3. share on average amount invested by each partner
4. may share on a percentage basis from sales or billings by each partner or time devoted to business
5. large partnerships partners may have a fixed percentage againt 80% of the income w/the remaining 20 going to junior partners
6. division of profits may be contemplated each year

306a makes all partner joint and severally liable (liable separately and together)
307d states creditors must first exhaust partnership assets b/f going after personal assets
There is often sympathy for the unfortunate investor

A. Richert v. Handly

F: agreed both would share equally in profits and losses, d had not agreed to contribute to p for his investment (they hadn’t agreed to share the losses equally)
R: b/c parties hadn’t agreed upon basis which losses would be shared the default provisions are applied
H: ct took p investment subtracted by net receipts; the ½ of the net loss (b/c they agreed to split the loss equally) was then subtracted from what remained due to p (investment minus amount so far received in return); amount due to p (p. 39)

Lessons
Non-recourse liability: (avoid an unlimited liability default rule)

may make creditor sign agreement that if you stop paying he can only go after certain types of assets
owners say can come against us but only have recourse to what partnership currently has

legal partnerships

Suggestion that equitable way to share profits would be to go primarily to partners w/a reserve for bonuses for associates
Comp factors:

productivity and billable hours
new business: percentage of the total fees generated by the new busin

F: firm was ignorant to Fitz actions-money wasn’t deposited in the firm account, they didn’t suspect or have reason to know-they are responsible only if he was acting as their agent at the time-had no expressed authority would only exist by implication from the fact that they were partners
I: whether receipt of money was w/in the scope of business
R: scope is gauged by usually and ordinary course in which business is carried, but may be broadened by the actual though exceptional course and conduct if carried on w/knowledge, actual or presumed, of partner sought to be charged
H: d in practice frequently had moneys belonging to clients held for a particular purpose such as investment, but they never received money to place on mortgage at their discretion-few lawyers receive money for general investment, usually don’t accept money until a specific purpose is found
stats cover malpractice, tort and k claims whereas narrow stats don’t affect basic partnership rules except in the fact of substantial malpractice claims in excess of insurance plus undistributed assets in partnership: if making reasonable decisions in good faith in business you’re not liable, doesn’t matter that they turned out to be bad: owner sharing in profit: paid a salary: should have valued Handley’s services and state he wasn’t personally liable for any losses of Richert if one isn’t aware that there is a principal, has claim against principal and agent one whose identity is not known but it is known that agent is working for a principal, principal and agent become bound unless otherwise agreed-both liable though 3rd party may only collect once if third party knows the identity of the principal at time the transaction is entered into, or may reasonably infer the identity of the principle-principal becomes an liable to the k but agent doesn’t unless stated otherwise in agreementauthority ability to do incidental acts that relate to a transaction that is authorized authority arises from the agency itself and w/o regard to either actual or apparent authority, arises impliedly out of authority actually or apparently grantedauthority flows directly from principal to 3rd party that an agent has power to act for and is liable w/in scope of that authority, 3rd party must establish that it was reasonable for him to believe that agent was authorized based what principal’s statements or conduct authority flows directly from principal to agent
D. power of an agent to affect the principal’s legal rights and duties in general
is not controlled by the other nor subject to the other’s right to control, may or may not be an agent: , LLC: limited liability for all participants whether or not they are active in management, total flexibility, LLLP: limited partners have no right to take part in control: corp is sole general partner-permits individuals and entities to be limited partners as well as officer or shareholders, LLP: general partnership except partners aren’t personally liable, created exclusively by stat w/o which they are general partners: business owned by a single individual who is personally liable called a sole proprietorship and continues to be liable for acts committed while business is a sole proprietorship: default form of businesses, formed if 2 or more co-own a business w/o understanding what the relationship is, parties are personally liable there’s usually a term for beginning and end: contracts w/another but is not controlled by the other nor subject to right of control: employer is liable for acts by employees: when a third party reasonably believes the actor has authority to act on behalf of principal traceable back to principal’s manifestations-third party acts reasonably in believing agent has authority to act when agent’s acts are consistent w/position agent occupies absent knowledge that would require him to enquire into agent’s authority: agent reasonably believes principal whishes him to so act: third party has notice agent is acting for a principal but doesn’t have notice of his identity: third party has no notice of principal: third party has notice that agent is acting for a principle and knows principle’s identity