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

OVERVIEW/GENERAL STUFF
Traditional means of classification of the subject is by legal form
· Sole proprietorship
o Owned by one person
o E.g. a lemonade stand
· Corporation
o E.g. Wal-Mart
· General partnership
· Limited partnership
New forms of business created in the 1990’s (also classified by legal form)
· Limited liability company
· Limited liability partnership
· Limited liability limited partnership

Classification by business form

Corporations
Unincorporated associations

Proprietorships
Partnerships
Limited partnerships
New forms of business dev’d in the 1990’s

Classification by whether it is closely held or publicly held (USED BY OUR BOOK!!!)

Closely held

One or a few owners
Unincorporated firms are usually C.H.

Publicly held

Hundreds/thousands of owners

Increasing attractiveness of unincorporated forms of business w/in the last 20 years

Creation of a new unincorporated business forms that grant the advantage of limited liability for all owners of the business
Changes in the regs promulgated under the IRC that give uninc’d firms and their owners great freedom in electing how their income is to be taxed.

Bus Org Generally

Largely statutory
Don’t memorize them, just know where to look

THE ROLE OF AGENCY LAW IN BUS ASSOCIATIONS
Vocabulary

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 so to act
See below for the scope of actual authority

Agency

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. (Restatement §1.01)

Agent (and co-agent and dual agent variations)

One that that manifests assent to act on the principal’s behalf and subject to the principal’s control
Types of agents

Co-agent

People w/ an agency relationship w/ the same principal. May be appt’d by the principal or by another agent actually or apparently authorized by the principal to do so

Dual agent

Acts on behalf of more than one principal w/ regard to the same transaction. Such principals are joint principals.

Apparent authority

Power held by an agent or other actor to affect an principal’s legal relations w/ 3d parties when a 3d party reasonably believes the actor has authority to act on behalf of the principal and that belief is traceable to the principal’s manifestations

Employer/employee (master/servant)

From B.L.D.: Someone who works w/in the service of another person under an express/implied K for hire, under which the employer has the right to control the details of work performance.
See green on pg 7
Employer have to withhold taxes, etc. I.C.s do not b/c they are self-employed

Implied authority

A manner in which actual authority may be created
Consists of those powers of the agent implied by or inferred from the authority expressly granted, i.e. those powers incidental and necessary to carry out the express authority. Determining the existence and scope is done by focusing on the principal and agent. Most authority is created in this way.

Incidental authority

From Black’s: Authority needed to carry out actual or apparent authority
Ex: The actual authority to borrow $ includes the incidental authority to sign a commercial paper to bring about the loan

Independent contractor

Person who contracts w/ another to do something for him but who is not controlled by the other nor subject to the other’s right to control w/ respect to his physical conduct in the performance of the undertaking.
May/may not be an agent

Inherent authority

From Black’s: Authority of an agent arising from the agency relationship

Principal

One who manifests assent to another person (an agent) that the agent shall act on their behalf and subject to their control
Types of Principals

Disclosed

When an agent and 3d party interact, the 3d party has notice that the agent is acting for a principal and has notice of the principal’s authority
“I am only an agent and I am acting for Tony.” Agent is not personally liable for the performance for that K unless you lie or do something bad.

Undisclosed

When an agent and 3d party interact, the 3d party has no notice that the agent is acting for a principal
Third party doesn’t know that person is not acting on their own behalf. Agent is liable under the law for the K. Principal can be liable assuming that principal created the agency agreement.

Unidentified (Partially disclosed principal)

When an agent and 3d party interact, the 3d party has notice that the agent is acting for a principal but does not have notice of the principal’s identity
“I am just an agent, but I refuse to tell you who the principal is.” The agent is liable unless the agent gets the 3d party to let them off the hook. Sign an agreement saying that I am only agent and that I will not be held liable for the perf of the K.

Respondeat superior

An employer is liable for torts committed by employees while acting in the scope of their employment.

Principal Sources of Agency Law

Case law
Restatements
Statutory Provisions w/ express/implied adoption of agency law principles

Common Agency Law Issues

How is agency relationship “manifested”? How are actual and apparent authority manifested/evidenced

P must manifest assent to A that A shall act on P’s behalf and subject to P’s control and A manifests assent to do so

Expressly
By position
Prior Acts

Actual

P manifests assent that A can take action that has legal consequences for P, and A reasonably believes that the principal wishes the agent so to act

Expressly
By position
Prior Acts

Apparent

Reasonable belief of a 3d party that A has authority to act on behalf of the principal that is traceable to the principal’s manifestations

Expressly
By position
Prior Acts

What is the scope of the agent’s actual authority? What is the effect of an agent’s belief as to the scope of her authority?

Scope: Has actual authority to take action designated or implied in the principal’s manifestations and acts necessary or incidental to achieving the principal’s objectives, as the agent reasonably understands them when the agent determines how to act.
Agent’s belief: Their interpretation of the principal’s manifestations is reasonable if it reflects any meaning known by the agent to be ascribed by the principal and, in the absence of any meaning know to the agent, as a reasonable person in the agent’s position would interpret the manifestations in light of the context, including the circumstances of which the agent has notice and the agent’s fiduciary duty to the principal.

What duties do agents and principals have to each other?

Fiduciary duty

Def: One who owes to another the duties of good faith, trust, confidence, and candor.

The agent will act on the principal’s behalf and subject to the principal’s control

What is the scope of the agent’s apparent authority? What is the effect of a third party’s belief as to the scope of an agent’s authority?

Apparent authority is when a reasonably prudent man, using diligence and discretion, in view of the principal’s conduct would suppose the agent to possess. (Hamilton)

When do an agent’s acts bind the principal to K’l or other obligations or duties and/or affect the principal’s property rights?

When they are given actual authority to do so
When the principal gives the impression to 3d party that the agent has the authority to do so.

When is a principal liable for torts committed by an agent?

When the agent is acting w/in the scope of their employment

How is an agency relationship terminated and what are the effects of such termination?

Actual

Absent any agreement between P & A, A’s actual authority terminates if the A renounces it by manifestation to the principal, or if the principal revokes A’s authority by a manifestation to the agent. A revocation is effective when the other party has notice of it

Apparent

Termination of actual authority does not by itself end any apparent authority held by the agent. But it ends when it is no longer reasonable for the 3d party w/ whom the agent deals to believe that the agent continues to act w/ actual authority.

Cases on Agency (see notecards)

Barton v. Snellson
Hamilton Hauling v. GAF Corporation

THE PARTNERSHIP
Sharing profits and losses

Richert v. Handley
Rs. Mo. 358.180 (in absence of an agreement between the parties, partners must share losses in percentage that they share profits) and 358.400 (rules for distribution in dissolution).

Law firm partnerships

Issues that come up: who is going to hire and fire, library materials, how to you value the things that are not billable hours?

Limited Liability Partnerships

358.150 Nature of a partner’s liability
358.440-358.500 (intricacies of setting up an LLP: filing w/ secretary of state, registered agent in state, legal existence of registered LLP)
358.440: Must file application w/ Sec of State. Should include

Name of partnership
Address of registered agent for service of process
Number of partners

Becomes a registered LLP on date of the filing w/ Sec of State. The application expires one year after date of registration unless otherwise renewed. Ask clients whether they will remember to renew every year.

There are various levels of protection from liability that an LLP affords (depending upon state laws)

Full shield

Covers claims arising from K as well as malpractice or tort

Partial shield

Might cover malpractice or tort but not K

Missouri 358.150

All partners are jointly and severally liable for partnership stuff
No partner of a registered LLP will be liable for any debts, obligations and liabilities of the partnership whether in tort, K, or otherwise while the partnership is registered as an LLP
Partner in a registered LLP is liable for their own negligence, wrongful acts, omissions, misconduct, or malpractice

Partnership Management

Nabisco v. Stroudàactual authority
Smith v. Dixonàapp authority as demonstrated by previous dealings
Rouse v. Pollardàapparent authority
Fanaras v. Doane
Roach v. Mead

Duties of Partners to One Another

Meinhard v. Salmon

Partnership Accounting

Capital accountàsets forth the partner’s ownership interest in the partnership

That account equals the capital contributed by the partner less the amt of any distributions to the partner plus the partner’s share of the profits less the partner’s share of the losses.

Accounting (generally)

Equity = Assets – Liabilities

Equity= ownership or net worth
Net worth of a business is equal to its assets minus its liabilities

Balance sheet is the most fundamental financial statement

Assets = Liabilities + Equity
Example of a balance sheet below

Assets

Liabilities + Equity

· 4 fundamental premises of accounting
o Financial accounting assumes that the business that is the subject of the financial statements is an entity
o All entries have to be in terms of dollars (including property, tangibles or intangibles, or obligations)
o Balance sheet must balance
o Every transaction that a business enters must be recorded in at least two ways if the balance sheet is to continue to balanceàdouble entry book-keeping.
· Balance sheet records a situation one instant at a time
o Every transaction potentially creates a new balance sheet
· Creating a profit and loss statement or income statement (syns for this example) for the business for one day of operation
o Income = revenues – expenses

Partnership Property

358.080 Partnership Property

All property brought into partnership or that is subsequently acquired by partnership is partnership property
Unless the parties agree otherwise, property acquired w/ partnership $=partnership property

358.240 Extent of property rights of a partner

Partner’s property rights include his rights in specific property, his interest in partnership (personal property, see below), an his right to participate in mgmt.

Partnership interest = PERSONAL property (regardless of how much real estate the partnership holds. (See 358.260).

Dissolution

Dissolution, winding up/liquidation, and then termination

Just b/c you do dissolution (i.e. if a new partner comes in) does not mean that you have to do the other two steps. May just have to pay off partner who is leaving.

Cases

Collins v. Lewis

Power v. Right to dissolve

Cauble v. Handler
Adams v. Jarvis
8182 MD Associates, Limited Partnership v. Sheehan

358.170 Liability of Incoming Partner

Meehan v. Shaughnessy
Gibbs v. Breed, Abbott, and Morgan
Bohatch v. Butler & Binion

Inadvertent Partnerships

Equity Owner v. Debt Holder

Equity: If you are a proprietor, holder of an equity interest, you get to keep the profit
Debt: You get paid off at a fixed interest rate and are on a schedule. However, if there is some sort of agreement that entails mgmt rights, then it could be something different (poss if you get % of profits).

Cases

Martin v. Peyton

Ct analyzes this under a partnership in fact (versus a partnership by estoppel)

P by E (358.160) has to do w/ holding a person out as a partner. If you do this to a creditor, you are estopped from claiming they are not a partner

Smith v. Kelly

Accountant who claims that he is entitled to 25% share of profits. Held that he is not a partner under 358.070 (Rules for Det’g existence of a partnership). “A profit interest is relevant unless it is a substitute for wages.”

Hillme v. Chastain
H2O v. Brazos
Morrison v. Labor & Ind. Rels. Comm.

LIMITED PARTNERSHIPS

Includes (have to make a filing for both…in the absence of filing, you don’t have it)

Limited Partnerships

Must file certificate of limited partnership w/ Sec of State (Ch. 359.091)
Liability

GENERAL PARTNERS: In 359.251 there is some flexibility for det’g the liabilities of general partners to the partnership and to one another, however, as to 3d parties there is no wiggle room
LIMITED PARTNERS: Are not generally liable to 3d party for debts, unless they get too involved

Two approaches

UPLA §303(b)

Creates safe harbors. LP does not participate in the control of the business by doing these things:

Being a K’er, agent, or employee of the LP or being an officer, director, shareholder of Corp GP.
Advising GP RE: business of LP
Acting as surety for LP
Bringing a derivative action in the right of the LP
Attending mtg of partners
Voting on:

Dissolution/winding up
Sale of LP assets
Debt
Change in nature of bus
Admission/removal of GP or LP

MO 359.201

LP is not liable for the obligations of LP by participating in the mgmt or control of business
Solves problem if someone gets too active. An LLLP filing may not protect the LP those filings typically protect the GP It isn’t clear if LP is treated as GP in LLLP filing

Limited Partnerships w/ Corp General Partners

This is considered advantageous b/c an individual could not be held personally liable, instead the corporate GP would be personally liable for the debts.

Traps the liability of the LP in the corp
Con: Expensive b/c of corp filing fees

There is less pressure today to have these b/c we have LLLP filing. The con of doing this is that you have to file every year.

Corp GP (is liable for debts of LP b/c it is a general partner)

Case: In Re USA Cafes, LP and In Re Spree.com

Limited Partnership

Limited partners

Shareholdersànot liable as G.P. Unless they sign on by K, their own misconduct, or piercing the corporate veil

Limited Liability Limited Partnerships

Gives extra layer of protection to general partners. They get the limitation of liability that is given to partners of LLP (358.440).

Family Limited Partnerships

Big deal these days. If parents have a lot of $/property and they put it into an LP and give kids partial LP interest. Helps reduce estate and gift taxes.
Problems: You don’t really own the stuff that is in it, may have difficulty getting $ out, families may fight over it.

Limitations on Distributions

359.381 basically says that the LP cannot distribute more cash than it’s got
359.361 says that (unless p’ship ag says otherwise) distributions are in cash only.

Power to withdraw

General partner 359.331

May withdraw from LP at any time by written notice, but if withdraw violates partnership agreement, the LP may recover from withdrawing GP for breach

Limited partner 359.341

May withdraw from LP only at the time or upon the happening of events stated in partnership agreement

Causes of dissolution

Also has to be wound up
Happening of events spec’d in cert of LP
Happening of events spec’d in p’ship ag
Written consent of all partners
Withdrawal of partner UNLESS

There is one other GP and the p’ship ag allows them to continue operating

Judicial decree

THE LIMITED LIABILITY CO.
· Brief History
o 1988 IRS Revised Revenue Ruling: Have to have more corporate than non-corporate to lose. Can avoid having 2 levels of tax using w/ LLCs. There were not initially any safe harbor provisions (such as w/ LP)
o Check the Box Regs: For a lot of entities/LLCs if you want to be a p’ship and you have 2+ ownersàfine, be a partnership. If you want to be a corporation, fine check that box.
o Why an LLC might not be the best choice
§ Costs may be more (filing fees, franchise taxes) for LLCs than corps
§ Legal predictabilityàcorps have an edge on this b/c they have been around longer
§ Veil piercing laws are probably the same for LLC and corp
§ Markets (NYSE) may like corporate stock b/c they understand it better. If you want to be publicly traded, a corp might be better
o LLCs tend to be closely held, not publicly traded
· Formation
o Ch 347.039: File articles of org that include:
§ Name of LLC
§ Purpose
§ Address of office and registered agent
§ Statement of whether it is member managed or manager managed
§ Events for dissolution
§ Name and address of each organizer
§ May set forth any other provisions which may be stated in op’g ag.
· Buyout provisions
o If you want to expel someone or if someone dies there are two ways to buyout partners
§ Cross purchase: Other owners buy out interest of person going away
§ Redemption: The co itself buys the interest
· There may be K’l issues behind this (as seen in Elf and Bubbles)
· Nature of Limited Liability for members and mgrs
o 347.057: Members/mgrs are not liable just b/c they are members for obligations of LLC whether arising in K, tort, or for the acts/omissions of other members/mgrs of the LLC
· Distributions
o Most important thing to have in your operating agreementàhow people are going to get their $ back.
o 347.101=gap filler for distributions
§ Make cash/property distributions when the op ag says so or when majority of members vote.
§ Distributions shall be shared according to op ag, or:
· In proportion to the amt of cash contributions and the value of other contributions until each member has been returned his contributions
· Distributions shall be shared by members equally
o 347.109=limitations on distributions
§ Can’t give out more $ to members if:
· LLC would not be able to pay its creditors
· LLC’s total assets would be less than total liabilities
· To make this determination look to
o Financial statements
o Fair valuation
o 347.111: Allocation of profits and losses
§ Must be allocated as the OA says. If it doesn’t say, then the profits must be alloc

Ct said personal guarantee did nto apply in tort action

Didn’t have “Inc.” on sign

Dissent

No sep between corp and shareholders. Very foreseeable action and they used corp intentionally to avoid liability in just this type of circumstance

Torts v. K

K carries a higher burden, policy wise it makes sense that tort would be lower.
Cases tend to indicate that even if it is undercapitalized, if they pay for insurance, then it may be okay and no piercing.

Radaszewski v. Telecom Corp

Parties

Parent co=telecom
Subsidiary=Contrux
P=hit by Contrux’s truck

General rule

To PCV

Parent co has to have control of subsidiary (actually run the show as opposed to having the right to control it)
Control must be used by D to commit fraud or wrong act or act dishonestly
The breach of duty must proximately cause the injury or unjust loss complained of

District court

Said even w/ insurance the subsidiary is undercapitalized

CoA

Insurance meets the policy just as well, perhaps better, than healthy balance sheet. Amt of insurance is relevant to undercapitalization factor

Outcome: No veil piercing b/c there was no fraud or bad act (very high standard)

Walkovszky v. Carlton

Facts

P is hit by taxi cab. D had apparent corp but there were 11 corps (one for each car). Kept minimum insurance for each car so that if one screws up, he won’t lose everything.

Common Enterprise

You set up 11 corps one for each cab. They are run, however, interdependently. Having trouble seeing each as a sep corp entity. You are running them and they are dep on you. Puppetmaster.

Outcome: Case eventually settled on its own

Fletcher v. Atex, Inc.

Facts

P suffered stress injuries from Atex keyboard. They are subsidiary of Eastman Kodak. P is trying to get to Kodak

Delaware law

Alter Ego Theory: Don’t have to show fraud, P must show that parent and subsidiary op’d as a single ec entity and that there was a general unfairness.
Factors

Interlocking directors and officers in parent co and subsidiary. In DE this puts you into a single ec entity analysis. It is relevant, but you don’t automatically lose if you have it.

P argues

Cash managed by Kodak
Kodak asserted control over major expenditures
Dominating presence of Kodak in advertising (in small print)
A’s assignment of its former officer’s mortgage in order to close A’s asset-purchase agreement w/ 3d party

Outcome

The court rejects all of this b/c there was not enough domination or enough injustice

O.T.R. Associates v. IBC Services, Inc.

Parties:

P=OTR associates (owners of shopping mall)
D=Blimpie’s subsidiary

Facts: P requires that the franchise have Blimpie’s personally guarantee the lease. Blimpie’s did not sign the lease, but they sent a subsidiary out (IBC) to do it for them.
Factors:

IBC was not doing bus of its own
Was undercapitalized

FN 3 talks about IBC’s course of dealing. They had disclosed at other shopping ctrs that they were thinly capitalized. There the LLs were able to get personal guarantees from the franchisees to protect themselves. Blimpie’s did not tell about thinly cap’d subsidiary here, but they sent people out that made LL think they were getting Blimpie’s as a whole.

Didn’t have any assets or income
Blimpie’s used subsidiary to commit fraud and injustice
Test used

Control & Domination

Was parent co dom’g control of subsidiary?

They have same people running subsidiary from HW
Subsidiary not going to make a profit by itself

Like Bartle dissent: Said it was a sham/alter ego. Did not carry the day in Bartle, however it was a relevant factor here

Fraud/Injustice

Was there some type of manifest injustice or fraud?

IBC led OTR to believe it was Blimpie’s itself. They were in Blimpie’s uniform when they signed the K

Like Atex: giving people the impression that you are one in the same.

Word on corp formalities

They were impeccable, however, this does not carry the day either

Outcome: Pierced

Generally

Can use subsidiaries, but if you undercapitalize, you may be at risk

Piercing in Federal/State relations

US v. Best Foods

If there is a statute, even in the absence of trad veil piercing characteristics, a person who operates may be liable under veil piercing under CERCLA (env statute)

Reverse piercing

Def: The corp is trying to pierce its own veil, in contravention of the “normal” veil piercing where the 3d party is trying to pierce the veil. Shareholder wants corporation to be ignored or disregarded
Cases

Cargill v. Hedge

Facts: Put family farm into corp. Bought supplies from Cargill and got into $ trouble. P’s argued that their home was subject to homestead exemption
Trial court: Agreed w/ Ds and allowed them to keep home b/c they were sole shareholders and b/c they had an equitable interest in property (SC rejects this)
Supreme Court:

No lease
It was family home
Too close to the D’s
Cargill did not know that it was dealing w/ corp until $ problems
No outside shareholders

Using corp assets to pay what shareholder #1 owes, shareholder #2 gets screwed. This would cut against reverse piercing if they were present

No fundamental unfairness to creditor

Outcome: Veil is pierced and the D’s get to keep their home

Pepper v. Litton

Parties:

P=creditor
D=owner of coal company

Facts: Litton sued coal company (of which he was the sole shareholder) and claimed that they owed him a salary (in an effort to try to keep $ from P). He causes a foreclosure sale. Litton shows up and buys the assets himself and the corp gets to keep the $. Then went to bankruptcy court and D claims his former corp owes him more $. The ct said “enough is enough” and denied his claim. Also made him put assets back from previous claim
US Supreme Court

Claims that there should be equitable subordination enforced: That is, the bankruptcy ct has broad powers that would allow D’s claims to be put low on the totem pole. This comes up when an insider is trying to take $ from creditors. Put his claim at the bottom of the ladder (a.k.a. The Deep Rock Doctrine).
Factors:

Need to show that D was dominant and calling the shots