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

Business Organizations Outline
Luppino—FS 2005

Considerations when choosing and entity (top is most important)

Ethics (ethical considerations) (overlaps w/ lawyer as business person)

Conflicts (could be conflict w/ current employer or between the owners)
Want to always check for conflicts first
Competence (can you adequately perform as attorney)

Lawyer as Business Person (overlaps w/ ethics)

Scope of engagement
What does lawyer need to do
How long/duration
Might have to hire expert in another legal area
Are you competent to handle this matter
What authority do you have on behalf of business
How will you get paid? (stock, interest, salary, cash)
What do you charge for services?

Agreements Among Owners

Who is liable?
Dissolution—what happens then
Duties/roles/compensation between owners
Fiduciary duties
Ultimate authority (who has it)—management decisions
Profits/losses—how are owners sharing them

Business/Marketing Plan

Location—local/regional/global
Financing (often breaks into 2 categories)

Debt
Equity

Employee’s of business or salaried (benefits)—authority
Marketing/advertising
Product production
Timeline for getting things done (where heading in future)

o Feasibility (barriers to entry—can they really do this)
o Budget
o Physical plant (buy/rent/build)
· Business Relationship to 3rd Parties
o Who’s liable
o Other interested parties in business (are there any)
o Product production
· Compliance w/ laws/Agreements
o Type of company?
o Do they need licenses
o Do they need to form an entity at all?
o Patents/copyrights (intellectual property)
o Contracts (types)
o OHSA, environmental laws (compliance w/ or subject to?)
o UCC
o Securities regulations
· Record Keeping
o To avoid potential conflicts w/ their current employer
o Retention and destruction policy of business records
· Do you need other professions? (need other lawyers who are experts in other areas)
o Licenses/permits/regulatory issues
o Patents v. copyrights (IP-intellectual property)
o Insurance
· Tax Planning
o Circumstances of parties involved
· Succession & Estate Planning issues
o Personal relationships
o Future (bring kids into business)
o Estate planning w/in compliance w/ peoples current plans
· Buy/sell agreements between owners

How do you create an entity—considerations that must be made
· Incorporated v. unincorporated
o Incorporated—formed under a corporate statute
o Unincorporated—not formed under a corporate statute, so must be some other form of entity
§ Ex: LP, LLP, LLLP, LLC, etc.
§ Reasons not to incorporate
· Many new entity options
· Tax purposes
o C-corporations as subject to double taxation
§ Corporation taxed on income
§ Shareholders taxed on dividends
· Closely held v. Publicly held
o Closely held—no market for buying an interest in the entity
§ Generally not as many owners
§ Many states have statutory close corporations
· Have to make special filing
· Can be restricted in number of owners
o Publicly held—traded in some way (generally traded in stock market)
· Federal v. State income classifications
o What is the entity for state law v. federal law purposes
§ Federal tax purposes
· 2 or more owners—partnership, corporation, or S-corporation
· 1 owner and unincorporated—disregarded entity or C or S-corporation
o C-corps—subject to double taxation
o S-corps & partnerships—considered to be flow-through entities—only pay 1 tax
§ Entity itself does not pay income tax
o Prior to 1977 there were statutes stating if met certain # of corp characteristics, you were corp for fed tax purposes
§ IRS came up w/ check the box regulations:
· If you were corp for state law purpose, you were for fed tax purpose
· If unincorp, you get to choose as long as you are consistent
o Exceptions:
§ Partnership if 2 owners
§ 1 owner—disregarded entity
§ if unincorp and want to be corp for fed tax purpose, you must make certain elections
§ no LLC classification for fed tax purposes
· General Entity Information and definitions
o Default Rules: (aka Gap fillers)—“unless you agree otherwise, this is what you are”
§ Worried that people wouldn’t always agree, or remember to include provision
§ Default rules are freedom of contract principle—whenever it says “unless agreed otherwise,” you are free to agree otherwise
o State business organization statutes generally govern how entities are formed, etc.
§ Sometimes overridden by Fed law—Ex: securities and exchange commission (SEC)
§ MO statutes follow pretty closely to uniform partnership act of 1914
o Limited Liability: agree to put certain assets at risk, generally means you cut off vicarious liability
§ Vicarious Liability: liability for actions of other partners
§ Most common ways to liable anyway:
· Closely Held Corps—fairly easy for directors and officers to be personally liable
o Ex: personal guarantee: contract away liability protection—agree to be personally liable
· Own wrong doing
o Ex: if you commit a tort personally liable, but wont be vicariously liable for other partners torts
· Piercing Corporate Veil: something about way entity is set up allows the court to look through the “corporate shield”—generally special situation
· Federal statute preempts on certain things for liability
o Ex: federal withholding taxes (taxes taken out of employee paychecks to pay federal income taxes)

Agency Law (a lot derived from case law)
· Business Organization Statutes—tell who has authority for an organization
· Types of Authority:
o Actual Authority: asks what the agreement is between the agent and the principle
§ Barton v. Snellson
· Lawyer (agent) accepted settlement from insurance company—client unhappy b/c didn’t want to accept settlement
· General Rule: lawyer must have actual, express authority to bind a client to a settlement (fact that lawyer is representing client is not express or actual authority)
o Exceptions:
§ Leffler: previous precedent that once lawyer says they have authority the burden shifts the client/principal to rebut that authority (prove they never gave authority)
· Holding: Aberration from general rule: agent acted enough like had authority and Barton’s couldn’t prove agent didn’t have authority, so Barton’s lost case
o Implied Authority: what would be expected that the agent could b/c of the type of agreement
§ IOS Capital v. Allied Mortgage
· Branch manager signed a 1 yr. lease agreement w/ IOS for copier, employment contract said he needed to get a copier but it also said had to have all contracts approved by home office
· General Rule: implied authority is actual authority which the principle intended the agent to possess that lacks direct proof, but rather is implied from relevant facts and circumstances as reasonably necessary to accomplish the purpose of the expressly conferred authority.
o Implied authority concerns only the extent of an express authority actually granted
o If agent does not have actual authority, then no authority can be implied
· Holding: b/c the employment contract said that the branch manager did not have authority to enter into contracts on behalf of the Allied Mortgage, there was no actual authority and b/c no actual authority, you can’t imply authority
o Kind of strange b/c manager got a copier, which would seem like something a manager should be able to do
o Apparent Authority:
§ Hamilton Hauling v. GAF Corp.
· Agent enters into contract w/ woodchip company to have deliveries made for several years (agent did not have authority to enter into contracts for the duration or the amount)
· General Rule: what did the principle make the 3rd party believe?
o When a principal holds out another as possession certain authority, thereby inducing others reasonably to believe that authority exists, the agent has apparent authority to act even though as between himself and the principal, such authority has not been granted.
o Apparent authority differs from actual authority in that the principal communicates directly w/ a 3rd party to create apparent authority; to create actual authority, the principal communicate directly w/ the agent.—fact that agent said they have authority is immaterial, principal must do something to make 3rd party believe agent has authority
· Principal can manifest authority (“hold out another”)
o Expressly stating to 3rd party that principal has authority
o Previous Dealings: if the agent as done this type of dealing previously
§ Best Evidence: if pervious dealing w/ same 3rd party—previous relationship
o Title or Position: if the title or position the agent holds is something that the “community” would generally believe a person in that position has the authority
· Holding: no actual or apparent authority—fact that agent said they had the authority is immaterial
· Termination of Agency Relationship
o P has duty to make some kind of notice of termination
§ Could be a publication—publication must be reasonable however
§ Could actually contact other party and say agent no longer has authority
· Liability
o Disclosed Principal: Agent is not bound to contract b/c contracting party knows principals existence and identity
o Undisclosed Principal: Agent can be bound to contract b/c contracting party does not know of principal’s existence or identity (3rd party needs someone to go after)
§ Agent can contract w/ principal to get off the hook
o Partially Disclosed Principal: Agent can be bound to contract b/c contracting party knows there is a principal but does not know identity (3rd party has to know who to sue)
§ Agent can contract w/ principal to get off the hook
· Duties owed between Principal’s and Agents
o A owes duty of loyalty to P—not supposed to double-cross
o A owes duty to act reasonably on P’s behalf (duty of care)
o P owes duty of reasonable compensation to A (unless agreed otherwise)
o P owes duty to cover reasonable expenses to A
o P owes duty to indemnify A for liabilities reasonably incurred
o P owes duty of reasonable cooperation to A

make special filing
· Liability:
o General Info:
§ Owner is personally liable
o Limiting Liability:
§ Limited liability may be helpful if have other employees (if employee hurts someone, wont be vicariously liable)
o Preserving Liability Protection: N/A
· Agreement:
o No written agreement—just in business
· Authority:
o Who Has Authority: the owner
o Limiting Authority: N/A
· Dissolution:
· Winding Up:

Partnership Accounting (pg. 77)
· General Definitions:
o Balance Sheet: keeps track of income and expenses
§ Lift side is assets
§ Right side liabilities and equity (owners equity)
§ Lot of assets on balance sheet are recorded at their historical cost (what was initially paid when purchased)—FMV is better measure of value (fair market value)
o Historical Cost: original purchase price of item
o FMV (fair market value)—what the item is worth now (accounts for depreciation)
o Depreciation: how much of the asset is used up each year (accounts for wearing out over time)
§ Generally a non-cash expenditure—helps to distinguish from net income
· Ex: owning/buying stock—buy for $10, sell for $10 (no income b/c didn’t make profit)—there is however an increase in cash flow b/c now have $10 in expendable cash (increase in cash flow)
o Cash Flow: how much available cash you have on hand, involves only transactions where cash actually goes in or out—depreciation can make actual cash flow different then income (note 3, pg. 83)
o Double Entry Bookkeeping: always have 2 entries so that balance sheet stay in balance (could have both entries on same side, in one column to offset)
o Equity = Assets – Liability (if business sold all assets and paid all liabilities, what is left over)
§ When pay employees—decrease equity
§ When make money (earnings)—increase equity
§ If have multiple owners, each individual owners equity is recorded in their capital account
o Income = revenues – expenses
o Revenue: What you collect in exchange for product/service
o Expense: Liabilities you incur (paying employees, rent, etc.)
o Liabilities: obligations you incur that must be paid to someone other then the owner (pay employees, rent, etc.)
o Capital Accounts: keep score of individual partners income and expenses
§ Get increased by what you contribute (start up capital, etc.)
§ Gets decreased for what business gives back to you (take out some of start up capital, etc.)
§ Gets increased for your share of income
§ Gets decreased for your share of losses
o Net Income/loss AKA Net Profit/Loss: what actually goes in pocket after expenses
§ Ex: do a job and get paid $300 for job, pay employee $50 in wages = $250 net income (increases equity)
o Income Statement: Keeps track of revenues and expenses—where you get the net income from
o Calendar Year: runs from Jan 1st to Dec 31st
o Fiscal Year: runs something other then Jan 1st to Dec 31st (generally from date you open for business)
o Cash Accounting: record income when actually get paid, record expense when actually pay expense
§ Less accurate picture then accrual accounting b/c looks like you have money, when that money will actually end up paying an expense
o Accrual Accounting: look at whether all events have fixed that allow you to collect income or when expense occurs—doesn’t matter if actually get paid or paid bill, just that event has occurred to fix right to receive pay or pay expense
§ More accurate picture b/c lets you know exactly where you stand (not on what you have at this moment)
· Richert v. Handly
o R wants partnership accounting b/c business he jointly began w/ H goes suffers losses and they agreed how to share profits, but not losses
§ R contributed $26, 842 to start business
§ H contributed equipment and was to supply labor, but no money
· H is to get ½ of profits and $13/hr for rental of tractor and $8/hr for every 1000#’s hauled
o R wants back his investment ($26,842) – ½ of losses
o Trial Court 1st try: messed up b/c instead of having the capital accounts be reflective of the initial contributions made by each, they made them both equal to R’s initial investment
§ Should have been
·