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

Business Organizations Outline
Fall 2006 – Luppino

I. Agency Law
A. Terms
1. Actual authority: an agent acts with actual authority when, 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
2. Agency: fiduciary relationship that arises when one person [principal] manifests assent to another person [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
3. Agent: one who is authorized to act for or in place of another (principal); a representative
4. Co-Agent: two agents that share the same principal. May be appointed by the principal or by another agent actually or apparently authorized to do so.
5. Dual-Agent: agents on behalf of more than one principal with regard to the same transaction. (also called joint-principals)
6. Apparent authority: power held by an agent or other actor to affect a principal’s legal relations with 3rd 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 principals manifestations
a. 3rd party involved
b. must have the reasonable belief of the 3rd party that the agent has authority to act on behalf of the principal and that belief is traceable to the principal’s manifestation
c. an agent cannot create extra authority by saying that they have it
d. 3rd party has to rely on manifestations by the principal not the agent
i. manifestations is a very broad term – reasonable inferences, oral, written, etc
e. what position the principal put the agent in
f. this authority ends when the party has reason to believe/knows that the authority ended – need to give notice that the relationship is over
7. Employer – Employee: personal authority over another’s services (principal) – person who is employed by another to work under control and directions of the employer (agent)
8. implied authority: either means when the agent and principal are tying to figure out what the authority is but it also can be implied apparent authority
9. incidental authority: standard is that you have incidental authority to get to the end point the principal has manifested to the agent
10. independent contractor: one who is hired to undertake a specific project but who is left free to do the assigned work and to choose the method for accomplishing it
11. inherent authority: along the lines of implied authority
12. respondent superior: employer is liable for torts by employees while acting in the scope of their authority
a. who tends to be an employee will vary in degree by how much control an employer has over the agent
b. key differentiation is be distinguished between independent contractor – torts by an individual contractor not usually imputed to the employer
c. factors to differentiate employee from independent contractor
i. basically the more control the employer has the more likely to be an employee
ii. actual control/more control = employee
iii. office location
iv. equipment – own equipment start looking more like individual contractor
v. length of relationship
vi. limited skills so need other employees or do everything themselves
13. Principals
a. disclosed principal: 3rd party has notice that the agent is acting for a principal and has notice of the principal’s identity
i. general rule: if have a disclosed principal relationship where 3rd party knows that it is an agent situation and knows who the principal is, the agent isn’t liable for a contractual obligation unless the agent agrees to be liable
b. undisclosed principal: 3rd party has no notice that the agent is acting for a principal
i. where the agent acts as if no agent relationship that agent is liable but the principal is liable also as long as the agent had the actual authority to act and acted within that authority
c. unidentified principal: 3rd party has notice that the agent is acting for a principal but does not have notice of the principal’s identity
i. general rule: agent is typically liable if won’t tell who the principal is unless the 3rd party agrees not to hold the agent liable – principal is on the hook as long as carrying out agents authority
14. Dual agent/joint principals: acts on behalf of more than one principal with regard to the same transaction
15. Fiduciary relationship: special type of relationship where 1 person has a special duty to another
a. duty of loyalty: should not be acting in a negative way to the principal
b. duty of care: reasonably and prudently

B. Principles of Agency Law
1. Hamilton Hauling [agent did purchase order with Hamilton for woodchips for 1yr – Hamilton wants to enforce deal – lower court said principal not liable – appellate court ruled for GAF because jury instructions were faulty and was really looking at the authority of the agent to see if he had apparent authority – big question is dealing with apparent authority] a. The manifestations of GAF [principal] are the ones that matter
i. A 3RD PARTY may not simply rely on statements by agent
a) Principal may directly manifest authority to 3rd Party
ii. If Principal gives a “position” title (purchasing agent), that may give apparent authority
a) unless, these is absolute knowledge that it is not so
iii. a course of dealings outside of actual authority may manifest apparent authority
b. Don’t have to be crystal clear; could be course of dealings
c. The court doesn’t think there is enough apparent authority because:
i. didn’t think there was anything inherent in agent’s role to think that it was normal for the agent to do such a large deal
ii. no track record for previous deals like this
d. it doesn’t matter what the agent says – the court is going to look past the agreement and look to facts such as the course of dealing
2. Barton [car accident and the attorneys negotiated for a settlement and P’s attorney accepted the settlement but P is saying that the attorney didn’t have the authority to accept the settlement] a. Rule followed Leffler:
i. there is a presumption that attorneys have the authority to settle cases – manifestations don’t necessarily have to be express
b. seems to be at odds with the general rule that what matters is the manifestation of the principal
3. How to figure agents actual authority
a. Basically what the principal told him to do and the actions that it takes to get to that end
b. Standard is that you have incidental authority to get to that end point that principal has manifested to the agent

II. Basics of Business Organization
A. Broad Categories
1. Incorporated: follow the articles of a corporation
a. filed the articles of incorporation
b. forms a corporation
c. specific types: corporation
2. Unincorporated: include
a. sole proprietorship,
b. general partnership [LLP variation],
c. limited partnership [LLLP],
d. limited liability company [LLC, may resemble a corporation] 3. Closely held: not publicly traded
4. Publicly held: there is a market for the publicly traded shares
a. there are such things as publicly held unincorporated companies

B. Business Forms
1. Proprietorship
a. single owner and there is no separation between the owner and the business
b. unincorporated and single owner
c. owner is personally liable on all business obligations since there is no legal separation between the owner and the business
2. General Partnership
a. liability is the big thing here because – all the partners are jointly and severely liable for debts and claims against the partnership
b. they can limit their liability by filing to be an LLP
i. the filing will not turn them into a Limited Partnership
ii. effect is that it limits the liability of the partners
iii. RSMo. § 358.150 – off the hook to partnership liabilities but still responsible for own liability and people under your control
c. default form for businesses that are owned by more than 1 person
d. formed when 2 or more persons go into a co-owned business witho any thought or planning or understanding of what the relationship is
e. oral agreement to share profits and losses at some agreed upon ratio may be sufficient to establish existence of general partnership even though initial financial contributions are unequal
f. a partner may always leave the partnership at any time = dissolution
3. Limited Liability Partnership [LLP] a. is not a limited partnership
b. form of a general partnership
c. example:
i. if you have a law firm with offices everywhere and you are operating as a general partnership and something happens somewhere to screw the firm – should everyone be held liable
a) general partnership would say yes
b) depends on what side of the argument you are for
d. special filing to be an LLP which is a type of general partnership – modern variation of general partnership
e. general partnership in all respects except that the statute provides that partners have no personal liability for firm obligations that exceed the assets of the general partnership
f. partners do have full personal liability for claims arising from own misconduct
4. Limited Liability Limited Partnership [LLLP] a. form of limited partnership that tries to protect even the general partners from liabilities of the partnership
b. applies LLP concept to a limited partnership in which some or all of the general partners have no personal responsibility for obligations of the LLLP
c. LLLP gives limited liability to general partners of a Limited Partnership
5. Limited Liability Companies [LLC] a. owners/no one is personally liable for the debts/liabilities of the entity
b. have a good tax result and have no one that is liable for the entity
c. provides limited liability for all participants, whether or not they are active in the management of the business and permits total flexibility in internal management
d. provides benefits of incorporation witho the limitation and rules applied to corporations
e. replacing general and limited partnerships
6. Corporations
a. generally shareholders not personally liable for liabilities/debts of the corporation
b. formed by following procedures set forth in the corporation statutes
c. results in creation of new legal entity, a fictitious person with sole responsibility for its own obligations
d. provides limited liability for all invests and participants, whether active or passive
e. publicly held: shares that are traded on public securities markets subject to federal regulations
f. closely held: corporations that don’t have publicly traded shares
g. black letter law that only the corporation is liable for corporate obligations however in a closely held corporation it is relatively easy for participants [director, officer, or shareholder] to incur personal liability
h. 3 tiered: shareholders who are traditionally viewed as the ultimate owners of the enterprise; board of directors who are the managers of the corporation’s affairs; officers who act for the corporation to implement the decisions of the directors
i. big disadvantage is the tax treatment

C. Limited Liability
1. Individuals do not have personal liability
2. This doesn’t mean that a person cannot ever become liable for actions that occur
a. if too active can become liable
b. corporation example: closely held with 5 people
i. exceptions that a shareholder/owner cannot be held liable
a) the person is a tortfeasor [negligent, fraud, etc.] b) piercing the corporate veil: it is just not right to allow the owners to stand behind the corporate veil and not be held liable
c) contractual undertaking: someone like a creditor could force them to sign a personal guarantee forcing them to undertake personal liability [contract idea; secure the loan]

D. Tax Classifications
1. Under state law it’s not necessarily true that the type of business you form will be the same for tax considerations
2. Classifications
a. Disregarded Entity: tax equivalent to sole proprietorship; not incorporated and have a single owner
b. Partnership: has flow through [1 level of tax]; has 2 or more owners
c. “C” corporation: 2 levels of taxation; corporation pays on income while shareholders pay on dividends if they are distributed
d. “S” corporation: gets flow through status which means that the shareholders will pay the taxes on the earnings and not the corporation; 1 level of tax
3. “C” and “S” corporations are not state law forms of corporations à they are tax classifications
4. tax law classifications is separate then state form classifications
5. unincorporated LLP, LLLP, LLC could fall into either partnership, “C”, or “S” corporation for tax purposes so need to figure out what the client wan

failure and the firm folded – no successor firm so he no longer got his retirement payments] a. In the agreement there was a contract provision right on point – “if the firm goes out of business with no successor then no payments”
b. P’s arguments
i. The partners violated the partnership agreement and killed the business
a) court said the agreement doesn’t cover former partners only present ones
ii. Lousy business managers and ruined the business
a) if there was a fiduciary duty to run the firm well then it went to the current partners
b) business judgment rule: no standard of perfection as long as they are acting reasonably and in good faith
c. The court said that the business just went bad and P is out of luck because no statutory, tort, or fiduciary claim
i. contract claim: no promise to keep the business running
ii. tort claim: no precedent for imposing tort liability on careless managers for the financial consequences of the collapse of the firm to all who are hurt by that collapse.
d. At the outset of this he could have [if a partner] had a contributory plan or could have said that he wanted the other partners to guarantee to pay him if the partners went under

D. Limited Liability Partnership [LLP] 1. If you file as an LLP it does not alter the management rights; it alters the liabilities
2. This is advantageous because a partner will not be liable for other partners
3. Filing requirements:
a. Most of the time for a general partnership you don’t need to file anything with the state
i. MO – if a partnership is going to operate under name that is not the names of the partners you need to file something saying what you are going to operate under
b. LLP is different – for an LLP you must file with the secretary of state
4. RSMo. § 358.440: Registration as a limited liability partnership – renewals – withdrawal of registration – amendment – revocation, effect – fees – false statements, penalty – foreign partnership requirements
a. Provides general ground rules for LLP
b. designation expires unless you renew it
5. RSMo. § 358.170: Liability of Incoming Partner
a. if there is an existing partnership and you come into it new, then you are liable for the pre-existing obligations of the partnership only to the amount of your partnership interest
6. RSMo. § 358.150: Nature of Partner’s Liability
a. MO seems to be a full shield state
b. people damaged the most by these statutes are people that have tort actions against the partnership and people that don’t have a personal guarantee
c. exceptions to limited liability
i. liable for your own wrong doing and for anyone that you supervise
ii. pretty broad protection in MO but need to watch who they supervise and control
7. RSMo. § 358.500: Legal existence of a registered limited liability partnership to be recognized – partnership formed in other jurisdictions, effect
a. will be governed by the laws of the state where the LLP was formed
8. Veil piercing: historically a corporate concept and not much of a concept with partnerships or limited partnership
a. LLC didn’t have anyone personally liable so began to see some of these cases and LLP’s will be the same way
b. conceivable that an LLP will come under a veil piercing attack

E. Management
1. National Biscuit Co. v. Stroud [Stroud advised P that he would no longer be responsible for any additional bread sold by P to Stroud’s Food Center – after that notice was given, a partner of P, Freeman, requested that P sell bread to Stroud and they did] a. The court believes that Stroud is bound by his partner
i. interesting because the 3rd party had knowledge that one of the partners didn’t want any more bread
ii. RSMo. § 358.090.1 – Freeman has actual authority [not apparent] to act –
iii. Problem for Stroud is that when he told P no more bread, he didn’t dissolve the partnership so Freeman still had actual authority to act – once dissolved has less authority to bind the partnership
b. Two person [family] companies very problematic assuming 50/50 situations
i. great potential for deadlock
c. Stroud could/should have:
i. Dissolved the partnership
ii. When he formed he could have contracted the management rights, what suppliers could buy from, who has to approve purchases, etc. à Freeman would have lacked actual authority
d. great example as to why partnerships should draft an agreement
2. Smith v. Dixon[contract for the sale of land in which the father [partner] signed a sale agreement on behalf of the partnership – the partnership didn’t want to give up the land and the other obviously wanted it] a. Another apparent authority case
b. Court said he might not have had actually authority but since he had done it before [course of action] he had apparent authority
i. course of dealing
ii. the partnership put him out there because he had done the deals before – manifestation of consent
iii. the family members could sue Dad
iv. if selling the business not in its usual course then P wouldn’t have been able to enforce
c. RSMo. § 358.100: Conveyance of Real Property of the Partnership
i. looks to where title is held
ii.