Select Page

Business Organizations
UMKC School of Law
Downs, Robert C.

Business Organizations

THE ROLE OF AGENCY
A 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. 
Disclosed principals:  If an agent and a third party interact, the third party has notice that the agent is acting for a principal.
Undisclosed principal: If when an agent and a third party interact, the third party has no notice that the agent is acting for the principal.
Unidentified principal: If and when an agent and a third party interact, the third party has notice that the agent is acting for a principal but does not have notice of the principal’s identity.
Actual Authority: 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 principal’s manifestations to the agent, that principal wishes the agent so to act.
Authority that is communicated in some way from the principal to the agent. Actual authority can also come from statutes.
Can be express OR
Implied: What would be expected the agent could do because of the type of agreement
Termination of: An agent’s actual authority terminates if the agent renounces it by a manifestation to the principal, or if the principal revokes the agent’s actual authority by a manifestation to the agent. Effective when the other party has notice of it.
Apparent Authority: The power held by an agent or other actor to affect a principal’s legal relations with third 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 principal’s manifestations.
Can exist even thought the agent didn’t have authority and knew they didn’t have authority—may exist bc agent did something over and over again and principal should have known about it—third party is entitled to rely on this.
Termination of: Termination of actual authority does not be itself end any apparent authority held by the agent. Apparent authority ends when it is no longer reasonable for the third party with whom the agent deals to believe that the agent continues to act with actual authority.
Kinds of Agents: Employees v. Independent Contractors
Don’t have to pay payroll taxes on independent contractors, but do so with employees. 
How do you know whether someone is an independent contractor or employee?
Whether the work is supervised, is the biggest indication of employment. Independent contractors set their own hours. 
If you have a location to do the work, it makes it look like employment.

INTRODUCTION TO BUSINESS FORMS
The proprietorship
Definition: A single owner of a business with no filing or written document required. Unless you choose a name other than your own name, you must file that fictitious name with the state.
Liability: Owner is directly liable for all the debts of the proprietorship
Taxes: Reports the gains and losses from the proprietorship directly on his own personal income tax return. 
In many respects, is a one person partnership.
Can’t call it a business organization because there is no structure to it, no entity law that governs it.
The general partnership
In all states, general partnerships are governed by statutes patterned on the Uniform Partnership Act.
Definition: An association of two or more persons to carry on as co-owners a business for profit.
Formed:A general partnership can come into existence by operation or law, without the need to file any formal papers with any state official. It is a lot like a contract in the sense that it can be written or oral. 
Liability: Each partner is liable for all the debts of the partnership, but must be within the scope of the partnership business.
Taxes: Flow through taxation—The partnership itself pays no tax, all the tax consequences flow through to the individual partners. 
Seen as one of the principle advantages of a partnership
Dissolution: Is fragile, it may be dissolved by a partner at any time simply by a statement of his or her express will
The limited liability partnership (358.150)
Definition: LLP is a 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.
Liability: No partner is liable for the partnership’s obligations just by virtue of being a partner. 
Partners do have full personal liability for claims arising form their own misconduct
Filing: Must file a statement electing to be limited liability partners. 
Professional service corp:The biggest users of LLP, are professional service firms, like law and accounting firms.
Management: The LLP status also has a major advantage over a traditional limited partnership, since a limited partner will lose her freedom from liability by participating in management, but a partner in an LLP will not.
The traditional limited partnership (359. 150)
Exclusively a creature of statute, in absence of a statute all partners are general partners no matter what there understanding is.
Filing: Here you have to file certificate of limited partnership with sec of states office, pay a fee, will also have a limited partnership agreement.
Liability: General partners are personally liable, but the limited partners are liable only to the amount of their capital contributions. Limited partners in MO will not lose this limit on their liability if they participate actively in the management of the partnership.
The limited partnership with a corporate general partner
Definition: The use of a corporation as the sole general partner of a limited partnership.
Is adaptable to both publicly held and closely held enterprises.
Liability:  General partner isn’t responsible for debt, bc they are now a corporation. No personal liability for them.
The limited liability limited partnership
Definition:  it is a limited partnership with both general and limited partners, but the general partners have the protection of the LLP election.
Filing: A limited partnership + a form, just like a general partnership filing. Everything else is the same.
You can have a limited partnership where both general partners and limited partners have limited liability

The limited liability company
Definition: A new business form, that provides limited liability for all participants whether or not they are active in the participation of the business.
Provides the benefits of incorporation without the limitations and rules applied to corporations. 
Liability: All those with an economic interest in the business can limit their liability to the amount invested.
Advantage: All of the participants had limited liability. 
Taxes: Flow through taxation exists.
Filing: File articles of organization, will also have an operating agreement which looks a lot like a partnership agreement (how’s it going to run, how’s the voting going to work, etc).
Two major ways it can be set up: 
Member managed: All the investors in the deal, get to vote.
One advantage: Federal and state securities law: Presumption it is not a security if member managed.
Manager managed: Either one person or a small group of people that make the day to day decisions.
Advantage: Can be the repository of non-business stuff. Ex. Own a condo with other people, can put it in a LLC.

THE PARTNERSHIP
Written Agreements:
o        Advantages:
§         Avoids future disagreements over what the arrangement actually was
If there is not an agreement the relationship will be governed by the provisions of the applicable state partnership statutes (unlikely this will reflect the expectations and understandings of the parties)
Default rules could cause unexpected results
Places suggestions and advice from the lawyer in concrete form so there is a less possibility of misunderstanding
Sharing of Profits and Losses: 
o        If not stated profits are to be shared equally, losses are to be shared in the amount profits are shared.
o        Possible ways profits may be divided:
§         Share a flat percentage basis without regard to any other factor
§         Fixed weekly or monthly salary
§         Share on a percentage basis, with the percentages recomputed each year on the basis of the average amount invested in the business during the year by each partner
§         The partners may share on a percentage basis, with the percentages recomputed each year on the basis of total income, the sales or billings by each partner, time devoted to the business, or ton the basis of some other factor
§         Each partner may be entitled to a fixed percentage applied against perhaps 80 percent of the income
§         Silent on the division of profits so that each year partners can work it out 
o        Statutory interpretations of the sharing of profits and losses in a partnership setting
§         358.150:
·         Partners are liable jointly and severally for everything chargeable to the partnership and all debts and obligations
·         If you have a limited liability partnership the partner will not be liable directly or indirectly for debts, obligations
o        The partner will still be liable for the partner’s own negligence, wrongful acts, omissions, misconduct, or malpractice and those in which they supervise.
§         358.170:
·         A person who enters a partnership is still liable for all obligations of the partnership before he entered but will not be personally liable—liability ends at the partnership assets
§         358.180:
·         Default rules—a partnership agreement would override this section
o        Each partner will be repaid their contribution and share equally in profits and surplus remaining after all liabilities
o        The partnership must indemnify every partner in respect of payments made and personal liabilities reasonably incurred by the partner
o        All partners have equal rights in management and conduct of partnership business
o        A partner is entitled to remuneration for acting in the partnership business, except that a surviving partner is entitled to reasonable compensation for the partner’s services in winding up the partnership affairs
o        No person can become a member of the partnership without the consent of all partners
Richert v. Handly
Facts: P alleges that he entered into a partnership agreement with the D, under the terms of which he was to purchase a stand of timber and the D was to log it, using his own equipment, and the two were to share equally in the profits or losses resulting from the venture. Further alleged that the undertaking was unsuccessful, and after all of the operating expenses the partnership suffered a loss of 9,825 and that he had advanced 26,800 but had only been repaid 10,000 for his advances. Therefore hes entitled to, 11,929 dollars. 
Holding: if don’t agree to share losses, then default rule is that you will share equally (MO 358.180—unless agreed otherwise, you share losses the same way you share profits)
Rule: A partner who contributes services to a partnership rather than capital, is nevertheless, required to contribute toward capital losses sustained by the partnership according to his share in the profits.
Law Firm Partnership:
Law firms are increasingly adopting two-tiered partnerships
Income partners: paid a salary that is not contingent on their firms’ profits
They obtain partnership status without assuming any of the risk
Equity partners: owners of their firms and share in the profits
Formula for work: 6: work, 3: business production, 1: profit production
Defined benefit plan: ex. Earn so much credit while your there x some multiple x salary during last 5 years. This becomes an entitlement, a defined benefit, regardless of other factors (fluctuations in market, etc). This is a known number
Contribution Plan: You put money in and whatever that funds grows to, is yours when you retire. It’s your money.
358.440: Filing form for LLP
When talking about business production, most firms say client belongs to the person who originally brought them into the firm. Even if you have done work for them the last ten years, etc.
Bane v. Ferguson:
Facts: Bane practiced law as a partner of a Firm. In August 1985 the firm adopted a noncontributory retirement plan that entitled every retiring partner to a pension, the amount depending on his earnings. The plan provided that the plan and the payments under it would end when and if the firm dissolved without a successor entity. P retired and began drawing his pension. Several months after his retirement the firm merged with another firm. The merged firm was dissolved in April 1988, benefits to P ceased and he brought suit.
Rule: A law firm is not liable to former partner for negligent mismanagement that affects the retired partner’s non-contractual pension benefits.
Business Judgment Rule: comes largely out of corporate cases
Judges not wanting to 2nd guess judgments of business people who made reasonable decisions that turned out wrong—don’t want to substitute their business judgment for persons who acted in good faith
Management:
Unless otherwise agreed, decisions about partnership management and operations decided by a vote of the partners are to be decided by a majority of the partners regardless of the relative percentages owned by the various partners.
National Biscuit v. Stroud: 
Facts: Stroud and Freeman entered into a general partnership to sell groceries under the firm name of Stroud’s Food Center. Stroud advised P that he personally would not be responsible for any additional bread sold by P by Stroud’s Food Center. After such notice P, at request of Freeman sold and delivered bread in the amount of $171.04 to Stroud’s Food Center. 
Rule: A partner in a general partnership can’t deny his liability for the debts of the partnership by informing creditors that he is not liable for a copartner’s purchases occurring in the ordinary course of business. 
Actual Authority case:
Partner Agent of Partnership as to Partnership Business: § 358.090
Every partner is an agent of the partnership for the purpose of its business,, for apparently carrying on business in the usual way and can bind the partnership, unless the partner acting has in fact no authority to act for partnership in a particular matter, and the person w/ whom is he dealing has knowledge of the person having no authority
Smith v. Dixon:
Facts: The appellants entire family constitutes a business firm known as EF Smith and Sons, a Partnership. By the terms of the K, the partnership agreed to sell 750 acre plantation for $200,000 and convey title to appellee. In the interim, by the lease provisions, the appellee took possession, farmed, and improved a portion of the property. Upon refusal of the appellants to convey the land as recited in the K, the appellee brought suit. 
Rule: A partnership’s express limitation on a particular member’s power to bind the partnership is insufficient to avoid liability for K’s made with third parties who were unaware of such limitation and reasonably believed that the partner had the authority to act.
No actual authority to sell for $200k, but had apparent authority b/c was carrying on business in the usual way
To not have authority, partnership must show
He lacked actual authority
That the business was not carried on in the usual course of business (if not usual course of business, must prove clear indication of authority) OR that 3rd party had knowledge of lack of actual authority
Rouse v. Pollard:
Facts: Seven D’s were partners engaged in the general practice of law. P is their client. Fitzsimmons took care of her legal business. He suggested P sell her valuable securities, and turn the money over to the firm, saying he would invest for her in good mortgages and send her the interest every 6 months. Accordingly P, endorsed to Fitzsimmons a check for 28,253 which he deposited into his personal bank account. Eventually the law firm dissolved. 1938 Fitzsimmons was arrested for embezzlement. 
Rule: A law firm may not be held vicariously liable for a partner’s fraud in connection with investment

y employees—decrease equity
When make money (earnings)—increase equity
If have multiple owners, each individual owners equity is recorded in their capital account
Income = revenues – expenses 
Revenue: What you collect in exchange for product/service
Expense: Liabilities you incur (paying employees, rent, etc.)
Liabilities: obligations you incur that must be paid to someone other then the owner (pay employees, rent, etc.)
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
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)
Income Statement: Describes the results of operations over some period of time: daily, monthly, etc.
Keeps track of revenues and expenses—where you get the net income from
Calendar Year: runs from Jan 1st to Dec 31st
Fiscal Year: runs something other then Jan 1st to Dec 31st (generally from date you open for business)
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
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)

Partnership Dissolution:
If a partners dissolves a partnership in contravention of the partnership agreement that partner will lose his right to be involved in the winding up of the partnership business, and if the partnership is continued by the other partners, the dissolving partner will not be entitled to a share of the good will of the partnership. 
Rights of Partners to Application of Partnership Property: § 358.380
Causes of dissolution: 358.310
Some of these are without risk: (not in violation of partnership agreement)
If it has a definite term
If it is a partnership at will
Can always dissolve a partnership if all the partners agree
If under agreement you have the ability to expel a partner, that also is a dissolution of a partnership
You can always dissolve a partnership, by saying you want out.
Have the power to do so, will be a breach of contract. Have to pay damages.
Some events dissolve partnership:
Death of partner
Bankruptcy of partner or partnership itself
Court has power, under sec. 320. 
Sec. 320 has a list of reasons for doing so:
Partner is mentally incapacitated. 
Partner has become unable to do their share
If a partner is guilty of conduct that prejudices the partnership
If willfully breach agreement, so it is not practicable to continue
If business can only be operated at a loss
Other equitable reasons
Assignee or a buyer who as interest due to a charging order
Can only do this if at will partnership or time is up
Buy-Sell Agreements:
For small businesses one of the most important parts of it, is the buy sell agreements. (aka continuation agreements).
Partnership will continue in event of death, etc.
Generally fall into two major categories:
Cross Purchase: The actual contract for purchasing or buying one another out is among the owners. Company is not part of it.
Redemption: Company is the party to the agreement. All the shareholders in the company are a part of it, if A dies, company buys A share.
Works better if there are a lot of people.


Collins v. Lewis:
Facts: Partnership going to lease basement of building for cafeteria. Collins was to invest money in cafeteria that Lewis was to run. Lewis guaranteed the money advanced by Collins would be repaid at the rate of at least 30,000 in the first year and 60,000 thereafter. Costs ran substantially higher then anticipated, expenses had exceeded over $600,000. Collins wants a judicial dissolution b/c is tired of paying money to Lewis, thinks Lewis is mismanaging money
Rule: A court will not grant dissolution to a partners who has failed to perform his obligations under the partnership agreement.
Cauble v. Handler:
Facts: The suit was brought by the estate of a deceased partner against the surviving partner for an accounting of the partnership assets. The partnership was engaged in selling furniture and appliances and each partner owned a 50 percent interest.
Rule: The representative of the estate of a deceased partners has a right to share in the profits if the other partners continues to operate the business after dissolution.
Widow had options
there had to be a dissolution b/c 1 partner had died
358.380 says if dissolution is not caused by something wrongful doesn’t have to windup and terminate
widow doesn’t want termination b/c could hinder her profitability
has choice to elect interest at fixed statutory rate of % interest of profits
Adams v. Jarvis:
Facts: P withdrew from medical partnership seven years after it was formed. The P is now suing for his share in the partnership assets, specifically accounts receivable. The agreement clearly states that accounts receivable shall remain in sole possession of the partnership. 
Rule: If a partnership agreement provides for continuation, sets forth a method of paying the withdrawing partners his agreed share, and does not jeopardize the rights of creditors, the agreement is enforceable
8182 Maryland Ave. v. Sheehan
Facts: General partnership entered into a lease agreement with P. D, Sheehan signed original lease for Maryland Ave. in ’84 along with 13 other partners. S left partnership in ’86, 4 other D’s joined partnership in Jan ’85-Jan ’86. The partnership actually took occupancy in April ’86, 4 other D’s left in ’89. Whenever anyone left or came into partnership a technical dissolution of partnership occurred.
Rule: When a partnership signs a lease, the existing partners remain liable for rent ever after withdrawal unless lessor agrees otherwise. 
Holding: S was personally liable b/c he signed original lease—358.150 makes partners jointly and severally liable and since he signed original lease, S was on the hook