Business Organizations Outline
Susan Hamill
Fall 2016
Unit One- Introduction to the Firm and the General Partnership
Economic and legal Concerns and Overview of the Types of Business Organizations. Casebook: pp. 1-19;49-53 (stop before 3); 149-154 (stop before problem 3-1); 451-454 (stop before B); 531-534 (stop before Elf Actochem)
The General Partnership
Formation of the GP
Requires no written agreement or governmental action.
All that is required is statutorily specified mutual manifestation of consent.
Equal Sharing of Ownership and Management functions (default)
Each partner is a residual claimant, has a full and equal right to participate in management of the firm, and has an equal right to act as an agent of the partnership.
Equal share of profits and equal share of losses.
Individual partner’s adaptability to changed circumstances favored over firm’s continuity and adaptability (default)
If the partnership wishes to terminate its association with a partner, it may do so only by dissolving the partnership and paying the expelled partner the value of his interest in cash.
Ordinary decision-making requires majority.
Extraordinary decision and changes in the partnership require unanimity.
Private ordering may modify these rules.
Unlimited Personal Liability
All partners are JSL for all obligations of the partnership and there is no limit on this potential personal liability. Therefore, one partners screw up could result in financial ruin for another.
The creditor can go after any of their bank accounts, and how the bear loss between each other goes to how they agree to bear loss or how the default mandates that they bearded losses
Fiduciary Duty
Reduces likelihood that one or more partners will misuse their ownership powers or rights
Mutual duty to act fairly and honestly
** Cannot unfairly usurp the partners profit and potential.
You cannot eliminate the duty by contract, and the statute will trump the contract in most instances.
Termination of the Agency Relationship
No that simple with co-proprietors and general partnerships.
There is an immutable right, you cannot by contract tell a partner that they must maintain partners if they don’t want to. You can, however, make it painful, by placing terms and conditions on dissociation.
Wrongful dissociation can have negative consequences.
Expulsion
Generally pursuant to contract, may get judicial expulsion.
At-Will Partnership
No defined term or undertaking, a dissociation dissolves it
Joint Ventures
Joint ventures are generally for the exploitation of a particular opportunity.
“partnership for the undertaking”
rules are slightly different than partnerships
often two companies come together and do some big thing just one time
The Limited Partnership
More for the development of real estate
Composed of one or more general partners and one or more limited partners (generally investors)
Separation of ownership and management functions
Limited liability- the limited partners are not liable for the partnerships losses or costs
GPs may withdraw from the partnership at will, but limited partners may not
Withdrawal, unlike in a GP, does not automatically or necessarily trigger dissolution and liquidation
Decision making decisions the same as GP
The Birth of the LLC
People wanted direct corporate liability protection.
Owners would only lose money if they had actually invested in the corporation
The IRS finally recognized that it wasn’t incorporated.
By 1996 all 50 states has LLC statutes on their books.
LLC is a hybrid, it is not uniform and evolves quickly
Closely Held Protecting Participant’s Expectations
Small number of participants actively involved in business with no rigid division between those contribution money capital and physical capital
Corporations Intro 451-54
LLC Intro 531-34
The Law of Agency and the Agency Relationship of General Partners. Casebook pp. 20-48; 131 (Skip P.A. Properties)- 139 (stop before 2). Statutes Ala. RUPA §§301; 303(a); 304; 305; 306(a)&(b).
The General Partnership
Materialization
Requires no written agreement or governmental action.
All that is required is statutorily specified mutual manifestation of consent, or an understanding, if you will.
Generally-
General partners
aw supplies.
*If there is no agency law, and this agreement is made, then contract law controls (duty of loyalty continues as long as prior agent lives)
contract controls, enforceable under law of contracts
Robbins v. Finlay
A one-year non-competition agreement was not enforceable under agency principles.
The court looked to uniqueness of training, trade secrets, etc. to strike down the agreement.
The covenant to not compete was expanding the duty of loyalty beyond the severance of the agency relationship. The court would not enforce this.
In order for a contract to be enforced, you must look at it with consideration to the employee- a minimum skill employee will more likely have a contract overturned than a CEO or a scientist working on some proprietary information.
The contracts would be enforceable if you met the bare bone of contract requirements.
Note
Fiduciary duty of loyalty is owed even though the principal did not bargain for it, contracts that expand this fiduciary duty through broad non-compete clauses have a stricter standard of review than ordinary contracts.
Non-competition agreements must be reasonable and balance the legitimate interests of the employer and the employee Courts will enforce noncompetition agreements if they are reasonable given the duration, geographical coverage, and the nature of the employer’s risk from such competition.
Such covenants will not be enforced if the employee has no ability to seize team-specific value to which the employer has a fair claim.
Fairness approach
Requires parties to refrain from self-interest behavior not specifically allowed by a contract.
L&E approach
Approximates the bargain that investors and agents would strike if they were able to dicker at no cost.
