Business Organizations
Professor Fred Brown
Fall 2017
7 Types of Business Organizations
Sole Proprietorship
Owners: 1 Owner
Liability: Personal Liability
Management: Owner (or agent thereof; i.e. employee)
Formation: No Filing Required
F.I.T.: Single Taxation at Owner Level
General Partnership
Owners: 2 or more Partners
Liability: Personal Liability
Management: Decentralized – Partners Jointly (or agent thereof; i.e. employee)
Formation: No Filing Required
F.I.T.: Single Taxation at Partner Level
Corporation
Owners: At Least 1 Shareholder
Liability: Limited Liability
Management: Centralized – Shareholders Elect Directors-Directors Elect Officers
Formation: File Articles of Incorporation with State Authority
F.I.T.: Double Taxation at Corporate Level and Shareholder Level
Limited Partnership
Owners: At Least 1 General Partner; At Least 1 Limited Partner
Liability: Personal Liability for General Partners; Limited Liability for Limited Partners
Management: Centralized – General Partners Usually Run the Business
Formation: File Certificate of Limited Partnership with State Authority
F.I.T.: Single Taxation at the Partner Level
Limited Liability Partnership
Owners: 2 or more Partners
Liability: Limited Liability – Partners Jointly
Management: Usually De-Centralized
Formation: Filed Certificated of Limited Liability Partnership with State Authority
F.I.T.: Single Taxation at the Partner Level
Limited Liability Limited Partnership
Owners: At Least 1 General Partner; At Least 1 Limited Partner
Liability: Limited Liability
Management: Centralized – General Partners Usually Run the Business
Formation: File Certificate of Limited Partnership and Limited Liability Partnership
F.I.T.: Single Taxation at the Partner Level
Limited Liability Company (Preferred Business Model Today)
Owners:1 or more Members
Liability: Limited Liability
Management: Centralized or De-Centralized (freedom to choose)
Formation: File Articles of Organization
F.I.T.: Single Taxation at the Member Level
Agency
Fiduciary relationship resulting from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control and consent by the other so to act
Elements of Agency
Agent acts on behalf of a principle
Both the principle and the agent consent to the relationship/arrangement
The principle has control
2 Types of Agency
Master & Servant (MS)
Principle is liable for agent’s torts
Independent Contractor (IC)
Agent is liable for agent’s torts
DISTINCTION: MS the Principle has control over the means by which a task is accomplished; IC the Agent has control over the means by which a task is accomplished
Authority
Actual Authority
The authority that an agent reasonably believes that she has based on the principle’s manifestations (words or conduct)
Communicated by Principle to Agent
Actual Express Manifestations: oral or written statement as to scope of authority
Actual Implied Manifestations: inferred from principle’s prior acts
Apparent Authority (AA)
The authority that an agent has when a third-party reasonably believes that the agent has the authority to act on behalf of the principle and the belief is traceable to manifestations of the principle
Communicated by Principle to Third-Party
Apparent Authority can be established by title or position
i.e. Treasurer can reasonably create belief in a third-party of authority to engage in “normal” treasurer activities
Inherent Authority (IA)
The authority that an agent has when a third-party reasonably believes that the agent has the authority to act
May generally occur in the same situations where apparent authority is present
DISTINCTION: AA requires principle manifestation; IA can occur in situations with an undisclosed principle who, therefor, can make no manifestations
Other Ways for Principle to be Liable for Agent
Estoppel: Principle is estopped from denying that another has certain authority when:
Principle contributed to third-party’s belief that another had such authority, or failed to dispel it; AND
The third-party has justifiably been induced by that belief to undergo a detrimental change in position
DISTINCTION: AA has no requirement for detrimental reliance
Ratification: Principle expressly or implicitly authorized the agent’s acts after the fact
Express: act or formal declaration from the part of the Principle
Implicit: no direct act, but Principle acts in accordance with the agent’s acts (Corporation receives benefits from agent’s contract)
**Principle must be aware of all the material facts
Vicarious Liability: an employer’s liability for torts of an employee committed within the scope of employment (respondent superior – master will answer)
Employee is also liable
Independent Contractor is liable for own torts
Agency Duties
Duties Agents owe to Principals
Duty of Loyalty
Agent has to refrain from competing with P
Agent must account an
freedom to contract – PSA governs anything waivable
Non-Waivable Provisions of the Partnership Agreement — § 9A-103(b)
The partnership agreement may not Restrict the rights of third parties — § 9A-103(b)(10)
The partnership agreement may not Restrict access to books — § 9A-103(b)(2)
Inadvertent Partners
Whether or not the persons intended to form a partnership — § 9A-202
Presumption of Partner Status:
A person who receives a share of the profits of a business is presumed to be a partner in the business, unless the profits were received in payment: — § 9A-202(d)(3) (see (i)-(vi))
Co-Owners
Two most important facts tend to be
sharing in profits/loss; and
Having power of ultimate control
Cases
Martin v. Peyton
Peyton lent partnership $2.5 million in liquid securities in exchange for a share of the partnership profits
Issue: Is Peyton a partner or just a lender?
Presumption of Partner: a person who receives a share of the profits of a business is presumed to be a partner in the business — § 9A-202(d)
UNLESS:
The profits were received in payment of interest or other charge on a loan even if the amount of payment varies with the profits of the business — § 9A-202(d)(v)
Exceptions:
A lender getting interest on a loan is not jointly and severally liable and is not a partner
Holding: Proper lender protections and did not go further
Lupien v. Malsbenden
Purported lender had the right to participate in the control of the business and did so on a daily basis
Holding: Purported lender was a partner and thus liable for partnership obligations
Management and Organization — § 9A-401 & § 9A-403
Each partner has equal rights in the management and conduct of the partnership — § 9A-401(f)
This can be altered by the PSA — § 9A-103
Because of the personal liability of partners
In deciding differences arising as to a matter in the ordinary course of business of a Partnership may be decided by a majority of the partners — § 9A-401(j)
