Business Organizations
I. Introduction
A. BusinessForms
(1) Sole Proprietorship – a business owned by a single individual where the owner of the pront prietorship is personally liable for the debts of the sole proprietorship.
(2) Partnership – a business that is owned by more than one person where all of the partners are personally liable for the debts of the partnership.
(a) Is the default form of a business.
(b) Partners are the agents and the owners.
(c) There is no taxation at the entity level
(d) Rule for determining a partnership
(i) UPA §§ 6(1) & 7 & 202(c) & Md. § 9A-202
(3) Limited Partnership – a partnership that has at least one limited partner and one general partner.
(a) Limited partner has limited liability and is generally only liable for his initial investment into the business.
(b) Limited partner also has limited ability to run a business
(c) Formed by filing a certificate in some public office – Md. §10-201 (SDAT) – Also required for LLP, LLLP & LLC
(d) There is no taxation at the entity level
(e) Limited partnership with a corporate general partner
(i) Statute has passed where if your business shares are sold in the open market you will be taxed like a corporation
(ii) This entity still exists for those businesses that it still benefits (mainly those where shares are closely held)
(4) Corporation – an entity created for profit
(a) Shareholders are the owners of the corporation and may receive the profits of the corporation in the form of dividends.
(b) Shareholders have limited liability for the debts of the corporation.
(c) The IRS can tax the corporation before profits are distributed to the shareholders (there is double taxation)
(5) Limited Liability Partnership (LLP) – a general partnership where all of the partners have limited liability-must file form/certificate
(6) Limited Liability Limited Partnership (LLLP) – a limited partnership where the general partner has limited liability (thus all partners have limited liability)-must file form/certificate
(7) Limited Liability Company (LLC) – a form that provides limited liability for all participants and total flexibility in internal management-must file form/certificate
(a) They receive single taxation status
(b) These tend to be replacing general and limited partnerships and perhaps also closely held corporations.
B. Agency Law – UPA §§ 9(1),(2) & 301 & Md. § 9A-301
(1) Agency – The fiduciary relationship that arises when one person (the principal) manifests consent to another person (the agent) that the agent shall act on the principal’s behalf AND subject to the principal’s control AND the agent consents to act.
(2) Manifestation – manifestation of consent or intention is through written or spoken words or other conduct if the person has notice that another may infer such consent from words or conduct
(3) Actual authority – if at the time of taking action, the agent reasonably believes, in accordance with the principal’s manifestations to the agent, that the principal has given him authority and agent consents to the authority; principal empowers the agent to bind the principal
(4) Apparent authority – If a 3rd party reasonably believes the agent has authority to act on behalf of the principal based on the principal’s manifestations to the 3rd party -flows from impression created by or permitted to exist by principal to the 3rd person; 3rd party believes principal empowered the agent to act in the principal’s behalf; based on the principal’s conduct
(5) Implied authority
(a) Implied actual authority-looks at the conduct of the principal-see McArthur
(b) Implied apparent authority-looks at the conduct of the principal-BOD tells everyone that X is pres, but they never made him pres., but they know he is going out signing K’s-he doesn’t have apparent authority because he isn’t pres
(6) Authority can be inherent which arises from agency itself w/o regard to either actual or apparent authority.
(7) Termination of agency
(a) Relationship terminates when objective of relationship is achieved
(b) Relationship terminates when principal or agent determines to end it.
(c) In terminating actual or apparent authority notice may be required to 3rd persons who may have dealt with agent and believe that principal has authorized the agent.
(8) Contrast between Master/servant and Independent Contractor.
In a master/servant the master is the principle who
employs an agent to perform service in his affairs AND who controls or has the right to control the
physical conduct of the other in the performanceof the service.
An independant contractor is a person who contracts with another to do something for him
but is not controlled by the other nor subject to
the other’s right to control with respect to his physical conduct in the performance of the undertaking.
One of the questions examined was in the relationship described in the hypo of AB furniture store where one of the partners runs the store, Is that partner considered an employee? The answer is no because the partner is working on his own behalf so an employer/employee relationship cannot exist.
II. Partnerships
A. Need for a written agreement (but not required)
(1) It helps to avoid future disagreements over what the arrangement actually was
(2) A written agreement is readily proved in court
(3) A partner may wish to lend rather than contribute and the writing would specify that
(4) Where real estate in the partnership is involved, a written agreement may be necessary to comply with the statute of frauds.
(5) An agreement can change most provisions in the code but § 103 specifies those provisions that cannot be changed by agreement
B. Sharing of profits & losses
(1) Generally, partners can make any agreements between themselves with regard to sharing profits & losses. If no other agreements are made however gap fillers found in UPA § 18 and § 401 apply
(a)Each partner is to be repaid his contributions and share equally in profits & surplus remaining after all liabilities (including those liabilities to the partners) AND to contribute toward losses sustained by the partnership according to his share in the profits – § 18(a)
(b) Md. 9A-401(a) does not require that a partner’s capital contribution be repaid before partners share in profits but does require an account of contribution.
(c) Each partner is entitled to share equally in loss and profit – UPA § 401(b) & Md. § 9A-401(b) BUT Md. § 9A-103(a) allows different arrangement by agreement.
(2) Richert v. Handly – partnership had to pay off liabilities to π partner for his initial purchase of the property before sharing in the profits of a partnership to buy land and process timber on the land
(a) Because the partners had not specified how they were to share the losses, the gap filler 18(a) applied.
C. Limited Liability Partnerships
(1) Developed to broaden protection for partner and shield partners against liability.
(2) Reverses the traditional rule that partners are jointly and severally liable for partnership obligations
D. Management
(1) Agency – Partner is agent of a partnership
(a) Every partner is an agent of the partnership and has the capacity to bind the partnership. UPA § 9(1) & 301(1) & Md. § 9A-301(1)
(b) Exception: when the partner
nership, only liable for partner’s partnership share (no personal liability)
(ii) If the partnership is a limited liability partnership (unless debts or obligations arise from negligence, wrongful act, or omission of partner, employee, etc., if partner is negligent in appointing, directly supervising, or cooperates with the partner, employee, etc; or debts incurred before became LLP; just because LLP does not effect liability of the partnership)
(iii) This arrangement can be changed by agreement
(e) Liability of incoming partner – UPA § 17 & Md. 9A-306
(i) With obligations incurred before incoming partner joined, incoming partner only liable for his partnership share and not personally liable.
E. Duties of Partners to one another
(1) Rules for determining the existence of a partnership – UPA (1914) § 7
(a) Section 4 says that the receipt of a share of the profits of a business is prima facie evidence that he is a partner in the business with exceptions:
(i) As a debt of installments
(ii) As wages of an employee or rent to landlord
(iii) As an annuity to a widow for a deceased partner
(iv) as interest on a loan
(v) As consideration for the sale of a good-will of a business or other property
(b) Section 2 lists circumstances where there is not a partnership such as a joint tenancy, tenancy in common, tenancy by the entireties, common property, etc
(2) Duty of partners to render information – UPA § 20
(a) Partners must render on demand true and full information of all things affecting the partnership to any partner.
(b) MD-403 (b) & (c) – requires that partners and their representatives have access to books and receive w/o demand info on regular business activities
(3) Partner Accountable as a Fiduciary – UPA § 21
(a) Every partner must account to the partnership for any benefit and hold as trustee for it profits derived by him w/o consent of other partner for any transaction (formation, conduct or liquidation)
(4) Right to an account – UPA § 22
(a) No equivalent in Maryland BUT implied under Md. § 9A-403(c)(2)
(5) General standards of partner’s conduct – UPA § 404
(a) The only fiduciary duties owed to the partnership are the duty of loyalty and the duty of care
(b) The duty of loyalty include:
(i) To account to the partnership
(ii) To refrain from dealing with the partnership on behalf of a party having an adverse interest in the partnership
(iii) To refrain from competing with the partnership in the conduct of the partnership business b/4 dissolution of the partnership
(c) The duty of care includes refraining from engaging in grossly negligent or
reckless conduct, intentional misconduct or knowing violation of the law.
(6) Meinhard v. Salmon-Justice Cardozo
Holding: Salmon owed a standard of duty to his prior partner Meinhard and thus had to offer Meinhard a share of the new lease agreement (which was created during Salmon & Meinhard’s co-adventureship)
