Business Organizations
I. Introduction
A. Business Forms
(1) Sole Proprietorship – a business owned by a single individual where the owner of the proprietorship is personally liable for the debts of the sole proprietorship.
(a) pass through taxation – 100% of profits go to owner and then owner
pays taxes on it personally
(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 – general partnership.
(b) Partners are the agents and the owners.
(c) There is no taxation at the entity level (pass through taxation – 100%
of profits go to owners and then individual owners pays taxes on it
personally)
(d) Rule for determining if there is a partnership
(1) UPA (1914) §§ 6(1) & 7; UPA (1997) 202(c); Md. § 9A-202
(2) Not necessary to file anything to form a partnership; may be
formed accidentally
(3) If you receive a share of profits in the business, you are
prima facie a partner in the business (but you can rebut) under
UPA (1914)
(4) Under UPA (1997) and MD, intent doesn’t matter
(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; general partner is personally liable for the debts.
(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 (pass through taxation)
(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 – only liable for the amount of money they put into the corporation.
(c) Board of Directors are employees of the corporation; BOD members
have no personal liability and may also be shareholders
(d) Double taxation – profits are taxed at the corporation level before profits are distributed to the shareholders; shareholders then have to pay personal taxes on dividends
(5) Limited Liability Partnership (LLP) – a general partnership where all of the partners have limited liability
(a) must file form/certificate
(b) same rules as partnership but limited liability even for general partner
(6) Limited Liability Limited Partnership (LLLP) – limited partnership but ALL have limited liability
(a) must file form/certificate
(b) NOT IN MD
(7) Limited Liability Company (LLC) – a form that provides limited liability for all participants and total flexibility in internal management.
(a) must file form/certificate
(b) pass through taxation
(c) These tend to be replacing general and limited partnership and perhaps also closely held corporations.
B. Agency Law – UPA (1914) §§ 9(1),(2); UPA (1997)§ 301; Md. § 9A-301; R.3d
Agency
(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.
(4) Apparent authority – If a 3rd party reasonably believes the actor 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
(5) Authority can be inherent which arises from agency itself w/o regard to either actual or apparent authority.
(6) Termination of agency
(a) Relationship terminates when objective of relationship is achieved
(b) Relationship 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 to act.
(7) Factors to determine whether one acting for another is an employee or an
Independent Contractor
(a) extent of control
(b) kind of occupation
(c) kind of business
(d) skill required
(e) does employer or workman provide supplies?
(f) length of time of employment
(g) method of payment
(h) is work being done the regular business of the employer?
(i) do the parties believe they have a master/servant relationship?
C. Closely Held v. Publicly Held
(1) Closely held is a few owners (could be 1, 10, 75, etc.)
(2) Publicly held is a large number of owners (SEC picked 500+ owners OR
whether it is traded on the stock market—is there a public trading place for it?)
D. Joint and/or Several Liability
(1) Joint liability – divides liabilities equally; if one doesn’t have and the other
does, doesn’t matter; only liable for half
(2) Several liability – if one can’t pay, the others have to pay that person’s share
(3) Jointly and Severally liable – each pays their share and if one doesn’t have
share, others have to pay
II. Partnerships
A. Need for a written agreement
(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 UPA (1997) § 103 specifies those provisions that cannot be changed by agreement
B. Sharing of profits & losses
(1) Sharing profits is prima facie proof of partnership under UPA (1914) § 7 (4); UPA (1997) § 202 (3); Md. 9A-202 (d) (3)
(2) Can form a partnership whether intend to or not under UPA (1997) § 202 (a); Md. 9A –202 (a) as long as the business is for profit
(3) Generally, partners can make any agreements between themselves with regard to sharing profits & losses.
(4) If no other agreements are made however gap fillers found in default rules UPA (1914) § 18 and UPA (1997) § 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) are paid 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
but creditors go after the partners under the statute (ie. in this case for joint liability). 3rd party creditors can rely on UPA (1914) § 15
(f) Smith v. Dixon
Facts: Contract for land between Smith partnership and Dixon. Dixon takes possession but Smith refuses to convey the title saying that W.R. Smith, who sold the property to Dixon, did not have actual authority to sell it for $200,000. Partnership only gave him actual authority to sell for $225,000.
Holding: W.R. Smith has actual authority to bind business in the ordinary course of business under UPA (1914) § 9 (1). BUT it was NOT the ordinary course of business of the partnership to sell land so W.R. didn’t have actual authority. He does, however, have apparent authority because the 3rd party (Dixon) reasonably believed that agent (W.R.) had the authority to act on behalf of the principal (partnership) because there were transactions like this in the past and manifestations of the principal.
Rationale: Normally in disposing of property (extraordinary) one does not have actual authority via § 9(3), but Smith had acted with similar authority in the past and thus has apparent authority.
Rule: According to agency law, a partner needs only apparent authority to enter into the transaction & bind the p-ship, not actual authority.
(1) Past behavior of the p-ship in relation to the partner can act to supply the apparent authority.
REMEMBER: There is a distinction between ordinary and extraordinary course of business – ordinary is the usual business of the partnership; extraordinary is anything else.
(g) Rouse v. Pollard
Holding: Bad attorney solicits money from old lady. He says his firm will invest it for her in mortgages. Attorney is later convicted of embezzlement. Old lady goes to get her money but it’s gone. She can’t sue attorney b/c he’s insolvent so she goes after partners (she can’t go after partnership b/c it is also dissolved). Under UPA (1914) § 14, the partnership should be bound by bad attorney’s breach if in the ordinary course of its business. Furthermore, under UPA (1914) § 15, the PARTNERS are jointly and severally liable so if bad attorney can’t pay, other partners should have to. BUT, neither the partnership nor the partners were personally liable for a partner’s embezzlement of a client’s money that was to be invested b/c it was NOT in ordinary course of business for attorney to invest money for clients (not in their normal scope of partnership) but rather would only transfer those funds to another to invest.
a. Rule: Determine what is in the normal course of business by asking: Is it in the usual & ordinary course in which such business is carried on in the locality where the p-ship sits?
b. Rule: Normal course of business can be exp&ed through an exceptional course of conduct, actually carried out by the p-ship, & carried on with the knowledge of the partner to be charged.
