Business Associations/Corporations Outline

Introduction – Chapter 1
–          The primary alternatives to the Corp include the general partnership, limited partnership, and (LLC) and limited liability partnership (LLP)
–          The corp, as an intangible legal entity, that cannot act but through its agents
I.      The Corporation
a.        Limited Liability of Investors.
                                             i.      Perhaps the best known characteristic of the corp is the limited liability of its investors, or shareholders. Absent special circumstances purchasers of stock in a corp stand to lose, at most, only the money which they paid for their stock in the corp. If the corp suffers losses and becomes insolvent, judgment creditors of the corp cannot look to the stockholders to satisfy their judgment
1.        p’ship (in contrast): each individual is liable for all obligations of the p’ship, whether arising in tort or K
b.        Centralized Management.
                                             i.      In the corp, managerial power is, by law, concentrated in a group of individuals known as the board of directors. Traditionally shareholders have been given a voice only in certain major transactions such as amendment of the articles of incorporation, dissolution of the corp, approval of mergers or the sale of substantially all of the assets of the corp. All employees of the corp, even its top officers, act only subject to the authority given to them by the board.
1.        general p’ship (in contrast): each one of the partners is by law an agent of the p’ship and can act on its behalf, unless the p’ship agreement provides to the contrary. Thus the p’ship makes no distinction between investors and managers
c.        Free transferability of interests.
                                             i.      The o’ship interests in a corp are represented by shares of stock of one or more classes. The corp code in each state authorizes the corp to issue different classes of stock which have such rights, preferences and benefits as are designated. The rights of shares, generally include but are not limited to, the right to receive dividend payments or to share in the liquidation of the enterprise on a pro rata basis with other shareholders of the same class, the right to vote for the board of directors and on certain other major corp changes such as mergers or liquidations and the right to inspect certain corp records
                                            ii.      The holder of shares of stocks does not have an interest in any specific property of the corp; as a legal entity in its own right, all property, real and personal, tangible and intangible is held in the name of the corp
                                          iii.      The corp is a legal entity, transfer of some or all of its stock from one person to another doesn’t affect the conduct of its business (continuity of operations)
1.        p’ship (in contrast): the death or withdrawal of any single partner operates as a dissolution of the p’ship and requires a winding up of the business of the p’ship as expeditiously as possible. What happens is that the remaining partners agree to buy out the interest of the partner who wishes to withdraw, since this preserves the valuable Ks and going concern value of the p’ship. Thus there is no liquid market for general p’ship interests; its sale will be on a one-on-one negotiated transaction
d.        The corp is a legal entity.
                                             i.      Changes in the identity or number of shareholders do not affect the corp’s legal existence. Nor do they affect the validity of its Ks with third parties. Since the corp holds property in its own name, changes in the identity of its shareholders or of the membership in the board of directors do not affect this status.
e.        Tax consequences – are different for corps than other legal entities
 
The Close Corporation
II.      The Close Corporation (Like a small/family-like corp – there is no marketability for its stock)
a.        Definition: a corporation which is permitted by state law to operate more informally than most corporations (allowing decisions without meetings of the board) and has only a limited number of shareholders. Usually a close corporation’s shareholders are involved in the actual operation of the business and often are family members
b.        Many states have separate special rules for these corps. Even where special statutory rules do not apply, the courts increasingly recognize that the nature of the small incorporated business is fundamentally different than the large public corp with tens of thousands of shareholders -justifying a difference in treatment
c.        In a close corp, where all of the shareholders are family members or close friends, the sale of shares may be of great concern to the remaining shareholders if the purchaser is someone who is incompatible with other shareholders. Therefore, the shareholders in a close corp often place restrictions on the transfer of shares, such as a “right of first refusal” for existing shareholders, which gives them control over their co-shareholders similar to the rights of partners in a partnership. 
d.        Decedent’s survivors are in a stronger position in a p’ship (b/c death dissolves a p’ship so surviving partners buy out the decedent’s interest in the p’ship to keep it going) than in a close corp. Buy-sell agreements triggered by death of one of the principals in a close corp are essential to protect the financial security of the survivors.
e.        The limited liability that SHs get from being a close corp isn’t v.great b/c:
                                             i.      Tort: most common tort claims will be covered by insurance anyway
                                            ii.      K: most creditors will demand a personal guarantee from SHs of the close corp; guarantee effectively negates the limited liability of all SHs.
f.         The centralized position of the corp may create problems in the close corp
III.      The Relevance of Taxation in Choosing a Business Entity
a.        Many of the supposed disadvantages of a p’ship can be eliminated by a written p’ship agreement.
b.        A corp is a separate taxable entity, a p’ship is not.
c.        Corps which elect to qualify for taxation as “S” corps are treated in most respects as p’ships for federal income tax purposes and thus are not subject to the corporate income tax. Corporate income is taxed to the individual shareholders in much the same manner as p’ship income is taxed to partners.
d.        The new tax rules generally allow any business entity, whether limited partnership, LLC or LLP, to elect either to be taxed as a separate entity or as a p’ship simply by “checking the box.” An entity with only one member can elect to be taxed as a corp or elect not to be taxed at all, as with the sole proprietorship.
IV.      Class Sum Up – Advantages/Disadvantages of a Corp
a.        Corp is a legal entity; Directors (managers) and officers are separate and distinct; these persons are elected by the shareholders (owners). b/c the corp is a legal entity it can enter into Ks, sue and be sued in its own name (while a p’ship is not a legal entity – however it can provide through K that it be taxed as a legal entity)
b.        Limited liability of shareholders – not always an advantage (if it’s a small business trying to start up a won’t give an LLCa loan without a personal guarantee)
c.        Free transferability of o’ship – not so great when you’re a small corp and one owner wants to sell to someone the rest don’t like. Also, big corps are in a very large market and are easy to sell, while small corps aren’t easy to sell b/c there’s not much of a market for them.
d.        Centralized management: in a p’ship can elect for centralized management but a shareholder w/no management power may have no say in what goes on.
e.        Taxes:. There is a problem of double taxation for the small corps, but subchapter S (available only if you’re a corp of 75 or fewer shareholders) solves this problem.
f.         Close corp: most states have no statutory difference between a regular corp and a close corp.
                                             i.      Some states DO have small business statutes (NOT in Florida)
                                            ii.      Typically lawyers would rather use regular statutes and provide incorporation provisions to deal with any problems
g.        (disadvantage) a corp is relatively harder to form than a p’ship. It doesn’t come into existence as a matter of law (as a p’ship does) therefore more complicated to form.
h.        (disadvantage) certain things are required for a corp, e.g. proper records (must be maintained) – therefore but should instead opt for a p’ship if can’t maintain.
i.         Taxation and the Close Corp – Alternatives for small businesses:
                                             i.        “S” filing (for the close corp)
                                            ii.      General p’ship
                                          iii.      Limited p’ship – has two categories: general and limited p’ships
                                          iv.      Limited liability company: limits liability of members/investors and is not taxable as such
Agency Concepts – Chapter 2
–          The Uniform P’ship Act provides unless otherwise provided, every partner is an agent of the p’ship and is authorized to bind the p’ship in transactions with 3rd parties.
–          The Corp, being an intangible legal entity, can function only through the efforts of agents, whether officers, directors, or other employees
Agency: is the fiduciary relationship that results 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. In order to create an agency there must be an agreement, but not necessarily a K between the parties. An agreement may result in the creation of an agency relationship although the parties did not call it an agency and did not intend the legal consequences of the relation to follow. The existence of the agency may be proved by circumstantial evidence which shows a course of dealing between the two parties. When an agency relationship is to be proven by circumstantial evidence, the principal must be shown to have consented to the agency since one cannot be the agent of another except by consent of the latter. 
Creditor v. Principal: A creditor who assumes control of his debtor’s business may become liable as principal for the acts of the debtor in connection with the business. A security holder who merely exercises a veto power over the business acts of his debtor by preventing purchases or sales above specified amounts does not thereby become a principal. HOWEVER, if he takes over the management of the debtor’s business either in person or through an agent, and directs what Ks may be made, he becomes liable as a principal for the obligations incurred thereafter in the normal course of business by the debtor who has become his general agent. The point at which he becomes a principal is that at which he assumes de facto control over conduct of his debtor, whatever the terms of the l K with his debtor may be. Agency can be inferred from the context/totality of the circumstances.
Buyer/Supplier v. Principal/Agent: One who Ks to acquire property form a 3rd person and convey it to another is the agent of the other only if is agreed that he is to act primarily for the benefit of the other and not for himself. Factors indicating that one is the supplier, rather than an agent, are: (1) Is to receive a fixed price for the property irrespective of price paid by him. (2) Acts in his own name and receives the title to the property which he thereafter is to transfer. (3) Has an independent business in buying and selling similar property.
 
V.      ESSENTIAL ELEMENTS OF AGENCY:
a.        The agent acts on behalf of the principal
b.        The agent acts with the consent, express or implied, of the principal
c.        The agent acts subject to the control, or right of control, of the principal.
                                             i.      The characterization is significant, due to the liability which the principal bears for acts taken by agent on behalf of the principal with his authorization.
                                            ii.      Ex’s of agents: lawyers, real estate brokers, employees, etc.
–          A franchise agreement explicitly stating that there is no P-A relations is not enough to establish in actuality that there is no P- A relationship: rather, need to look at the totality of the circumstances (namely the control that the “principal” has over the “agent”) Murphy c. Holiday Inns – Tort case, whereby an individual was injured in a slip and fall at franchise Holiday Inn. π trying to argue a principal-agency relationship so can tap into HI’s deep pockets. Court found Holiday Inn Franchise didn’t have the power to control day to day maintenance operations – the local owners bought the name and methods of operation only. HI doesn’t have enough control to be principal.
–          Reliance by the public is not sufficient to establish a P-A relationship.
RULES:
–          “continuous subjection to the will of the principal which distinguishes the agent from other fiduciaries and the agency agreement from other agreements.”
–          “In considering whether a K establishes an agency relationship, the critical test is the nature and extent of the control agreed upon.”
–          “The fact that an agreement is a franchise K does not insulate the contracting parties from an agency relationship. If a franchise K ‘so regulates the activities of the franchisee’ as to vest the franchisor with control within the definition of agency, the agency relationship arises even though the parties expressly deny it.”
“A servant is an agent employed by a master to perform services in his affairs whose physical conduct in the performance of the service is controlled or is subject to the right to control, by the master. A Master is subject to liability for the torts of his servants committed while acting in the scope of their employment.”
 
VI.      Apparent Authority of an Agent in determining the liability of a corporation
RULES:
–          “The president (of a company) only has authority to bind his company by acts arising in usual and regular course of business but not for Ks of an extraordinary nature.”
–          “While BODs nominally control corp affairs, in reality officers and managers frequently run the business with little, if any board supervision. Natural consequence of such development is that third parties commonly rely on the authority of such officials in almost all the multifarious transactions in which corps engage.” (apparent authority)
–          Generally settled that presidents can hire/discharge employees and fix compensation – however, Ks for life are considered ‘extraordinary’ and beyond scope of authority.
–          Apparent authority can bind a corp if there is reasonable reliance; however, an appearance of authority that fools no one does not bind the principal. Chase v. Consolidated Foods Corp: dealing with a breach of K issue. π is saying that ∆ broke its K to sell him a division of their corp based on a telegram sent by the VP of ∆ corp which stated that the board of the corp had approved his purchase. The VP actually didn’t have actual authority to sell w/o getting the board’s approval .
–          The trait of apparent authority has to come from the principal – the principal has to do something that leads the 3rd party into thinking that the agent HAD the authority to do the questioned act. CANNOT and DOES NOT come solely from the agent saying/acting as if they had the authority.
FACTORS: Apparent authority is essentially a question of fact. It depends not only on the nature of the K involved, but the officer negotiating it, the corps usual manner of conducting business, the size of the corp and the number of its stockholders, the circumstances that give rise to the K, the reasonableness of the K, the amounts involved.
Authority:
a.        Actual: may be:
                                             i.      express: written or some other tangible proof of it
                                            ii.      implied: when a BOD normally gives a person certain powers, it’s implied they have them on other circumstances
b.        ApparentAuthority: The appearance of being the agent of another with the power to act for the principal. Since under the law of agency the principal is liable for the acts of his agent, if a person who is not an agent appears to an outsider (a customer) to have been given authority by the principal, then the principal is stuck for the acts of anyone he allows to appear to have authority. This “apparent authority” can be given by providing someone (who has no authority to contract) with materials, stationery, forms, a truck with a company logo, or letting him work out of the company office, so that a reasonable person would think he had authority to act for the company. Then the contract or the price quote given by hime and accepted by a third party is binding on the company. Apparent authority may also arise when he works for the company, has no authority to contract, but appears to have been given that authority.
c.        Estoppel: b/c of reasonable reliance, court will find there was authority.
 
Sole Proprietorships and P’Ships – Chapter 3
               I.      The Sole Proprietorship
RULES:
–          Sole proprietorship: a form of business in which one person owns all the assets of the business in contrast to a p’ship, trust, or corp. The sole proprietorship is solely liable for all the debts of the business – it has no legal identity apart from its owner.
–          In contrast with the limited-liability characteristics of a corp or limited p’ship, the liabilities of the business venture are the personal liabilities of the individual proprietor.
–          At common law, sole proprietorships are not ‘legal entities.’ Neither are p’ships… Rather, sole proprietorships and p’ships are deemed to be merely the alter egos of the proprietor or the partners (as individuals). In a sole proprietor