I. Business Organizations
I. Introduction
A. Class Notes
1. Entities
a) Introduction
(1) Course deals with entities that are formed as the result of relationships among the parties.
(a) Does not focus on sole proprietorship.
(b) Taxes are extremely important to the course
(2) Historically
(a) There were only 3 entities to deal with
i) General P/ship
ii) LTD P/ship
iii) Corporation
(b) Very clear differences between them, and there wasn’t a lot of confusion.
(3) Today
(a) We now have
i) the LLC.
ii) A General P/ship can also be a LLP.
iii) A LTD P/ship can also be a LLLP.
(b) Statutes are default, and almost anything can be created by agreement within any business structure.
(4) Management Structure
(a) One of the first questions by the attorney. Each entity has a different management structure, and attorney should ascertain how the client expects the entity to be managed.
b) Modern Entities
(1) General Partnership
(a) Fundamental Concept – Equality.
i) Each partner has an equal voice in management.
ii) Doesn’t matter the investment of each officer.
iii) If there is no arrangement for profit sharing, parties split equally.
(b) Partnership agreement
i) Can change concepts of the partnership.
(c) No need for initial or subsequent filings.
(2) Limited Partnership
(a) Normally, general partners run the operation, and the limited partners are investors.
i) May be some things they have a voice in, but the running of the business is in the hands of the general partners.
(3) Limited Liability Company (LLC)
(a) Can be two forms of management – up to the parties to decide.
i) Member Managed
(1) All investors have a voice. Like a G P/ship.
ii) Manager Managed
(1) Managers selected by the members manage. Do not even have to be members.
2. Liability –
a) Second question asked by the attorney.
(1) Whatever the investor puts into the entity is always at risk.
(2) The concern is whether personal assets can be accessed by creditors.
b) Used to be that a Corp was the only way to limit liability, but now all but G/P are limited.
c) Under each type:
(1) G/P:
(a) 620.8306 – fundamental liability provision. Provides for j/s liability for all partners.
i) Exception for LLP’s.
ii) All partnerships should register as LLPs.
iii) The LLP is a novel approach which began in the US and not really anywhere else.
(2) LTD P/Ship:
(a) 620.1303 -No liability.
(3) LLLP
(a) 6220.1404(3) – No liability
(4) LLC
(a) 608.4227
d) Taxes
(1) Pass through entities do not file tax returns. These include
(a) Partnerships
(b) LLCs
(c) S Corporations
i) Must file with IRS to be an S Corp, and must meet these requirements:
(1) No more than 100 shareholders.
(2) No shareholder can be a non-resident alien.
(3) Only one class of stock.
(2) Check-the-Box
(a) If you are a pass-thru entity, you may check the box specifying that you want to be taxed as a corporation, even though you wouldn’t otherwise be.
e) Handouts
(1) Handout p.5 (Loss)
(a) Note that where there is a loss, the individual may take deduction when the entity is not a corp, but where there is a corp, they do not have
(b) This is a “tax shelter”: situation in which losses from a particular entity or business is deducted from income you otherwise make, to the extent taxes are actually reduced.
(2) Handout p.4 (Profits Retained)
(a) “Constructive Receipt”
i) Note that although the profits are retained and not distributed, the IRS taxes the profits of the entity to the individual.
ii) Why? So someone pays taxes on it. Taxes are “passed through” to the owners.
(b) Note that in a pass through, Able only has $75k in pocket, and his taxes are $86k.
(c) NOTE: Where you have an entity that will retain its profits, it should be a corporation. Otherwise, the entity practically has to pay enough of its profits to the employees to pay their taxes.
(3) Thus, for Handout 1, the best advice is to tell the parties to create a pass-through entity until the entity becomes profitable and wants to reinvest in improvements, when it should then become a Corporation.
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II. AGENCY
A. The Agency Relationship
1. Generally
a) Whether an agency agreement has been created is a question of fact.
b) Burden is on the party alleging agency.
c) An agent or principle can be an entity as well as a person.
2. Defining Agency
a) Restatement (2d) – The restatement definition of agency is full of ambiguity. It really states a conclusion, that if the relationship exists then there are certain duties.
(1) “On behalf of” : The acting party must be acting on behalf of the principal.
(a) Agent may be paid for the service, but is primarily acting on behalf of the principal.
(b) Where the party is primarily acting for their own benefit, such as a store operating in a mall, there is no agency. Clapp v. JMK/Skewer
(c) “A person does not become the agent of another simply by offering help or making a suggestion.” Carrier v. McLlarky
(2) Control : The principal must exert control over the actions of the agent.
(a) One party may have significant control over some aspects of another parties business, such as agreements between manufacturer/supplier or creditor/debtor, without the control rising to the level of agency. Hunter v. Mgm’t Asstn’ce
(b) One who receives goods from another for resale to a third person is not thereby the other’s agent. RS §14 J.
(3) “Manifestation of Consent” : Required for both parties. Notice: Not “consent”.
(a) Consent can be implied by the principal’s actions. Principal does not have to know. From the A’s point of view, A must reasonably believe there is consent.
i) Consent can exist even where the parties fail to recognize they have created an agency. RS §1 cmt. b.
(b) However, agents actions cannot imply consent. The agent has to know (or think they know) they have the authority to do the act.
i) If the existence of an alleged agency is unknown to the “agent”, there is no agency. State v. Luster
b) Restatement 3rd – Same, but requires manifestation of consent by the agent as well.
c) Note on Restatements: Courts do not have to abide by the Restatement, thus the court is always free to, for example, ignore whether the principal had control over the “agent”, as the court did in Carrier.
3. Subagency
a) Is e a relationship that looks like P->A->SubA
b) The SubA does have an agency relationship with the P.
(1) However, P may be entitled to indemnification from A.
B. Constructive Agency
1. Where a creditor exercises significant control a debtor’s business, a court may find that the creditor has become a principal of the debtor’s business. Cargill
2. This is most likely to occur where a bank, as a condition for a loan, takes over significant control over the business requesting the loan. If the control rises to that typical of a principal/agent relationship, the court may find it.
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III. RIGHTS AND DUTIES BETWEEN A PRINCIPLE AND AGENT
III.(Includes Class Notes; Need to Supplement with Book Notes)
A. Duties Imposed on the Principle
1. Indemnification
a) Expenses Incurred
(1) Normally, all expenses by the A expended through the agency are the responsibility of the P.
b) Costs Arising out of Suit
(1) When Agent Prevails
(a) Agent entitled to costs of defense, as the Agent is acting to protect the interests of the Principle.
(2) When Agent Loses
(a) If the Agent is acting explicitly on the direction of the P (therefore the P bears partial or total responsibility) the Agent is entitled to indemnification. Howe
(b) If the Agent is not acting pursuant to directions of the P, probably not able to be indemnified.
c) Subagent’s Costs
(1) As a general rule, agent is responsible for the subagent.
(2) For P to be responsible, A must show that the principle knew or authorized hiring of SubA, and expressed willingness to pay the SubA’s expenses.
2. Workers Compensation Statute
a) Origin
(1) Direct response to the fellow servant rule
b) Fellow Servant Rule
(1) CL doctrine that if a fellow employee injuries you, it is not the liability of the employer.
(2) If the employer is responsible, there can be a direct suit. Doctrine eliminates vicarious liability in these contexts.
c) Payouts
(1) Tradeoff, because under WC there is a payment schedule.
(2) Give up the right to sue the employer for negligence.
B. Duties Imposed on the Agen
Section C –
(a) Shifts the burden of proof to the employee to prove that the covenant is over broad, once the employer has proved legitimate business interests;
(b) If the restraint fails for any reasons, the court shall modify the restraint and grant the relief reasonably necessary to protect the employer’s interests.
(c) This is a very important provision. The legislature hardly ever mandates the court’s actions, and Cohn objects strongly to the shall provision.
(d) Court should have the ability to strike the whole thing if it was truly unreasonable.
(2) Section E –
(a) Mandates that a court shall presume reasonable in time any restraint of 5 years or less, and unreasonable any restraint of 10 years or more.
(b) These presumptions become rebuttable.
(3) Section G –
(a) Mandates the court not consider oppressiveness or individual hardship on the employee.
(b) Court must presume the corporation has suffered an irreparable injury.
(4) Section H
(a) Abrogates contract rules, stating that the court must favor the employer, and that ambiguities will not be construed against the drafter.
(b) Court is mandated to revise covenant if found to be too broad, instead of invalidating it.
(5) Section K
(a) Provides that prevailing party is entitled to fees, and the contract cannot eliminate this.
iii) Critique of the Statute by Cohn
(1) Ultimately, the statute is contrary in many ways to the traditional role of the court and traditional contract rules. It is a very pro-employer unbalanced statute.
(2) However, the Courts have (thankfully) not quite followed the statute:
(a) In Anich, the court found that the sales person did not have “substantial contact” with existing customers simply because she had made some sales.
(b) In Mid State Fire, the court narrowed the scope of the injunction so as to only prohibit disclosure of trade secrets and working with prior customers. Otherwise, the employee was free to work with the competitors.
D. Employee Inventions
1. Employees are Presumed to Own their Inventions
a) Unless an exception below applies, the invention belongs to the employee.
2. Exceptions – Under the following circumstances the employer can insist the invention belongs to the employer:
a) Contract
(1) Obviously, if the parties have a contract, it controls.
b) Employment for the Purpose
(1) Arises when the inventor was engaged specifically to exercise his inventive faculties for the employer’s benefit
(2) In these cases, the employee retains the patent, but the invention belongs to the employer.
c) Shop Right Rule
(1) If the Employer wins, the inventor gets the patent, but the employer has an irrevocable but non-exclusive right to the invention.
(a) Intended to protect employers so that they can utilize inventions that they were not expecting.
(2) Factors weighing in favor of the employer:
(a) the invention was conceived and developed during working hours,
(b) with the aid of fellow employees, and
(c) with the use of employer’s machinery and materials.
(3) Factors weighing in favor of the employee:
(a) has used his own supplies,
(b) on his own time, and
(c) utilized for the employer purely to ensure that the product meets the employer’s needs.
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IV. LIABILITY OF THE PRINCIPAL FOR PHYSICAL ACTS OF THE AGENT
A. Liability For One’s Own Negligence
1. General Rule – Personal Liability Only
a) A tortfeasor is always liable for their own wrongs
