Select Page

Business Associations
University of Illinois School of Law
Sharpe, Nicola Faith

BUSINESS ASSOCIATIONS OUTLINE
FALL 2016 – SHARPE
 
Transactional Attorney’s Goals
Maximize client’s gain or add value to the deal by:
Reducing informational asymmetries between parties
Assessing risk with information
Past experience on similar transactions à knowing corporate regulations
 
Default Rules
Statutory defaults that can be modified by parties
Creates rules that the parties normally would bargain for, which is good for weaker parties
Some rules are mandatory to be a type of association
Attorney must know common workarounds to modify the defaults
Inter se duties between partners/agents have numerous default rules and few mandatory
But partners cannot remove the fiduciary duty to each other
Third party duties have few default rules and many mandatory
 
Tradeoffs of Association Types
Common issue: business need money through cash, loans, partners or investors
Partners share equally in losses and profits beyond initial investment and they are jointly & severally liable, but they have more control of their investment
Lenders’ risk is capped at investment, but the reward is limited to fixed terms and less and infrequent control. The longer duration of the loan terms makes the loan riskier, but compensate by the higher interest rate.
Investors can lose their entire investment, but can gain in the profits and have more control
Shareholders can calibrate their risk and reward from the shares owned, but only control through proxy voting.
 
Selecting an Association Type
Tax implications
Partnership is taxed as an entity, but there is no profit tax. Instead, each partners are individually taxed on their personal incomes (39.5%).
Corporations get taxed on their income statement (35%) and shareholders are taxed again (24% capital gains)
Corporations live forever so long as there is money
Partnerships are limited
Corporations have limited liability capped at the value of investment
Partners are personally liable for everything they own, limited by statute, but can get insurance
Transferability of interests (default)
Partners cannot transfer interests (default)
See RUPA § 503, for rules on transferring partnership interest.
Investors and shareholders can transfer interests in corporation
Complexity/Flexibility of formation and management
Corporations are very complex and have high start-up costs
Corporations have centralized management for efficiency
Partnerships are simpler and have lower start-up costs
Partnerships have diffuse collectively run management
 
Types of Associations
Joint venture: partnership for specific purpose until concluded
Limited partnership: one general partner bears full risk and other partners are limited by their investment. The general partner is in control.
: statutorily authorized company managed by members with limits on transferability of ownership. Some trades cannot be LLCs who want to limit liability e.g. lawyers.
: partner is not liable for the negligent acts of those you do not supervise or other partners, but still liable for your own negligence and for those you supervise. Same tax benefits of an ‘S’ corp.
: wealthiest in terms of overall money in the market
S Corp.: 100 or fewer shareholders, so there is an easier tax structure
 
AGENCY
 
Agency is the foundation of all business relationships.
R3d (Agency), §1.01. Agency: fiduciary relationship when:
Principal manifests assent to agent that the agent shall act on the principal’s behalf, and
Agent manifests assent or otherwise consent to so act, and
Agent is subject to the principal’s control.
R3d (Agency), §1.02. It does not matter if parties characterize themselves as principal agent or not. Satisfying the elements of agency creates it.
Gorton v. Dorty. High school coach was an agent of school teacher when teacher volunteered her car for the football team to take a trip to the football game because it had to be driven by the coach à sufficient control established through the condition precedent of the coach driving.
At C/L, owner of the car is presumed the Principal of the agent because the owner is the least cost-avoider. The owner can get insurance or contract around losses.
Only need to direct the ultimate objective.
. Agency can be proved by course of dealing and circumstantial evidence. Fact-specific inquiry. Corporate grain dealer was the principal of a struggling grain storage facility because of de facto control over the agent’s internal affairs. Totality of the circumstances considered to established control.
Agent/Principal consented by supplying/procuring grain
Principal needed agent because agent was the monopoly in Minnesota
Phone recommendations
Frequent correspondence and criticism of finances, salaries and inventory
Held not merely creditor-debtor, despite typical lender arrangement: financing of grain operations, power to discontinue financing operations, right of entry/periodic audits, inability to enter mortgages, buy stock or pay dividends without approval, right of first refusal
Creditor-debtor/supplier relationship: Insisting on financial information, providing discrete counseling, advising borrower to hire consultants for larger problems
Agency when there is veto power, coercion leading to control by a person selected by creditor, providing assurance of payment on behalf of debtor, generally acting in different capacities (e.g. creditor and supplier and customer etc.)
The power to give interim instructions distinguishes agency from mere service contractor. E.g., cannot give interim instructions to bus driver, so bus driver is not agent of person taking the bus.
 
AGENCY AUTHORITY & PRINCIPAL LIABILITY
 
Questions: (1) Is there agency? (2) Was there any authority to bind the principal?
R3d (Agency), §2.01. Actual Authority. Agent reasonably believes the Principal wishes the agent to so act based on the Principal’s manifestations to the agent (express or implied).
Customs can show reasonable belief. E.g. a broker customarily has authority to sell.
R3d (Agency), §2.03. Apparent Authority. Power to affect Principal’s legal relations with Third Parties if:
Third party reasonably believes the agent has authority to act on behalf of the Principal
That reasonable belief is traceable to the Principal’s manifestations.
Example: Cargill. Draft forms with Principal’s name on it.
Principal must overcome apparent authority if there is no actual authority by publishing to third parties. Principal is the lowest cost-avoider.
Actual Implied Authority grants authority to do incidentals of the express instruction from the Principal, which are customary for the transaction. Mill Street Church.
Policy: reduces transaction costs.
R3d (Agency), §2.05. Agency by Estoppel. When third party is justifiably induced to make detrimental change in position

tire transaction, not parts.
R3d (Agency), §4.08. Ratification by Estoppel when:
Manifestation of ratification, and
Third party reasonably believes there is such a manifestation, and
Third party is induced into making detrimental change in position.
Boticello v. Stefanovicz. Spouses were tenants-in-common to farm land. Husband unilaterally leased land with the option to buy without wife’s consent. Wife said she would not sell for less than $85k (solicitation).
Apparent Authority: none because no presumption husband does business for wife. Husband doing more business than wife does not create third party reasonable belief of agency. Also, wife consistently cosigned property instruments à not passive.
: none because it requires: (1) accepting the results, (2) intent to ratify and (3) full knowledge of the material circumstances.
Receiving proceeds from the lease rent into a family purpose funds account does not ratify because Walter was free to lease his undivided ½ interest in the cotenancy.
Also, wife could only ratify the entire transaction, so accepting rent payments does not ratify. But it can be argued the option to purchase was a separate contract maybe.
She did not know all the material facts e.g. option to purchase; she thought it was a mere lease.
 
AGENCY & TORT LIABILITY
 
R3d (Agency), §7.01. Agent’s Tort Liability. Agent is liable to third parties harmed by agent’s tort although he acts as an agent or employee within the scope of employment, unless statute provides otherwise.
R3d (Agency), §7.03. Principal’s Tort Liability. Principal liable to third parties harmed by agent when:
Agent acts with actual authority or principal ratifies (conveying actual authority), and
Agent’s conduct is tortious, or
If the agent’s conduct was the principal’s it would be tortious; or,
Principal is negligent in selecting, supervising, or otherwise controlling the agent; or
The principal has a duty of reasonable care for risks coming out of special relationship, including the risk agent will harm the other in the relationship. §7.06(2).
Principal delegates performance of duty to use care to protect other persons or their property to an agent who fails; or,
Agent is an employee who commits a tort while acting within the scope of employment; or,
Employee: agent whose principal controls manner and means of performance. §7.07(3).
Scope when performing work assigned by the employer or engaging in a course of conduct subject to the employer’s control. §7.07(2).
Not within scope when independent course of conduct not intended by the employee to serve any purpose of the employer. §7.07(2).
Agent commits a tort when acting with apparent authority or purportedly on behalf of the principal.