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Business Associations
University of Iowa School of Law
Yockey, Joseph W.

Business Associations Yockey Fall 2017
Four main issues:
Risk of Loss — how much could I lose?
Return — how much money am I going to make?
Control — how much control do I want to keep the first 2 factors in check?
Duration — how long to last? Indefinitely? One-year w/option to renew? Singe project?
Resolution of these elements
Government Regulation, and/or
Private Contract
Types of Costs/Liability to a business:
Remove Personal Liability — how and when can parties minimize their exposure to personal liability and shift risk of loss to the entity (#1 Goal of BA attorney)
Try to talk them out of being a sole proprietor
At the outset the key risk of loss is the debt (loans start the company)
Lower Transaction costs — the costs of doing a deal; economic equivalent of friction
Lower Agency Costs — the costs that result when an agent does something in her own self interest and to the detriment of the principal
How to minimize all these costs= create a different type of business:
Go from sole proprietor to general partnership
By making a partner “buy in” there’s a cash infusion to the business
Now has “skin in the game” and has incentives as a supervisor
General Partnership to Corporation
Can attract investments from lots of people (shareholders)
Limited Liability entity — SH generally not on the hook for corporate’s actions
Pretty much all corporations are based out of/follow DE law= MUST have BoD
How else can shareholders reduce agency costs?
Lawyers add value to businesses and corporations
Minimize personal liability
Transaction cost “engineers”
Lower agency costs
Bring people together
Compliance/avoid litigation
State Law — Gives us our standard forms (off rack) and default rules of internal governance
Fiduciary Duties
A duty of utmost good faith, trust, confidence, & candor owed by a fiduciary (such as a lawyer or corp officer) to the beneficiary (such as a lawyer's client or a shareholder (SH)); a duty to act w/the highest degree of honesty & loyalty toward another person & in the best interests of the other person (such as the duty that one partner owes to another)
Generally speaking — owed only to company/corporation and shareholders
Recipe for Success
Revenues that Exceed Expenses
Products/Service that Consumers want to Buy
Ability to Retain Profits
Ability to Recover from Losses
The more risk, the more control you want
Who is an agent?
Definition of Agency (R3d Agency §1.01)
Manifestation of consent by P to A that A shall act on P’s behalf and subject to P’s control and A’s consent to so act.
Consent can be prior dealings or some other showing of meeting of the minds
Low bar for injured party to show that agency exists (can be ANY control over situation)
Agent is always liable for their own tort negligence (Same for P)
Test for agency: Black and white issue
P consents that A acts for P
A is subject to P’s control
A consents to P’s control
Consists of 3 types:
Principal & Agent
Employer/proprietor & Independent Contractor
Master & Servant
When agency relationship exists, principal is legally responsible for actions of the agent
Always check for principal, agency, and third party
Third party would want to hold principal responsible
Cheaper Cost Avoider
Who can protect herself at the lowest cost?
Implied Agency
Gorton v. Doty
Significance: no K needed to establish agency, uses circumstantial evd
Agency relationship = once party agrees to act on behalf of 2nd party subject to 2nd party’s control
H: consent given when she designated Coach to have control/drive the car (created a condition precedent which est. agency relationship)
PP: Likely ct wanted everyone to have car insurance to protect themselves
coach, driving Doty’s car, crashed w/players in car (Coach dies)
Controlling Creditor Relationship
Restatement §14 O: When does the creditor become a principal?
When P

Present or past conduct of principal;
Nature of the task at issue (i.e., the one the principal instructed the agent to perform).
Includes such powers reasonably necessary to carry out the duties actually delegated
Ex. P tells A to buy X but ≠ explicitly state she’ll pay incidental costs
Mill Street Church of Christ v. Hogan
F: B hired his brother Sam to help paint a church & S fell off & hurt himself—S wanted workers comp
S said he was an employee to get WC $
I: Was hiring bro a necessary part of completing job? Ct considers (1) nature of the task and (2) course of dealing
R: Implied authority is actual authority that’s proven circumstantially to indicate that P intended to delegate powers to A that are necessary for carrying out A’s duties, and one major circumstantial factor is prior work performed by A for P
H: Yes, there was implied auth to hire bro here
P does something to cause T to reasonably believe A has authority to do X
Silence can be apparent authority if P doesn’t speak up when RP would
Authority that a 3rd party reasonably believes A has, based on T’s dealings w/P, even tho P ≠ confer or intend to confer the authority.
Must have P telling T something about A to make them believe there’s authority
Perhaps could put in K that anything A does against express wishes of P is A’s responsibility (issue that A could be gone)
Also K that says A ≠ authority for certain things
Law can create apparent authority when no actual authority has been conferred
Ex. P tells T that A is her agent, she’s bound by what A does, doesn’t matter if P has ever even met A