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

Unincorporated Business Associations Yockey Spring 2018

Planning, Agency, and Entity Formation

Basics of Business Planning

Almost 60% of new businesses started each year are LLCs and Partnerships; area of law has grown considerably in importance and scope
The firm is a single entity that can enter into contracts vs. many individual contracts
Firms lower the costs of contracting while increasing efficiency and predictability
Unifying Elements: 1) Risk of Loss, 2) Return / Profit, 3) Control, and 4) Duration
Private contracts vs. uniform / default statutory rules – unincorporated firms today rely much more on custom private contracts
Structural / incentive strategies to reduce agency costs, and liabilities

Business Concerns During Planning:

1) Connect values to specific business results
2) Establish procedures for decision-making
3) Encourage the free exchange of ideas / viewpoints
4) Provide equal access to information
5) Foster accountability
6) Provide sufficient resources
7) Break down “silos”
8) Encourage honesty and integrity

Agency Law: Responsibility for Wrongful Employee Actions

The agency relationship is fiduciary in nature. The agent must exercise their power primarily for the benefit of the principal. (Restatement 3 Agency s. 101)

Duty of loyalty: includes the duties to account for profits arising out of the agency, not to act adversely to the principal without consent, and not to compete with the principal on related matters. (Rst. Agency ss. 802-806)

The agent also owes a duty of care, to give information, to act within the agent’s authority and to obey the principal’s instructions. (Rst. Agency ss. 807-812)

A principal’s duties to the agent, aside from liability under worker compensation, are primarily a matter of contract between the agent and the principal.

Agency is an inherently a consensual relationship that lasts only as long as the consent continues. The power to terminate is different from a contractual right to terminate (termination may be a breach of contract).

The principal creates “actual authority” by manifesting to the agent the principal’s consent to be bound by the agent’s acts. (Rst. Agency s. 201)

Real authority can be express or implied from the circumstances or course of dealings between the principal and the agent.

Principal can expressly confer authority by telling the agent what to do or by knowingly acquiescing to their actions. (Esso Geometric v. Harvard)
Implied authority flows from express authority and encompasses the power to act in ways reasonably necessary to accomplish the purpose for which the express authority was granted. (Esso Geometric)
Evidence of similar historic conduct without limitation can support. (Id.)

Apparent authority exists when the principal’s acts create an appearance of authority from the perspective of third parties dealing with the agent whether or not the principal has consented to be bound by the agent’s acts. (s. 203)

Did the third party reasonably and in good faith rely on the apparent authority?
The principal can expressly tell a third person that the agent has authority

Hypothetical Bargain: agency law poses the risk of loss on the party who could most cheaply have prevented the agent from acting (least cost avoider).

Principals can control errors through instructions, monitoring, and selection

Estoppel: permits third parties to recover from principals as a result of unauthorized agent transactions or acts. (Rst. Agency s. 2.05)

Does not depend on the principal’s having created an appearance authority

Restitution: involves recovery for a benefit a third party has conferred on the principal for which the principal should be required to pay. (Rst. Agency s. 2.07)

Ratification: occurs by the principal’s affirmation of an earlier unauthorized act.

Vicarious Liability: an employer is subject to vicarious liability for a tort committed by its employee action within the scope of employment. (Rst. Agency s. 7.07)

Employee: an agent whose principal controls or has the right to control the manner and means of the agent’s performance of work. (Id.)
Scope of Employment: when performing work assigned by the employer or engaging in a course of conduct subject to the employer’s control.

Not within scope when it occurs with an independent course of conduct not intended by the employee to serve any purpose of the employer. (Id.)
Must be in with

ng “articles/certificate of organization/formation” with Secretary of State; these agreements are governed by statutory default rules
Members contribute money or property to join
Default rule is member-management (but easily changed to manager-managed)

In member-managed, default is one member, one vote – each helps manage

Under the Delaware Act, member voting power is based on capital contributions

In manager-managed, smaller unit of management handling day to day while others act as passive capital providers

Under RULLCA, member agency is determined by state agency law; under the Delaware Act, all members are agents of the firm
Dissociation doesn’t trigger dissolution; and firms still retain supervisory liability and individual liability

LLC Operating Agreement: Non-waivable provisions

Members’ Right to Information
Members’ Duty of Loyalty – can clarify / limit, but not remove entirely
Members’ Duty of Care – no “unreasonable” reduction
Members’ Duty of Good Faith and Fair Dealing

A contractual provision in an LLC operating agreement is valid even if the LLC that the agreement formed did not sign the agreement. (Elf Atochem v. Jaffari)
Delaware LLC law provides broad discretion and great flexibility for freedom of contracting for the establishment of LLCs. LLC operating agreements are thus generally enforced according to their terms. (Elf Atochem)
Claims arising from an LLC operating agreement are governed by the terms of the agreement. (Elf Atochem)

The de facto corporation and corporation by estoppel doctrines are applicable to limited liability companies (Duray Development v. Perrin)
Court looks for substantial compliance with the LLC statute in the event of drafter error in the LLC filing documents. (Duray)

Still a good faith requirement to rely on de facto LLC doctrine – no intent to defraud (Duray)