Select Page

Business Associations
University of Kentucky School of Law
Michael, Douglas

BA.Michael.Fall2010
BUSINESS ASSOCIATIONS
 
Introduction
 
·         Business Associations is thelaw of non-trust, non human, legal persons
o    BA’s can own property, hire lawyers, etc., but they are not a person
o    As a sole proprietor (entrepreneur) you are not a distinct legal person. You are not separate from your humanness as opposed to a BA.
·         Why do we need such persons (i.e., BAs)?
o    Limited Liability.
·       Debts & obligations of entity remain those of the entity and not the owner. 
·       There are exceptions though and partnerships are different.
o    Raise money
o    Get other owners
 
·         (General) Partnership
o    Has been around forever; fits the model of a small business pretty well
o    Minimum of 2 people required to form a GP
o    Basic Rules
·       Equal Sharing of Ownership & Management responsibilities & rights
·       Individual adaptability favored over continuation
o    Consensual – if you want out, you can get out
·       No limited liability – all partners are joint & severally liable
·       Extensive fiduciary duties
o    Statute: Uniform Partnership Act (1914) or Revised UPA (1997)
·       RUPA clarifies and mostly restates old act except for dissolution 
·       KY adheres to RUPA
·         Limited Partnership (LP)
o    Developed to allow impersonal investment → accommodate the interest of someone who only wants to invest money but doesn’t want to manage or control or be held liable
·       Must have a general partnership with “limited” partners
o    Have to have at least one general partner and one limited partner
·       Limited Partners
o    Limited in their liability
o    Limited in their management rights
o    Statute: RULPA (1976 with amendments)
o    Next development rendered LP virtually obsolete
o    Re-RULPA (2001) – changes most of rules but limits types of LPS
·       Real Estate & Family LPs are the only uses for LPs today (we don’t study LPs b/c they aren’t used much anymore)
·         The Age-Old Problem → Businesses & investors wanted 3 things but could only get 2
o    In a GP → No Limited liability, but favorable taxation, and flexible management & ownership
o    In a LP → Limited liability and favorable taxation, but inflexible management & ownership
o    Corporation → Limited liability, but partially favorable taxation and limited flexibility
·       Corporate income tax taxes corporations & shareholders
·       Partially favorable taxation → Certain corporations were exempted from corporate income taxes
·       Partially Limited Flexibility → S-Corps are limited in types of ownership it can offer
o    Limited Liability Company was borrowed from abroad to solve this problem
·         Limited Liability Company (LLC)
o    Best of all worlds
·       Limited liability
·       Favorable tax treatment
·       Complete Flexibility in
o    Types of Ownership        
o    Style of Management
o    Statutes: not uniform, ULLCA (1996) good model
·       ULLCA written after all the states had already written their act, so more of model act then a uniform act
·       Can do everything we want with a LLC, so why not do everything like that? 
o    Lot of legal inertia. Still tons of corporations being created. 
o    Later, S Corps and LP laws will be repealed and LLC law will remain
·       GP is only set of rules that apply whether you know it or not (no need for a lawyer)
o    All others, you have to file something to create. So need default rule (partnership) and the LLC (template)
·       PLLC (and PC): these fall under a separate category for professionals (mostly attorneys, accountants, and physicians)
o    all owners must hold that professional license; lose it and you’re automatically out
·         Limited Liability Partnership (LLP)
o    Enacted in response to real estate & S&L crises in Texas; professional organizations have to organize as partnerships→ lawyers & accountants couldn’t use LLC
·       KY Sup.Ct. allows lawyers to organize as LLP so long as they do not limit liability to clients and must have an amount of malpractice insurance available 
o    Same rules as a GP but provides limited liability to the general partner
o    Statute: modifications to the RUPA or UPA Article 10
·         Limited Liability Limited Partnership (LLLP)
o    Limited partnership with no general partners→ all partners are limited
o    For LPs which cannot reorganize as LLPs b/c of tax consequences from the reorganizing
o    If starting out, you don’t do a LP or an LLLP. They are not used now. Estate planning is the only area you would do a LP or a LLLP
·         Corporation
o    “S” Corp → Taxed like a Partnership
·       S Corps have no federal corporate income tax
o    “C” Corp → Taxed Separately
·       Federal corporate taxes apply
Agency
 
Introduction
o    The law of Agency
·       The Principal (P) has an Agent (A)
o    For this course, the P is a BA (but they could both be humans) 
·       BA’s are non-human so they need humans to act so we study agency. 
o    Having an A is the only way a BA can do anything (GM can’t sign a contract).
·         Creation – Rest.3d. §1.01
o    “Manifestation” of assent/willingness or consent by both parties for A to act:
·       1) On Principle’s Behalf; AND
·       2) Subject to Principle’s Control
o    Distinguishable from other relationships
·       Control but not “on behalf”
o    Franchisee
·         Burger King franchisee acts on its own behalf but subject to Burger King’s control
o    Mortgagee
·       On someone else’s behalf but not subject to control
o    Lawyer makes own personal professional judgments on how to practice, etc.
o    A trustee acts on your behalf but not under your control
o    Agency Problems, Part 1.
·       Sculptor hires Galleria to show Sculptor’s latest statues and to offer them for sale to interested patrons. After a few weeks, Sculptor decides that he would like to keep one of his works, and notifies Galleria that it should not be sold. Galleria, who has already had serious inquiries from patrons about the statue, decides to sell it despite Sculptor’s contrary instructions, on the hope that Sculptor will go along with it and Galleria can pocket the commission. However, Sculptor not only does not go along with the sale, but sues the customer for recovery of the statue. Ignoring any claims for damages, who is entitled to possession of the statue?
o    Probably the Sculptor, because it was over when the agent said he quit
·         (the agent may be able to sue on breach of contract)
·       It’s a typical Monday morning.

o give certain notice, but they did a contractual modification to stay until Jan. 29th. He (agent) can’t do anything against interest of employer (principal) before the 29th. He breached his loyalty.
o    Every employee is an agent of the employer
o    Rule: While on company time and still an agent, nothing that he does can be for his own benefit at the expense of his employer
·         Reilly should have declined the offer; state he cannot compete with employer until his employment term ends
·         Reilly cannot solicit business while he is still employed, even if they would have preferred him to his employer
o    If he is hired after his employment ends, he still cannot use employer’s confidential info or trade secrets
o    practice tip: get rid of a departing employee as quickly as possible to avoid this mess
·       Hamburger v. Hamburger(Superior Ct. of Mass 1995) – Dad and uncle are co-owners of a business but are on very bad terms. David (son/nephew) built business up. Uncle won’t pay David well and tries to fire him. David talks to a customer over dinner about desire to start his own business. The customer agreed and gave him $50K in financing. David deposited the money into a bank account. David did all this before quitting. Afterwards he hired former employees of old company.
o    Similar to Reilly, but David’s actions were permissible
·         Equities favor David → very similar to Reilly, but more sympathetic case
o    Exception to Reilly: Agents can make logistical arrangements w/out violating duty not to compete see Rest (3d) § 8.04: allows “to prepare for competition”
·         i.e., de minimus arrangements don’t’ impact self-interest of employer
·         Set-up company, sign lease office space, financing, etc. 
·         Hiring away P’s employees → beach of duty; must wait until termination of agency/employment relation
·         Use of customer list (after he resigned) allowed b/c it wasn’t proprietary → Lists were readily available from business directories permissible
·         “How to sell wire” not specific to company →  this is a general skill learned, not ER’s information
·         but Proprietary v. general is not a hard and fast rule
·         Can contact employees after he leaves
o    Modifiability of Fiduciary Duties
·         in general, FD are not waivable
·         you can modify FD’s somewhat with the terms of your contract
·         a court will respect these modifications unless you push it too far
Non-compete clauses → Valid and enforceable if reasonable in terms of:
·         Length of time
·         Geographic area
·         Nature of employment → unique?