Select Page

Business Associations
University of Kentucky School of Law
Michael, Douglas

Business Associations Outline
I.       Generally
A.    Law of non-trust, non-human, legal person
B.     Why legal entities and not all sole proprietor?
1.      liability issues
2.      Death of Humans, non human entities are perpetual
3.      Multiple owners, multiple investors
C.     Pivotal question in lawyering is “why do you want to know” a person can be an agent for one purpose and not for another. The context is crucial.
II.    Agency Law
A.    Generally
1.      Why study agency now?
a)      business entities need an actual person to act in their behalf.
2.      restatement is the basis for this law
3.      employee’s are a subset of agents, all employee are agents but not all agents are employees.
B.     Creation of the agency §1, 12-15, 117-119
1.      3 requirements to create
a)      Manifestation of consent or willingness by both parties.
(1)   Can be oral, written, or action
b)      Act on P’s behalf
c)      Subject to P’s control
2.      Some will act the behalf of another
3.      Some will act under the control of another
4.      only when both are present is there an agency.
Relationship                control?                       On behalf?
Franchise                     Yes                              No
Trustee                                    No                               Yes
Employee                    Yes                              Yes
Contractor       Maybe                         Maybe
5.      Problems on Agency
a)      Problem1 K to have a dealer sell your painting is he an agent? Ask the questions, under control? On behalf? Here it seems so.
b)      Problem 2A. is the babysitter an agent? Under control? On behalf? Yes
c)      Problem 2B. is the plumber an agent? Under control? No. On behalf? Yes
d)     Problem 3. is a cabbie an agent? Under control yes. On behalf? Yes.
e)      Problem 4. the car repair shop an agent? Under control no, on behalf? Yes.
6.      Two things happen when an agency is created
a)      Fiduciary duties are created
b)      The Agent has power to bind the Principle in two aspects
(1)   By contract
(2)   By tort
C.     Termination of the agency
1.      How to terminate
a)      must manifest unwillingness to continue the relationship. give notice. (§118,119)
b)      or by the terms of the agency (§117)
2.      Problems
a)      Problem1A—early revocation, you can do it, just tell them and you are out, you get the painting back. The dealer may have a cause of action, but that is as separate matter (K law), you can get out of the Agency relationship.
(1)   A partner, likewise, can get out at any time, there may be penalties, but he can leave.
D.    Fiduciary duties §13
1.      Those duties the Agent owes to the Principle (§376-396)
a)      No self-interest (the interest of the P come first)
(1)   No competition P on own or with others (side jobs)(§393, 394)
(2)   opportunities that belong to P (CCS v. Reilly p15)(§382, 395)
(3)   obey P’s instructions (§385)
b)      full information (§381)
c)      Due care (like neg.)
(1)   Skill and Prudence (§379)
(2)   fiduciary duty of care (fiction, but that is way the CEO’s are charged with it
2.      Those duties the Principle owes to the Agent (§438-440)
3.      Cases
a)      3 issues when someone quits and starts a business in the industry you are in
(1)   What did they do while still employed by you?
(a)    Can’t breach the duty of loyal to you and your interests
(i)     No competition (while employed)
(ii)   Can’t take customers (while employed)
(iii)Must obey
(b)   Must give info. to the P.
(2)   What did they take when they left?
(a)    Can’t take trade secrets
(b)   No Customer lists
(i)     Can look in phone book for # of customer if you know them.
(c)    you can’t discard the relationship that you have with people (you can you those)
(3)   non-compete clause (must be reasonable in time and geographic area).
b)      CCS v. Reilly p15
(1)   Fund raising, takes customers, and makes arrangements on co. time.
(2)   He did act in the interest of the employee when approached by the customers
(3)   You can’t take trade secrets or co. secrets
c)      Hamburger v. Hamburger p18
(1)   Starts wire co. with uncle mad
(2)   Logistics are ok while employed
(3)   you can use your knowledge to some extent, but the lists have to be public.
d)     Massotheraphy v. Burek p21
(1)   The instructor turn out to be Independent Contractors
(a)    How to determine an independent contractor or employee (why do you want to know)
(i)     If employer controls the manner and means of work the person is an employee
(ii)   If the manner and means are left to the person then they are an independent contractor
(iii)Factors to consider, who controls:
(a)    Details and quality of the work
(b)   Hours worked
(c)    Materials used
(d)   Tools used
(e)    Personnel used
(f)    Travel routes
(g)   Length of employment
(h)   Type of business
(i)     Method of payment
(b)   Most independent contractors are not agents, but they can be.
(2)   Students files were not trade secrets b/c they were not protected.
4.      The duties of agency only extend to the scope of the agency
a)      Scope is limited
5.      The laws that control agencies are like contract law
a)      The drafter try to make things that the parties would have agreed to before the problem had they known about it.
b)      The rules are changeable by K (except that there must be a manifestation to create the agency.
6.      Problem 5A—Assume agency: if cabbie speeds for you and you are still late and lose in court b/c of it can you sue the cabbie? No, you have to indemnify your agent.
7.      Problem 5B—cabbie loses control and he gets hurt, are you liable? Yes, he is your agent, what principle are we looking at here? He can bind me legal, is this a tort.
E.     Ability of the agent to bind the principal §12
1.      in contract (for what, look tot the scope of the agency)(this is a matter of authority)
a)      authority is only actual authority. This only comes through a manifestation. (words, action)
(1)   implied authority—from actual authority
(a)    haggle, find the buyer?
(b)   The actual transfer
(c)    Must be hooked to actual authority.
(2)   inherent authority (crossed)
(a)    title of president normally has X power.
(b)   crossed b/c it is either apparent or actual authority.
(c)    Not in 3d restatement
(d)   Was its own type of authority now more refined analysis shows that it fits here (maybe implied).
b)      apparent authority is not authority but takes a lot of time.
(1)   Defined in §8
(2)   Gets you to the same result as actual authority without actual authority
(3)   Transact b/t the “a” and the 3rd “a” acts for the ”p”.
(4)   The “p” is bound because of a manifestation.
(a)    Reasonable Manifestation is that “a” is the agent
(b)   Remember whether the manifestation comes from (agent can’t create the agency)
c)      if you contract w/ someone that is not the agent of the P you don’t have a K.
d)     A is not liable for the K (in torts the A is liable for the K but the P is too).
2.      by Tort
a)      respondeat superior (employee) in course and scope of employment
(1)   employer is liable for the acts of the employee
(a)    the employer is not guilty or neg. it is the employee themselves
(b)   doesn’t relieve the employee of their liability, the K does relieve the agent for there liability, if they are an authorized agent.
b)      direct liability (the principle is directly liable)
(1)   fail to supervise (neg.) should have controlled the agent
(2)   “instrumentality” (agent is an instrument), principle uses the to do something.
3.      Problems to illustrate (change the instructions there is no P and A relationship b/t the customer and the dealer)
a)      6a. the dealer is liable under failure to supervise if an employee steals the car (not respondeat superior b/c that is not w/in the scope of employment)
b)      b. Stolen by a thief, this is more like a bailment, you should supervise your lot (this has nothing to do with agency law)
c)      c. employee test drive and car is damaged, respondeat superior the dealer is liable
d)     d. Crash at lunch, failure to supervise (not in scope of employment)
e)      7a. The babysitter can bind you to pay for the diapers that in w/in the scope of the agency (probably implied authority) if she bought something to repair your house that is outside the scope of her agency
f)       b. The plumber buying a rare wrench in not binding to you. t

x breaks of partnerships (partnerships calculate income like a separate entity and divide the Profit/Loss in equal shares and the partners are taxed individually on that).
2.      LP with a de minimis general partner (joe gives $1) and is otherwise a corp. IRS says it looks like a chicken it acts like a chicken it is a chicken (for tax purposes).
3.      IRS has 4 attributes of corps. And if 3 or 4 of them are in an entity, regardless of what it is called, it is treated like a corp. for tax purposes.
4.      Creation of the LLC
D.    LLC
1.      Formed in 70’s—Started in Wyoming the Legis. passed a law allowing for and recognizing LLC’s (fits two of the 4 attributes but explicitly in the statute it says that they shall not have the other 2).
2.      Requires a filing
3.      Key attributes
a)      Limited Liability
b)      Taxed like a partnership
4.      IRS looks it over and OK’s it.
5.      1995 Kentucky gets theirs (45th state to adopt)
6.      1996 IRS has the “check the box” rule (check the box if you want to pay taxes, or the other if you don’t).
7.      Lawyers and Accountants can’t be LLC’s by statute (they have to be liable for there neg.)
E.     LLP (g) leads to the LLP
1.      Lawyers and accountants want limited liability
2.      Create LLP
3.      Must have filing
4.      This is a general partnership with limited liability
5.      In Ky. the S.Ct. said Lawyers can’t be LLP but the Lawyers did anyway. They struck a balance, the lawyers have to have an minimum amount in the Partnership for suit and they can be an LLP
F.      LLLP (limited liability limited partnership)
1.      b/c LLP’s are available there is no need for a LP (except when it is familiar, like is often the case in oil and gas cos.
2.      If for financial reasons a LP can’t dissolve and reorg. As a LLP they can file and become a LLLP.
3.      This is pretty much a limited partnership w/ no general partner
G.    Why are corps. Still around with all of these limited liability ass’ns around that don’t get taxed?
1.      if you are publicly traded it doesn’t matter what you are you are subject to corp. taxes
2.      if you are small corp there is a Subchapter “S” exemption
a)      a lot of people are familiar with corps. And sub “s” so they continue.
A.    Formation (1. and 2. are the test to determine if there is a partnership)
1.      General Rule §202(a)
a)      “The association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intend to form a partnership.”
(1)   2 or more persons
(2)   as co-owners
(3)   a business
(4)   for profit
(5)   regardless of intent
2.      Helpful interpretive rules §202(c) (presumptions about partnerships)
a)      Joint ownership of property is not a partnership
b)      Sharing gross returns doesn’t create a partnership (Bailey v. Broder p53)
c)      If you receive a share of the profits you are considered a partner unless the payment is:
(1)   Payment of debt
(2)   For services of a contractor or wages to an employee
(3)   For rent
(4)   An annuity or retirement
(5)   Interest on a loan
(6)   Sale of good will of a business
3.      Bailey v. Broder p53
a)      Only one of the partners was footing the bill
b)      They shared fees (not profits), they weren’t a partnership b/c of §202ciii
4.      §401 if you have a profit sharing arrangement the loss sharing is the same.