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Business Associations/Corporations
University of Mississippi School of Law
Bullard, Mercer E.

Corporations Outline


Spring 2016

Business Associations
Agency and Partnerships
Corporations – Formation and Finances
Limited Liability and Ultra Vires
Board of Directors
Corporate Democracy
Derivative Actions and Indemnification
Duty of Care
Duty of Loyalty
Duties of Controlling Shareholders
Closely Held Corporations
SEC Regulation

Business Associations we talked about this first

Sole Proprietorship You NEVER want to form this entity.


Direct control
Lower expenses
No double taxation


Unlimited liability
Dependent on the management of the owner (death business lost)
Not easily transferred
Not a legal entity with the state

Partnership Also NEVER want this


No separation of ownership and control (agreement)
Flexible and simple
Lower expenses
No double taxation


Unlimited liability. One partner liable for the actions of the other
Partner cannot sell his interest; if a partner dies then the partnership is dissolved

Limited Partnership – general partner + one or more limited partners


Limited liability (not for general partner)
Separation of ownership and control
Lower expenses


Unlimited liability (for general partner)

Limited Liability Company (LLC)


Limited liability
Separation of ownership and control
Lower expenses
No double taxation (no federal corporation tax) (only individual taxes, which must be paid whether the income is distributed or not)


Transferability restricted by agreement and laws

Interview questions when forming an LLC

Percentage interests
Exit strategy
Decision making
Legal duties and indemnification
Capital contributions

Limited Liability Partnership (LLP)


Limited liability against partner
Lower expenses
No double taxation


Not easily transferred
Not protected from all liability. Only partial shield.



Limited liability
Separation of management and control
Interest easily transferred (securities)
Perpetual life
Don’t have to worry about ghost income (income that’s taxed even with no distribution)


Double taxation – profits and dividends taxed (not in S-corp.)
Management – may manage for their own interests (e.g. higher salaries and perquisites)
Expensive reporting and registration



Pass through taxation: does not pay federal taxes at the corporate level
Protected assets
Straight forward transfer of ownership


Less than 100 (real people only) investors
Only one class of stock
Lack of flexibility: Because of the one-class-of-stock restriction, an S corporation cannot easily allocate losses or income to specific shareholders. Allocation of income and loss is governed by stock ownership, unlike a partnership or LLC where the allocation can be set in the operating agreement.

Why would a firm choose double taxation?

To get benefits of corporate form
To exploit differences in tax rates
To eliminate taxes on ghost income

Form of organization this will be on the test. Know how to explain each one

Key factors:

Limited liability
Simplicity and cost
Default rules

Agency and Partnerships we talked about this third

Agency Definition

Fiduciary relation which results from the manifestation of consent by one person [the principal] to another [the agent] where the agent will act on the principal’s behalf and will be subject to the principal’s control and consent by the agent

3 Elements of Agency Relationship:

Consent to act on principal’s behalf (implied or expres

ere not
Can exist in the absence of actual authority where the principal gives a third party reason to believe that actual authority exists (RPP standard?)
Apparent authority alone is sufficient to support a finding that a person is acting as a principal

Allows third parties to rely on “reasonable perceptions of agency” w/out having to investigate the validity of the agency before every transaction

Butler v. McDonald’s

Facts: a child cut his hand when a glass door shattered at a McDonald’s leased under a franchise agreement. The parents sued McDonald’s claiming that the franchisee 1) held himself out as McDonald’s agent and 2) P believed and relied on this.
Apparent authority applies when:(factors)

The franchisor’s “image of uniformity” led a reasonable person to think that he or his employees were employees or agents of the principal (McDonald’s)
P actually believe employees were agents
P relied to his detriment on agents’ care and skill

Inadvertent Partnership

Martin v. Peyton – lenders have terms as part of the loan to protect their investment. Terms included, having veto power, lenders appointed trustees, Not considered control, just protecting themselves. The trustees were in charge only of transactions affecting their collateral.
Are the terms such as may be properly inserted to protect the lenders? Or do they go further?
A partnership is not formed unless two or more parties are closely associated so as to be co-owners carrying on a business for profit.

we talked about this second

Exam Tip

Bullard combines pre-incorporation; defective or de facto corporation; and piercing the corporation into one factual scenario