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

Corporations Outline
Bullard – Fall 2007

Ch. 1 Business Associations – Background and History
● Proprietorships- individually-owned businesses that have no separate legal status apart from their owner (i.e., mom and pop grocery)

Integrated Control- owner controls and operates the business
Unlimited Liability- for all contractual or tort damages
No transferable interests
Simple and flexible structure- no shareholder meetings or need to provide reports to others or register with the state

● Partnerships- an association of two or more persons carrying on a business for profit as co-owners.
-can be created regardless of the intent of the parties
-requires at least two partners

Integrated Control- ownership and control dependent on partners
Unlimited Liability

-Can collect all debts from one partner or some from each partner

No transferable interests
Simple and flexible structure- must be according to state partnership laws

-Default Rules- need unanimous approval for new partner, all partners have equal management rights, equal share in profits and losses, etc.
-Risk of inadvertently being in a partnership- liability concern

● Limited Partnerships- entity has a general partner that operates the business and one or more limited partners that contribute investment capital but do not participate in mngmt

Separated Control- partners can invest without getting involved with mngmt

General partners

Active partners
Empowered to make and carry out business decisions
Jointly and severally liable for all obligations
May withdrawal at will

Limited partners

Inactive investors of capital→ no management power or agency
Not personally liable for obligations→ liability is limited to investment
Cannot withdrawal at will

Courts will recharacterize people who are assuming the title of limited partner, but who are active in management, to be general partners and therefore liable for obligations.

Limited Liability- liability of limited partners limited to their investment. Liability of the general partners is unlimited, though.
Restricted transferability
Some simplicity and flexibility- filing requirements and taxes

● Limited Liability Companies- an incorporated partnership that allows members to actively participate in management or to be passive if they wish

Separated control; can engage in management w/out incurring unlimited liability
Limited liability
Restricted transferability
Some simplicity and flexibility under operating agreement

● Corporations- businesses that have a separate legal status apart from owners

Separated control
Limited liability of investors- encourages risk taking and advances society
Stock holdings are transferable
Life of the corporation continues until it’s dissolved- perpetual life
Onerously complicated costs/operations
Double taxed- taxed for any profits, then taxed again if the income is distributed to them through dividends.

Ch. 2 Agency and Partnerships

Agency- the fiduciary relation which results from the manifestation of consent by one person (the principal) to another (the agent) that the agent shall act on the principal’s behalf and subject to the principal’s control, and consent by the agent so to act.
● Vicarious Liability- When the agent is acting within the scope of the agent’s authority, the principal will be responsible for the agent’s acts.
● The more you act as a principal, the more likely you are to be held liable for the injuries caused by the supplier. Courts will look not to what you claim your relationship was, but what the actual relationship was.
Duty of Loyalty of Agent:
-Agent has duty to act solely for benefit of the principal.
-Agent may not deal with the principal as an adverse party.
-Agent who makes a profit while working for a principal is under a duty to give that profit to the principal.
Cargill- The actions of Cargill, the lender and buyer for Warren, was essentially
calling the shots for Warren and as principal will have to eat the debts of the agent.
-Indications of Cargill’s apparent authority over Warren: constant recommendations by phone; Cargill’s right of first refusal on grain; requirement of approval to enter into mortgages, purchase stock or pay dividends; Cargill’s right of entry to check and audit; financing of all grain purchases and operating expenses; etc.
Actual authority- runs from the principal to the agent; can flow from a contract, title, job
description, past course of dealing b/w principal and agent.
Apparent authority- can exist in the absence of actual authority where the principal gives a third party reason to believe that actual authority exists.
-requires proof of such conduct on the part of the principal as would lead a reasonable third person to believe the agent has the authority he purports to exercise. (An agent merely claiming to have authority under a principal is not enough).
McDonalds Corp.- the principal (corporation) has given the impression to a third
party (child injured by glass door) that it is in control of the agent
(franchisee); golden arches, menus, uniformity of signage.

Martin v. Peyton- Partnership results from a contract, express or implied (receipt of a share of profits by the D may be enough)
-if the K as a whole contemplates an association of two or more persons to
carry on a business for profits as co-owners, it’s a partnership
-Here, three people joined together to help KN&K investment banking partnership get out of financial tro

Bankruptcy- company can no longer meet its financial obligations. In liquidation, assets are paid according to rank:

Secured creditors
Unsecured creditors
Preferred stockholders
Common stockholders

● Limited Liability Partnership/Company

Owners of entity only at risk of losing their investment
Managers only have limited liability
One level of taxation (corporation has double taxation)
Lewis- A partner is not liable for another partner’s actions; only liable for wrongful actions you commit or someone under your supervision commits; must be involved in actions of partner to be liable.
In member-managed LLCs, each of the members is an agent of the LLC and has the authority to bind it in the ordinary course of business.
Operating agreement- usually sets terms for voting rights, for dissolution, expulsion of members, etc. When provisions are absent from the operating agreement, most states usually have default rules.

Ch. 4 Corporations – Formation and Finances

● Forming the Corporation

Pre-Incorporation Liability

Promoter’s Liability- for activities engaged in before incorporation; promoters run risk of having acted in context of de facto partnership w/out the protection of limited liability against claims by K creditors and tort victims

Major issues:
1. Personal liability of the promoters for their acts
2. Determining when corporate liability attaches to pre-incorporation acts
3. Liabilities of the corporation to investors for fraudulent promoters acts
O’Rork- When a party is acting for a proposed corporation, he cannot bind it by anything he does at the time, but he may:
a. Merely receive an offer from the third party which designates the contemplated corporation as the offeree; or
b. make a contract at the time, binding himself, with the stipulation or understanding that if a company is formed it will take his place and he’ll be relieved of responsibility; or
c. bind himself personally without more, and look to company when formed for indemnity.
-You can’t act as an agent if there’s no principal in existence.
-Adoption: a corporation’s assent to a contract that was made in contemplation of the corporation’s assuming it after organization