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

Corporations
Bullard Fall 2007

Chapter 1: Business Associations (background & history)

I. Purpose corporations serve:
– What is the purpose of having a business association? raise capital and limit your liability.
– Once start raising capital for your business, need business structure to organize activities, functions, etc.
– There is a need for rules governing how the company is run, when liability will stop, etc.

Liability

Control

Transferable Interests

Life

Cost/Simplicity/
Flexibility/Taxes

Proprietorship

Unlimited

Integrated

NO

Limited

Good; flow through

P-ship

Unlimited

Integrated

NO

Limited

Good; flow through

LP

Limited

Separated

Maybe

Flexible

Moderate; flow

LLC

Limited

Separated

Maybe

Flexible

Moderate; flow

Corporation

Limited

Separated

Yes

Perpetual

Onerous; double taxed

– LL (during industrial revolution) encouraged people to invest and create businesses; this made the country flourish.
– The pooling of capital to create large businesses is good and benefits society and our standard of living.
– To have corporations, talented business people and capital must be together to run the corporation; need LL in order to tap the resources necessary to have business associations
– Transferability of interests is important b/c people want to know that they will be able to continue owning stock after the original owner of the company dies or retires = investors.
– Corporate law, primarily governed by state law, is a form of organizing relationships.
– There has been some federal involvement occurring with corporate law such as SOX.

Chapter 2: Agency and P-ship

I. Principles of Agency: When should one be held liable for another’s actions? Goal-We want to hold the person who makes the decisions about risk liable. BUT, principal may also be liable for things they didn’t “decide” on.

A. Definition of agency: “Agency is the fiduciary relation which results from the manifestation of consent by one person [the principle] to another [the agent] that the [agent] shall act on the [principal’s] behalf and subject to the [the principal’s] control, and consent by the [agent] so to act. In order to create an agency there must be an agreement, but not necessarily a K b/t the parties.”

B. BOP:
– Agency may be proved by circumstantial evidence which shows course of dealing b/t 2 parties (Implied)
– The principal must be shown to have consented to the agency since one cannot be the agent of another except by consent of the latter.
– It must be shown that a supplier has an independent business before can conclude that he is not an agent.

C. Three (3) Elements of Agency Relationship:
1. Consent of principal for agent to act on his behalf (agent consents by doing it)
2. Agent actually acts on principal’s behalf &
3. Agent is subject to P’s control (most important/primary issue for determining presence)
a. This comes up in implied P/A r’ship.
b. Co

there is a legal issue and tell them about the risk that they are creating if they continue wanting things
iv. company wants to control another company to get all their product that creates a problem.
v. If you are lending a company money in order to get their goods that is a principal-agent control situation.
vi. You are trying to reach a balance b/t the needs of the business and your exposure to risks that fulfilling those needs creates.
vii. Facts indicating P/A (i.e.-these show Cargill’s CONTROL of Warren).
· Factors that can be characterized as lending or agency r’ship
1. Constant recommendations (lender’s do this all the time); strong paternal guidance
2. Warren’s inability to enter financial transactions w/o Cargill’s approval (Lender’s do this when debtors are in trouble); Cargill’s right of first refusal
3. Right of entry on premises for checks/audits (protecting inv.)
4. Correspondence and criticism re financing, salaries, and inventory (protecting their investment).
5. Cargill’s name on Warren’s drafts and forms (could go either way. C could say, “we just finance their Acc’ts Rec.)
6. Financing all purchasing and operating expenses (ordinary L)
7. Power to discontinue Warren’s operations (ordinary for L)

2. Apparent authority exists in the absence of actual authority where P gives a third party reason to believe actual authority exists. (What would RPP think?)
i. Main issue is “Would a RPP believe the P controlled the A?”
ii. Q of fact that depends on…
· the nature of the K involved
· The officer negotiating it
· Corporation’s usual manner of conducting business
· size of the corporation
· number of its SHs
· circumstances that give rise to the K
· reasonableness of the K
· amounts involved
· who the King 3rd party is
· etc. (this list is not exhaustive)