Business Organizations – Fall 2009
Business Models
Primary forms of conducting a business – Type of business organization
1. Sole proprietorship
a. One person doing business
b. Most common form.
c. Under assumed business name.
2. Partnership
a. general partnership
b. limited liability partnership (LLP)
c. limited partnership (LP)
3. Corporations
a. comprise the greatest percent of annual revenues
b. non-profit corporations
c. professional corporations
d. For tax purposes
i. C corporations
ii. S corporations
4. Limited liability company (LLC)
One purpose of this class is to enable a person to answer the question of what form he or she should operate under.
1. Three primary concerns
a. taxation
b. liability – what protects assets.
c. control and management – how is power shared.
Corporations
1. Generally provide liability protections
2. Customer can sue corporation and recover against assets. But, they can’t go against the owners.
Key Concepts:
1. Is there an agency relationship?
2. Is the underlying dispute in contract or tort?
3. If in contract, authority of the agent is a key concept
4. If in tort, key concept are:
a. the extent of control exercised by principal over agent (which determines whether agent is an employee agent or non employee agent) AND
b. Whether acts of agent were within scope of agency relationship.
AGENCY:
Who is an Agent?
Rules
· Restatement 3d of Agency
o 1.01 – 1.04
o Principles of attribution: 2.01, 2.02
o Creation and termination of authority and agency relationships: 3.01, 3.02, 3.04, 3.05, 3.15
o Contracts and other transactions with third parties: 6.01
Notes
· agency relationship is consensual in nature
· based on concept that parties mutually agree:
o agent will act on behalf of the principal
o agent will be subject to principal’s direction and control
· agreement can be express or implied
Agency elements (Rst. 3d § 1.01):
· A person is an agent if the person:
o Acted on the principal’s behalf
§ Look for some benefit the principal will receive through the agency relationship.
o Was subject to the principal’s control
o Manifested assent or otherwise consented to act
Rst. 3d § 1.01: Agency is a fiduciary relationship that results from:
· when one person (a “principal”)
· manifests consent that another person (an “agent”) shall act
o on principal’s behalf
o subject to principal’s control
· Agent manifest consent to so act
Define an agency relationship (Rst 3d § 1.01)
A manifestation of consent by one person (the principal) that another person (the agent) act:
· on the principal’s behalf, and
· subject to the principal’s control
The agent’s consent to so act
Age requirement (Rst. 3d § 3.04) – An agent has capacity to act on behalf of the principal if the agent, outside of the agency relationship, would have the capacity to act.
Agents can act only so long as the principal can act. Rst. 3d § 3.01.
· If the principal becomes incompetent, the agent can’t act unless there is a durable power of attorney.
· Durable powers of attorney don’t need to be in writing, but they should.
· Principal must have legal capacity to act, but not necessarily the agent.
Agency is a fiduciary relationship. But, the principal typically doesn’t owe fiduciary duties to the agent. Rst. 3d §§ 8.01-8.06.
No writing necessary for an agency relationship unless required by law. Rst. 3d § 3.02.
Equal dignities rule – If an underlying contract must be in writing, then the agency relationship must be evidence by writing. Rst. 3d § 3.02.
Principals may be estopped from asserting lack of agency if a third party has suffered a detriment because it relied on the purported agency. See e.g. Rst. 3d § 2.05.
Two types of authority:
· Actual authority (Rst. 3d §§ 2.01, 2.02)– the agent can do anything he reasonably believes is necessary to carry out his duty as an agent based on the principal’s conduct, silence, written instruments involved, or custom.
o Can be express, implied, or incidental.
· Ostensible (MT)/apparent authority (Rst. 3d § 2.03) – Not actual authority. Conduct of an agent that exceeds the bounds of authority.
o However, a third party can nonetheless hold the principal liable because it appeared there was authority.
o There must be a reasonable belief by the third party based on the circumstances.
o The belief must be based on the principal’s acts (not the agent’s acts or beliefs) that caused the third party to believe the agent had authority to act.
o Can be express or implied from custom or past practice
o E.g., “my principal said I could do this” – not apparent authority because based on agent’s actions and not the principal’s. But, if principal has authorized the agent in the past, that is principal’s conduct that might give rise to apparent authority.
o Partnerships and LLCs
§ there is a statutory apparent authority that modifies common law apparent authority. A third party statutorily is given reason to belief that a partner or that a member of a member-managed LLC or manager in a manager-managed LLC has authority to act on the en
grain.
Issue
When a creditor loans a debtor money, does the creditor become a principal and the debtor an agent?
Holding
An agency relationship existed between Cargill and Warren.
Under some circumstances. You have to look at the totality of the circumstances.
In order for there to be an agency, there has to be an agreement between the parties, but not necessarily a contract.
An agency is a fiduciary relationship.
If the creditor becomes deeply involved in the business of the debtor, then an agency may be created.
App.
Cargill had become deeply involved in Warren’s business. It was a principal, and Warren was its agent.
AGENCY
Liability of Principal to Third Parties in Contract
Rules
· Restatement 3d of Agency
o Principles of attribution: 2.03 – 2.05
o Creation and termination of authority and agency relationships: 3.03
o Ratification: 4.01 – 4.08
o Contracts and other transactions with third parties: 6.01 – 6.04
Notes
Rst 3d § 144: A principal “is subject to liability upon contracts made by an agent acting within his authority if made in proper form and with the understanding that the principal is a party”
If there is actual or apparent authority, then a principal can be liable.
Types of authority
· Actual authority (Rst. 3d §§ 2.01, 2.02)– the agent can do anything he believes is necessary/reasonable to carry out his duty as an agent. (compared to Rst 2d § 8, the Rst 3d add the concept of reasonableness)
o Can be express, implied, or incidental.
o implied actual authority: act of putting agent in such a position leads agentto reasonably believe he has authority. Agent does what he thinks is reasonably necessary to accomplish the task.
· Ostensible (MT)/apparent authority (Rst. 3d § 2.03) – Not actual authority. Conduct of an agent that exceeds the bounds of authority. However, a third party can nonetheless hold the principal liable because it appeared there was authority. There must be a reasonable belief by the third party based on the circumstances. The belief must be based on the principal’s acts (not the agent’s acts) that caused the third party to believe the agent had authority to act.
o Can be express or implied from custom or past practice
o implied apparent authority: act of putting agent in such a position that leads third party to reasonably believe agent has authority
