Business Associations
Professor Coyle, UNC
Fall 2012
1. Sole Proprietorship
A single individual owns the business assets and is liable for any business debts. He can hire employees. Proprietorships are usually small, with modest capital needs that can be met from the owner’s resources and from lenders.
· Advantages:
o Control
o Simple
o Less Expensive
o Taxes
· Disadvantages
o Unlimited Liability
o No separation between ownership and control
o Transferability
2. Partnership or General Partnership
Two people arrange to carry on the business while agreeing to share control and profits, thus automatically creating a partnership. As partners, they are each individually liable for partnership obligations. The general partnership is prevalent in service industries—such a law, accounting, and medicine—where trust must exist among participants and capital needs are not great.
· Advantages:
o Control
o Simplicity
o Lower Cost
o Taxes
o Flexibility
· Disadvantages
o Unlimited Liability
o Non-Transferable
o Partners are jointly and severally liable for partnership’s debts and obligations; if the agency fails, partner’s personal assets may be reached by a creditor
o Dissolves when any partner dies, withdraws, or files for bankruptcy; When this happens, the only authority left in the partners as to the partnership is to wind up and liquidate business.
3. Limited Partnership
Limited partners provide capital and are liable only to the extent of their investment. General partners run the business and are fully liable for partnership debts. Sine limited partners need not be general partners, someone could be the general partner and both of them limited partners. LPs combine tax advantages and limited liability.
· Advantages
o Limited liability for the limited partners
o Separates control and ownership
o Limited filing requirements
o Unlimited liability for the general partner
· Disadvantages
o General partner subject to unlimited liability
o Limited partner cannot sell or transfer interest
4. Limited Liability Partnership (LLP)
Allows specified professionals—doctors, lawyers, and accountants—to limit their vicarious liability without running afoul of ethical rules that prohibit professionals from practicing in the traditional corporate form.
· Advantages
o Limited liability
o Taxation may be passed through to members, avoiding double taxation
· Disadvantages
o Partner may be subject to unlimited liability for his own acts
o Ownership interest not easily transferred
5. Limited Liability Company (LLC)
A hybrid entity between a corporation and a partnership. Like a general partnership, the members of the LLC provide capital and manage the business according to their agreement; their interests generally are not freely transferable. Like a corporation, members are not personally liable for debts of the LLC entity.
· Advantages
o Limited liability
o Separation of ownership and control
o Taxation may be passed through to members, avoiding double taxation
· Disadvantages
o Interest may be transferred but subject to terms of operating agreement
6. Corporation
Shareholders provide capital, and directors and officers manage the business. Corporate participants are not personally liable for corporate debts; only the corporation it liable. Corporations are the principal means of organizing businesses with complex organizational structures and large capital needs. The corporate form, however, works for any size business, including a one-person incorporated proprietorship.
· Advantages
o Limited liability – shareholders liable to the extent of their investment
o Separate ownership and control
o Taxation—if corporation makes a profit and reinvests it, it pays tax instead of shareholders
o Ownership interest is freely transferable
o Professional, centralized management
o Perpetual life—continues regardless of ownership and management change.
· Disadvantages
o Double taxation
o Managerial self-interest
o Federal Securities laws
Every business organization serves as in investment vehicle for the pooling of money and labor. Each organizational form must resolve five basic issues:
1. When does the investment begin and end?
2. What is the return on the investment?
3. Who manages the investment?
4. How can investors get out?
5. What are investors’ responsibilities to others?
Agency
Agency is the label the law applies to a relationship in which:
· By mutual consent (formal or informal; express or implied)
· One person or entity (called the “gent)
· Undertakes to act on behalf of another person or entity (called the “principal”)
· Subject to the principal’s control.
Notes on agency
· Whenever a person or organization seeks to act through the efforts of others, the legal concept of agency likely applies.
· Agents and principals can each be individual human beings or organizations, such as corporation, non-profit corporations, partnerships, and limited liability companies.
QUESTIONS TO ASK AND ANSWER ON EXAMS:
· “For the purpose of [specified consequence], is X an agent of Y?
· What label or category of agency applies?
· Is agency law the main event, or is it an auxiliary role to some form of substantive law, like torts or contracts?
· Between the principal and the agent:
o Under what circumstances does an agency relationship exist?
o What duties does the agent owe the principal? The principal relies on the agent to accomplish the tasks.
o What duties does the principal owe to the agent? Must the principal compensate the agent? Must the principal alert to risks? Bail out?
· Between the principal and third parties:
o If a third party has made a commitment in dealing with an agent, under what circumstances can the principal enforce that commitment?
o If the agent possesses certain information, under what circumstances will the law treat the principal as if the principal possessed that information?
o If the agent conveys certain information, under what circumstances will the law treat the principal as if the principal had conveyed that information?
o If an agent’s acts or omissions cause tort injuries to a third party, under what circumstances can the third party proceed directly against the principal?
· Between the agent and third parties:
o When an agent arranges a commitment between the principal and a third party, under what circumstances may the third party hold the agent responsible for the commitment?
1. Identifying The Agency Relationship
A. THE RESTATEMENT’S VIEW OF CREATION
Restatement (Third) of Agency
§ 1.01 Agency Defined
Agency is the fiduciary relationship that arises when one person (a “principal”) manifests assent to another person (an “agent”) that the agent shall act on the principal's behalf and subject to the prin
· While “consent to control” is an element necessary to establish an agency relationship, issues of control also play major roles in at least three other parts of agency law. It is important to keep all four roles distinct from each other. The other three roles are:
o Control as an element of servant status: Whether the principal has a right to control the physical performance of the agent’s tasks determine whether the agent is a “servant” or an “employee.” This issue is crucial to determining vicarious liability.
o Control as a consequence. As a consequence of agency status (rather than as an element necessary to create that status), the principal has the power to control the agent. Once the agency relationship comes into existence, the principal has the power (though not necessarily the right) to control every detail of the agent’s performance.
o Control as a substitute method for establishing agency status. When a creditor exercises extensive control over the operations of its debtor, that control can by itself establish an agency relationship. The law treats the debtor as the agent and the creditor as the principal. As a consequence, the creditor becomes liable for the debtor’s debts to other creditors.
Gay Jenson Farms Co. v. Cargill, Inc.
(see constructive agency below)
C. ALL ELEMENTS NECESSARY
Each element discussed above must be present for an agency to exist. For example, although a construction company’s foreman may exercise detailed control over a work crew, the crewmembers are not the foreman’s agents. They have consented to work on behalf of the construction company, not the foreman.
D. THE RELATIONSHIP BETWEEN AGENCY AND CONTRACT
Although agency itself is not a contractual relationship, the parties to an agency can make contracts regarding their agency relationship. Contracts between agent and principal have limited impact. They can change the rights and duties that exist between the agent and principal, but the cannot abrogate the powers that agency status confers on each party to the relationship. Thus, for example, despite any contract provisions to the contrary:
· The principal always has the power to control every detail of the agent’s “performance”
· The agent may have certain powers to bind the principal
· Bothe the principal and the agent have the power to end the agency at any time
***When an agent or principal exercises a power in breach of the other’s contract right, the injured party can bring an action for damages, but the exercise of power cannot be undone or enjoined.
1) Distinguishing an Agency from a Mere Contractual Relationship
Performing a duty created by contract may well benefit the other party, but the performance is that of an agent only if the elements of agency are present. (Dry cleaner, independent contractor, distributor, etc.) See p. 13 in green book.
