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Business Associations
University of North Carolina School of Law
Coyle, John F.

Business Associations Coyle Fall 2013
 
Intro/overview
Corporate law is analogous to romantic relationships and “the butterflies”; you’re either looking ahead & working together to build something, or else looking backward to extract a pound of flesh after the shit hit the fan.
            à“good lawyers get deals done”; “amateur hour”
 
Corporate role-play – lawyers as:
·         Guardian (reports up the chain to cover the client’s ass)
·         Counselor/expert advisor/negotiator in an area unfamiliar to client/corporation (ex: corporate naming rights & sports arenas)
·         Facilitator
·         Designated asshole
·         Anal-retentive K-grammarian (cross the Ts, dot the Is, etc)
·         Due diligence
 
Mandatory vs. Default rules
Mandatory = set of rules parties are powerless to change by contract (ex: criminal law; just because A&B agree A can beat the shit out of B doesn’t mean the state won’t prosecute A for doing so)
Default = rules that exist UNLESS there’s a contrary contractual provision the parties agreed to (ex: UCC Art 2 provides Implied Warranty of Merchantability, but the parties can contract that away and have relationship governed by specific terms)
àmandatory can’t be turned off, default allows for specific tweaks
àpoint of why states have default rules = to lower the costs for contracting; parties can agree to the specifics they care about, let the default rules define their other rights, fill in the gaps to avoid wasting time/$ negotiating over every last detail
 
Basics of business structure:
Corporation (c-corps)
ADVANTAGES:
·         Limit your liability: whatever you invest in your business, you can lose, but nothing more
o   Ex: shareholders own Apple stock; they’re only liable for the amount of $ they bought the stock for, Apple’s creditors cannot reach the shareholders' personal assets to make up shortfall
·         Basically, it’s a safety net to insure you cannot lose more than you put in
·         Relatively recent innovation; historically, unlimited liability prevailed
o   Ex: Scottish banks…no limited liability in Scotland, banks fail, creditors could go after shareholders’ personal assets (huge downside, detracts/disincentivizes entrepreneurship
·         Eternal life: entity is perpetual in duration (oldest corp in W. hemisphere is Harvard)
·         Separate ownership from control: allows investment with minimal involvement; again, this is a recent innovation; allows for hiring professional managers to run the business as vehicle for private investors to generate wealth
·          acquiring the shares of Exxon gives you control over ALL these assets (vs. the old way of doing things, where individual transfers required for all assets); far easier transferability
·         Capital accumulation: greatly enhanced by ability to incorporate b/c of advantages of limited liability, entity status, etc…it’s hard to organize a massive undertaking (like a railroad) as a partnership/proprietorship, vs. selling stocks to many, many people to generate cashflow
DOWNSIDE:
Taxation: corporations treated as PERSONS who must pay federal income tax on earnings (could be as high as 35%)
o   Double-taxation: when shareholders get paid dividends on profits, they must pay taxes, too…so, corps taxed once as entity, then again at shareholder level
Vs.
o   Pass-through tax: corporation doesn’t pay any entity-level tax, only taxes assessed on corp income is assessed at individual shareholder level as part of individual federal income tax
§  Partnerships follow this model & benefit accordingly
 
Sole proprietorship
·         No limited liability
·         No eternal life; dies when proprietor dies
·         No separation of ownership/control (owner = manager)
·         Capital accumulation is difficult, no entity advantages
·         Taxes: only assessed once
 
General partnership
·         no limited liability, no eternal life, no separation of ownership/control
·         bad for accumulation; there are some advantages from entity status
·         taxes only assessed once
·         Structure: 2+ people, partnership = separate entity that can enter into contracts, but both individuals are liable
·         NEVER encourage client to form GP; it’s ALWAYS a bad idea
·         Can be formed by accident
 
Limited partnership
·         sorta corporate hybrid
·         Structure: General partnership that sells interests in itself to investors (individuals and occasionally businesses) who put in cash and get limited partnership interests in return; general partnership is still on the hook w/ unlimited liability for debts incurred by the partnership BUT limited partners enjoy the benefits of limited liability; if partnership fails, creditors cannot reach the assets of the limited partners
·         Allows organization of the general partnership as a corporation, which protects EVERYBODY
·         Tax advantages: taxed as partnership, allows benefits of pass-thru taxation
o   Some eternal life, some limited liability, entity status, accumulation
 
Limited liability partnership
·         Generally only formed by lawyers & other professions (doctors, architects, etc) that the law requires to be partnerships (not allowing incorporation encourages them to do a good job)
·         General partnership can be very dangerous; exposes all the partners’ personal assets to debts incurred by one bad apple
o   Partially explains why law firms historically were quite small
o   HERE, the bad apples are personally liable for their bad acts, but innocent partners are protected by limited liabilityàcan lose their partnership stake (can be substantial loss) but their personal assets cannot be seized by creditors to satisfy debts
o   Creation of this new form allows dramatic expansion of law firm size
 
Limited liability company (LLC)
o   “best of all possible worlds” – best attributes of corporation + tax benefits of a partnership
o   very recent innovation
o   owners = members; member-run LLC = similar to partnership
o   managers; manager-run LLC = professionals hired by members to run the corporation; similar to CEOs of corporation
o   benefits: limited liability for members; eternal life for entity; separation of mgmnt/control is possible but not required; capital accumulation is easier
o   taxation: LLCs enjoy pass-thru taxation (only 1 time, assessed to owners, not the entity)
o   # in NC has skyrocketed in last 2 decades, is now default mode of business entity in this state & most others
o   so, why does anybody still stick with regular old corporations?
 
S-corps: basically the same as regular corporation, but with pass-thru taxation
o   BUT there are many limitations on structure/actions:
o   Max of 100 owners/shareholders (doesn’t matter so much for small businesses, but if grows to certain size, things get messy)
o   Major public corporations are all c-corps
 
 
Where to form?
o   Internal Affairs rule: internal affairs of a corporation are governed by the law of the state in which it is incorporated (also applies to LLCs, partnershi

w/ P
§  no conflicts of interests
§  no usurping corporate opportunities
·         2 EXCEPTIONS: if A tells P & P passes, OR
·          if opportunity arises totally divorced from A’s capacity as P’s agent (then A isn’t obligated to share w/ P)
 
A’s authority to bind Principal
w/r/t 3rd parties: when can A take acts that effectively bind P?
·         Actual authority: PàA (express or implied, via K, conduct, words, etc)
·         Apparent authority: absence of actual authority, but P gives 3P reason to believe actual authority exists & A is empowered to act on P’s behalf
o   3P’s belief A has authority MUST come from P
 
P’s liability: (see handout @7.03 for full breakdown)
Tort liability? Butler v. McDonalds (vicarious liability)
àif A has authority to bind P to a contract, then P will also have vicarious tort liability for As acts while working within scope of the agency relationship; for employees/franchisees, even if A lacks actual & apparent authority, if A commits a tort within scope of his employment, P = liable
·         McD’s sets up franchisor/franchisee relationship where corporation “technically doesn’t directly own most individual restaurants
·         P suffers injury when door breaks, sues indiv restaurant & whole corp, alleging franchise K = agency relationship; D argues franchise K specifically states no agency relationship exists
o   P argues chain stores all follow same manual and procedures, use same ingredients, subject to same regular inspections, etc
·         Ct rules this = apparent agency b/c:
o   D(corp) acted in manner that would lead reasonable person to conclude operator & employees of franchisee are agents of P
o   Plaintiff believed they were actual agents & relied to his detriment
 
A’s liability
a) disclosed principal: 3P knows A is acting for principal & knows who P is (1.04.2)
§ 6.01 Agent for Disclosed Principal
When an agent acting with actual or apparent authority makes a contract on behalf of a disclosed principal,
(1) the principal and the third party are parties to the contract; and
(2) the agent is not a party to the contract unless the agent and third party agree otherwise.
 
b) undisclosed principal: 3P has no notice A is acting for a principal (so by definition, no apparent authority, although there could be actual authority, but 3P wouldn’t know that either)
§ 6.03 Agent for Undisclosed Principal
When an agent acting with actual authority makes a contract on behalf of an undisclosed principal,
(1) unless excluded by the contract, the principal is a party to the contract;
(2) the agent and the third party are parties to the contract; and
(3) the principal, if a party to the contract, and the third party have the same rights, liabilities, and defenses against each other as if the principal made the contract personally . . . .