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Business Associations
University of North Carolina School of Law
Hazen, Thomas Lee

Business Associations
Professor Hazen
Fall 2010
 
I. Business Entities
A.    Sole Proprietorship – Like a family run business with other employees.
1.            Advantages:
a)    Control
b)    Simplicity
c)    Less expensive
d)    Less taxation
2.            Disadvantages
a)    Unlimited liability
b)    No separation of ownership and control
c)    Transferability
B.   Partnership – Business owned by two or more people
1.            Advantages:
a)    Control
b)    Simplicity
c)    Less taxation
d)    Lower Cost
e)    Flexibly
2.            Disadvantages:
a)    Unlimited liability
b)    Not transferable
c)     Partners jointly/severally liable for debts and obligations; if agency fails partner’s personal assets may be at risk
d)    Dissolves when any partner dies, withdraws, or files for bankruptcy; the only authority left in the partners as to partnership business is to wind up and liquidate business
C.   Corporation – Association of individuals that is its own legal entity and is governed by statute; AOI filed with secretary of state from state where it’s incorporated; can do business on its own; shareholders don’t conduct corporate business
1.            Advantages:
a)    Limited liability (shareholders liable only to extend they invest)
b)     Separate ownership and control
c)    Taxation (only if corporation reinvests profit does it pay tax instead of its shareholders)
d)    Ownership interest transferable
e)    Professional and central management
f)Perpetual life
2.            Disadvantages
a)    2x taxation (if dividends are paid to shareholders)
b)    Self-serving management possible
c)    Federal Securities laws
D.   Limited partnership – Includes at least one general partner and other limited partnership
1.            Advantages
a)    Limited liability for limited partners
b)    Separates control and ownership
c)    Limited filing requirements
d)    Federal Securities laws
2.            Disadvantages
a)    General partner subject to unlimited liability
b)    Limited partner cannot sell/transfer interest
E.   Limited Liability Company (LLC) – Corporate entity that may be run as a partnership with “pass through” tax treatment to partners
1.             Advantages:
a)    Limited liability
b)    Separation of ownership and control
c)    Taxation may be passed to members avoiding 2x taxation
2.            Disadvantages:
a)    Interest may be transferred but subject to terms of operating agreement
F.    Limited Liability Partnership (LLP) – Some or all partners have limited liability, so has characteristics of partnership and corporation
1.            Advantages
a)    Limited liability
b)    Taxation may be passed to members avoiding 2x taxation
2.            Disadvantages
a)    Partner may be subject to unlimited liability for personal actions
b)    Ownership interest not easily transferred
G.   Joint Stock Company – Corporation with unlimited liability; involving two or more individuals that own shares of stock in n the company. Certificates of ownership (“shares”) are issued by the company in return for each financial contribution, and the shareholders are free to transfer their ownership interest at any time by selling their stockholding to others.
H.   Partnership Association – Supplanted  by LLC
II.Agency and Partnerships
A.   DEL § 142 (officers get actual/apparent authority); MPC §8.40 (officers get actual/apparent authority); MPC §8.41 (duties of officers)
B.   Agency relationships
1.             Agencya fiduciary relationship that results from manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and by consent by the other to so act.  
a)    Principal is liable for the acts of the agents as long as they’re within the scope of the agency relationship.
b)    Employers of any of the business entitles mentioned above are agents
c)    Acts of an agent bind a principal
d)    Principal can terminate agency at any time.
(1)           Gay Jenson Farms Co. v. Cargill Inc.
(a)                An agency requires mutual assent between the principal and agent.
(b)                In this case, there were constant telephone conversations, Cargill, which was financing the operation, had first right of refusal, the ability to do audits and had their name printed on Warren’s forms. About control, agency activity for the benefit of the principal.
(c)                Cargill could essentially discontinue financing Warren’s operations. They wanted to make money on the grain. 
(d)                The court didn’t rule on how the plaintiff relied on these factors, but said that if you allow someone to use your name then you’ve consented to them acting on your behalf.
e)     Duties of agency:
(1)          Fiduciary duty to care (don’t be negligent)
(2)          Fiduciary duty of loyalty
(a)                Unless otherwise agreed, agent is under a duty to act only for the principal. An agent may not deal with the principal as an adverse party. An agent who makes a profit while working for the principal is under a duty to give that profit to the principal. Must have confidentiality of information and cannot disclose secret information. 
f)Types of authority:
(1)          Actual authority – Actual discussion between principal and agent, can be expressed or implied. If a reasonable person would believe that principal authorized agent to act.
(a)                Express – principal tells agent what to do exactly
(b)                Implied – reasonably necessary to carry out express authority given to agent
(2)          Apparent authority – Authority exists because of a communication between the principal and a third party. Principal’s words and conduct cause reasonable person to believe principal has authorized agent to act. This is a question of fact.
(a)                Presidents can do ordinary things
(b)                VPs generally don’t h

a close call but that there was not a partnership, as an agreement that gives a degree of control to one party doesn’t constitute a partnership if the original party maintains day-to-day control of the business. Veto power did not provide defendant with D2D control, and profit sharing, normally prima facie evidence of a partnership, was not evidence in a case of repayment of wages and debt.
5.             Peed v. Peed
a)     Plaintiff and defendant were married and were in a farming enterprise together. The court said the jury could infer that from the registration of cattle, the financing and plaintiff’s conversations with defendant concerning a partnership agreement and contribution to the farm that a partnership existed.
b)    Not partnership if there were just profiting on marital property. But this is very similar to a co-ownership. Evidence suggests this was a legal partnership, but that’s a question of act.  
E.   Partnership agreements:
1.            Formal written agreement that specifies duties and obligations
a)    Partners give equal votes to partnership
b)    Rule by a majority vote
c)    Shares will vary according to partner’s production
d)    Capital account
(1)          Partners contribute money to firm as part of business entity and it’s viewed as an asset
e)    Professional managers
2.            Parnetship has “aggregate entity” status (collection of people) and can still be sued as entity. Revised UPA goes back to entity theory.
3.            UPA § 18 (Rights of partners without an agreement)
a)    All partners have equal rights of management
b)    No pay for acting, share profits
c)    All parties must share admission of the other parties
d)    Majority may resolve ordinary matters unless in contravention of agreement; then all must agree
F.    Fiduciary Obligations
1.            Meinhard v. Salmon
a)    Salmon entered joint venture with plaintiff, who would provide investment capital for his hotel refurb project.
b)    Twenty years later the property owner offered Salmon more of the property and he signed a new lease without telling Meinhard.
c)    Court said both partners had a fiduciary duty to inform the other of investment opportunities. Duty of foremost loyalty. Partners are held to stricter standards than the morals of marketplace; not honestly but punctillo of honor is the standard.
G.   Profit sharing