PROFESSOR HAZEN – BUSINESS ASSOCIATIONS – SPRING 2016
BUSINESS ENTERPRISES: ADVANTAGES/DISADVANTAGES
Proprietorships
Individually owned businesses that have no separate legal status apart from their owner (mom and pop grocery stores)
Advantages:
Control – owner controls and operates business
Simplicity – lack of separate legal structure, easy to operate, more flexible
Expenses – less expenses in operates, no expensive reporting
Taxes – not taxed separately
Disadvantages:
Unlimited liability – sole proprietor subject to unlimited liability
Management – dependent on management of owner
Transferability – cannot readily be sold, integral part of owner’s personal mgt
Does not mean you have to make a profit, just aspirational
Partnerships: **default of business associations***
An association of 2 or more persons carrying on a business for profit as co-owners
Advantages:
Control – owners can directly control p’ship and safeguard assets
Simplicity – partners can conduct their business in any way they wish (flexibility) but affairs of p’ship must be conducted in accordance with state partnership laws
Expenses – less expensive than a corporation
Taxes – not taxed separately,passed through to owners
Disadvantages:
Unlimited liability – partners subject to unlimited liability
**if corporation is defective – partnership is default & partners may be jointly and severally liable
Transferability – cannot sell his ownership interest in p’ship
Limited Partnerships:
One general partner that operates the business and one or more limited partners that contribute investment capital but do not participate in management
Advantages:
Limited Liability – liability of partners limited to amt of their investment, general partner subject to unlimited liability
Separation of control and ownership – ltd partners may invest capital in enterprise without becoming involved in mgt.
Expenses – business may be structured freely under p’ship agreement
Disadvantages:
Unlimited liability – general partner subject to unlimited liability
Transferability – partner cannot sell his ownership in partnership
Limited Liability Company (LLC)
Best of both worlds: limited liability and no double taxation
Basically an incorporated partnership that allows members to actively participate in mgt or to be passive if they wish
Advantages:
Limited liability – liability of members limited to amt of their investment
Separation of ownership and control – members may invest capital in enterprise without becoming involved in mgt
Expenses – simplicity in mgt available
Taxes – can be passed through to members, avoiding double taxes of corporations
Disadvantages:
Transferability – ownership interest may be transferred, but transfer may be restricted by terms of operating agreement
Limited Liability Partnerships (LLPs)
Another form of incorporated partnership.Particularly popular with law firms
Advantages:
Limited Liability – liability of members limited to amt of their investment.Partner is subject to unlimited liability for his own acts.Partnership protected from personal liability of other partners, but his own p’ship interest can be seized by creditors of p’ship
Expenses – LLP can structure their operation in any manner
Taxes- passed through to members,no double taxation
Disadvantages:
Transferability – ownership interest of LLP member not easily transferred
Corporations
Businesses that have a separate legal status apart from their owners
Advantages:
Limited Liability – the liability of investors in a corp is limited to the amt of their investment.Encourages risk taking that is necessary for society to advance
Separation of mgt and control – corp structure separates ownership and control
Transferability – stock holding in corp may be transferable.Sales may be subject to federal securities laws, might not always be a ready market for the stock
Perpetual life – unlike proprietorships or partnerships, corporation continues in existence until dissolved.Death of owner does not terminate life of corp
Disadvantages:
Double taxation – corp is separately taxes for any profits it may receive.Shareholders of corp are then taxed again if remaining income is distributed to them.**this can be avoided in small corps through subchapter S status that allows a pass-thru of profits directly to shareholders
Management – managers may manage their own interests, rather than seeking to maximize shareholder wealth
Expenses – corp is more expensive – must comply with expensive reporting and and registration requirements under federal securities laws
AGENCY LAW
Law of agency determines when one person can act and bind on behalf of anot
party’s perception)
Basis for authority can be found in EITHER or a COMBINATION
(Ex: titling someone “President” could fall under both)
Actual Authority
Express or implied, this is based on a manifestation of consent between principal and agent.Doesn’t have to be a binding K
Sources:contract, job title, job description, course of dealing
2 types of actual authority:
Express: clear, expressed in words, maybe in the employee or corporate handbook, etc
Implied: permission to travel to worksite – can be implied over a course of conduct
Apparent Authority
Can exist in absence of actual authority – where the principal gives a third party reason to believe that actual authority exists
An agent cannot create his own apparent authority
A lot of times officer title plus industry practice is enough to create apparent authority
Estoppel – reliance is good enough to get a judgment for estoppel
Ratification – where the principal approves the agent’s act after the fact, the principal is bound by the agent’s act (only get here if already determined didn’t have authority to begin with)
Relates back to the time of the agent’s unauthorized act
Ratification need not be express – the principal can act in a manner showing affirmation
***really doesn’t matter what type of authority person has -what matters is “did person have the authority to act?”***
VICARIOUS LIABILITY
When an agency relationship exists, principal is vicariously liable for acts of agent
Scope of Agency
To impose vicarious liability, principal must show agent was acting within scope of agency
Butler v McDonald’s Corp
Is a franchise relationship an agency relationship?
The franchise license agreement explicitly states no agency has been created,BUT a party cannot simply rely on statements in an agreement to establish or deny agency
***key element of an agency relationship is the right of the principal to control the work of the agent***
