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

Business Associations Capsulized Outline

Business Entities

1. Sole Proprietorship: mom and pop grocery store that can have employees
Advantages
– Control
– Simple
– Less Expensive
– Taxes
Disadvantages
– Unlimited Liability
– No separation between ownership and control
– Transferability

2. Partnership: business owned by two or more persons
Advantages
– Control
– Simplicity
– Lower Cost
– Taxes
– Flexibility
Disadvantages
– Unlimited Liability
– Non-transferable
– 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
– Dissolves when any partner dies, withdraws, or files for bankruptcy; when this happens, the only authority left in the partners as to the partnership business is to wind up and liquidate business

3. Corporation: association of individuals–separate legal entity, governed by statute (articles of incorporation must be filed with Secretary of State for the state in which entity is to be incorporated in, capable of doing business in its own name;) shareholders have no authority to conduct corporate business
Advantages
– Limited liability—shareholders liable to the extent of their investment
– Separate ownership and control
– Taxation—if corporation makes a profit and reinvests it, it pays tax instead of shareholders
– Ownership interest is freely transferable
– Professional, centralized management
– Perpetual life—continues regardless of ownership and management change
Disadvantages
– Double taxation
– Managerial self-interest
– Federal Securities laws

4. Limited Partnership: limited partners and one or more general partners
Advantages
– Limited liability for the limited partners
– Separates control and ownership
– Limited filing requirements
– Federal Securities laws
– Unlimited liability for the general partner
Disadvantages
– General partner subject to unlimited liability
– Limited partner cannot sell or transfer interest

5. Limited Liability Company (LLC): corporate entity that may be run as a partnership, with “pass through” tax treatment.
Advantages
– Limited liability
– Separation of ownership and control
– Taxation may be passed through to members, avoiding double taxation
Disadvantages
– Interest may be transferred but subject to terms of operating agreement

6. Limited Liability Partnership (LLP):
Advantages
– Limited liability
– Taxation may be passed through to members, avoiding double taxation
Disadvantages
– Partner may be subject to unlimited liability for his own acts
– Ownership interest not easily transferred

7. Joint Stock Company
– A corporation with unlimited liability

8. Partnership Association
– Supplanted by LLC

Agency

o Agency is fiduciary relationship that results from manifestation of consent by one person to another that the other shall act on his behalf and subject his control, and consent by the other to so act.
§ Principal is liable for the acts of the agents, as long as they are within the scope the agency relationship
§ Employers of any of the business entities mentioned earlier will be agents
§ Acts of an agent bind the principal

Types of agent authority:
1. Actual
2. Apparent

Actual authority:
o If the principal’s words would lead a reasonable person to believe that he had authorized the agent to act.

Express: principal tells the agent exactly what to do

control over Warren
Cargill dealt in the day to day operation of Warren; Cargill had right to micromanage Warren’s business

AGENT ACTIVITY FOR BEENFIT OF PRINCIPAL:

Warren acted on behalf of Cargill; loan was for benefit of Cargill as 80-90% of Warren’s business was with Cargill; holding out—farmers were not misled—Cargill allowed Warren to look like it was acting on Cargill’s behalf (sort of like apparent authority)—i.e. stationary, order forms, etc.

HOLDING OUT:

Cargill allowed Warren to use its name (business forms, etc). Perhaps is Warren had not used Cargill forms, there is a better chance that Cargill would have gotten off.

Agency duties:
– A must act solely for the P
– Must give all profits to the P, except for tips in a restaurant
– Must have confidentiality of information–cannot disclose secret formula
– A treat P as adverse party

Agency–General Rules about Apparent Authority
– President has authority to do ordinary things
– Vice-presidents generally do not have such authority
– Chairman of the board could either be nominal or very powerful
– Corp. Secretary can fix the seal; no authority to transact business or sign deeds
– Corp. Treasurer has no apparent authority