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

Business Enterprises
 
1)      Types of Enterprises
a)      Sole Proprietorship (DEFAULT for 1 person)
i)        Individually owned business in which legal status of owner = business
b)      Partnership (DEFAULT for 2+ ppl)
i)        For-profit business owned by 2+ persons as co-owners
ii)      Governance:
(1)   Common law: contract/agency (fiduciary
(2)   §: Uniform Partnership Act (UPA) is majority; Revised UPA (RUPA) is minority
c)      Limited Partnership
i)        General partner manages biz and 1+ limited partners contribute capital only
ii)      Governance
(1)   §: Uniform Limited Partnership Act (ULPA)
(2)   CL interpreting §, though no CL origins
d)      Limited Liability Company
i)        Most common for starting biz
ii)      Incorporated partnership that allows members to choose active/passive mgmt
iii)    Governance: §
e)      Limited Liability Partnership
i)        Form of incorporated partnership (popular w/ law firms)
ii)      Governance:
f)       Corporation
i)        Association of individuals, and business has separate legal status
ii)      Governance:
g)      also, Business Trust, where trustees manage the business and the beneficiaries share Π
i)        Good for investor-oriented products like RE; not valid in many states, including NC
 
Entity
Advantage
Disadvantage
Sole proprietor
·    Control of biz
·    Simple (flexible)
·    Cheaper administration
·    Taxes passed thru to owners
·    Unlimited liability
·    No mgmt/ownership control separation
·    Not easily transferable
Partnership
·    Control by agmt
·    Simple legal structure (flexible)
·    Cheaper admin (but winding up harder)
·    Taxes passed thru
·    Unlimited liability
·    Can’t transfer ownership interest
LP
·    Ltd liability for ltd partner
·    Ownership/control separate
·    Cost: structure freely by agmt, but state filing requirements
·    General partner unlimited liability
·    Ltd partner cant sell/transfer unless registered/exempt under fed securities
LLP
·    Liability ltd to investment
·    Taxed passed thru
·    Simplicity of expenses/structure
·    Partner subject to unlim lia for own acts; creditors of p’ship can seize p’ship interest
·    Not easily transferred
LLC
·    Liability ltd to investment
·    Separate ownership/control
·    Taxes passed thru
·    Low expenses (easy admin)
·    Accounting more complex than p’ship
·    Transfer restricted by operating agmt
 
Corp
·    Limited liability
·    Separate mgt & control
·    Transfer subject to securities laws
·    Perpetual life
·    Double tax
·    Expensive reporting/admin
·    Mgmt self interest
 
 
Agency Law
 
1)      Agency is a fiduciary relationship which results from principal (P) giving consent that agent (A) will act on its behalf and under P’s control, and agent consenting to so act
a)      Rooted in CL, not §
b)      Elements
i)        Manifestation of mutual consent that A will act on P’s behalf (both A and P agree)
(1)   Don’t need enforceable K OR actual consent
ii)      P controls A
c)      Result
i)        Fiduciary relationship between A and P
ii)      P bound by A’s acts when A acting w/in scope of authority
(1)   P also liable for expenses/payments made by A
iii)    A generally not liable for P’s obligations (see disclosure below)
iv)    3d parties bound to P when interacting w/ A (2 way street)
d)      Disclosure of P’s ID
i)        3d parties bound if P’s ID is partially disclosed, undisclosed
(1)   BUT 3P not bound when A misrepresents agency and 3P would not have dealt w/ P if he had known P’s ID
ii)      A liable too if P’s ID not disclosed
2)      What can create agency
a)      Independent contractors
b)      Partnership – partner is agent of partnership UPA §9
c)      Loan (not normally – question of fact)
i)        Liability limited to amt of loan
ii)      Gay Jenson Farms v. Cargill: Cargill loaned $ to Warren; farmers sued Cargill on basis of loan
(1)   Factors indicating agency are judged together
(a)    Control: day to day ops, right of first refusal
(b)   Benefit: whether A had any independence outside P
(c)    Loyalty to P
(d)   Representation – apparent authority, appearance to outside world (stationery)
d)      Franchise agreement (most don’t – question of fact)
i)        Butler v. McDonalds: even though franchise agmt said no agency relationship, court found franchisor’s actions could lead to apparent agency IF: RP to believe franchisee was agent; P actually believed so; P relied to his detriment
ii)      Avoid result in Butler by posting sign that franchise is indy owned/operated
3)      Fiduciary duties created by agency
a)      Duty of care (no negligence)
b)      Duty of Loyalty
i)        Act solely for benefit of P R2d §387
ii)      Conflict of interest: A may not deal w/ P as adverse party (other side of table) R2d §389
iii)    Unjust enrichment: give Π to P while working for P R2d §388
(1)   Except tips in restaurant
(2)   Don’t use confidential info to own benefit (insider trading)
(3)   Duty not to compete
(4)   Can’t appropriate opportunities belonging to principal
c)      Contracting around fiduties: can’t necessarily get rid of it entirely, but may be able to limit (non-compete K)
4)      Types of Authority (only P creates authority)
a)      P vicariously liable for A when A acting w/in scope of authority
b)      Actual: by K, title, job description, course of dealing R2d §26
i)        Express: specific authorization of agency
ii)      Implied: from express grant (title “cashier” can accept checks for bank; hire and fire)
iii)    R2d “inherent authority” is hybrid concept – title gives authority for certain functions
iv)    If A didn’t have actual authority, then A liable for P’s obligations he created
c)      Apparent: in absence of actual authority, exists when P gives 3P reason to think actual auth. exists
i)        Question of fact (Lee v. Jenkins)
ii)      3P can sue A on breach of warranty of authority or estoppel
d)      Apparent and actual are not mutually exclusive (may be both)
e)      Ratification: P approves of A’s unauthorized act after-the-fact (relates back)
5)      Vicarious liability
a)      P is vicariously liable for A
b)      Plaintiff must show the agent is acting within the scope of the agency R2d §219
6)      Termination of agency relationship
a)      A acting outside scope of relationship
b)      P can terminate at any time, even if breaching employment K (damages).
i)        Good b/c agency imposes unlimited liability
 
 
Partnership Law
 
1)      Definition = association of 2+ persons carrying on as co-owners of business for profit UPA §6
a)      Is default for 2+ persons doing biz
i)        Can be oral or written
ii)      Express or implied (not necessarily consensual)
iii)    Is an equity interest (not debt/lender)
iv)    Terminable at will
b)      **Partners ar

er partners §40f
ii)      New partner is liable for pre-existing debts of p’ship, but can only satisfy that liability out of specific partnership property.
b)      Partner is agent unless 3d party knows of lack of authority §9          
i)        Unless outside ordinary course of business: requires consent of rest of p’ship RUPA
ii)      Can limit by agmt, but must provide notice to 3d parties b/c of apparent authority
c)      Admissions: partner bound by admission of other partners, charged w/ knowledge on individual partners §11, §12
8)      Dissolving the Partnership
a)      Terminable at will unless agmt otherwise
b)      Dissolution: end of one form of the partnership §29
i)        P’ship not terminated upon dissolution; continues until winding up §30
(1)   Can be continuation agreement so that p’ship not terminated when dissolved
(a)    Unlike entities (LLP, Corp) which end
ii)      Reasons why dissolution §31
(1)   Without violation of agreement
(a)    Termination of definite term or undertaking specified in agreement
(b)   Express will when no definite term/particular undertaking
(c)    Expulsion of partner IAW power in agreement
(2)   In contravention of agreement…by express will of any partner at any time
(i)     Can breach, but partner can be liable for wrongful dissolution §38
(ii)   Breacher gets value of own interest (-) damages
(iii)Page v. Page: partner wanted to continue on w/o other partner. Court said p’ship was terminable at will, BUT if there is bad faith & violation of fiduty in attempting to appropriate prosperity of p’ship for own use w/o adequate compensation, then wrongful dissolution. Page1 didn’t breach agmt, but owed fiduties.
1.      fiduties come into play when majority owner eliminates minority!
(3)   When unlawful for biz to be carried on or for members to carry it on
(4)   Death of any partner
(5)   Bankruptcy of any partner
(6)   Decree of court in §32
(7)   Partner tries to sell interest
c)      Winding up & Termination: business continues while ops being terminated §30
d)      Dissociation: when partner exits but p’ship continues (revised act)
i)        Partner no longer has right to manage biz, no duty not to compete, duty of care/loyalty limited for matters occurring before dissociation
ii)      BUT may have lingering apparent authority even if no actual authority
iii)    BUT dissociated p can still be liable for transactions of p’ship for specified period of time
e)      THE WAY AROUND DISSOLUTION
i)        Draft a continuation agreement for events that would otherwise cause dissolution
(1)   Draft in damages for wrongful dissolution
ii)      Courts will imply agreement to continue partnership (i.e., death)
iii)    RUPA divides dissociation into either buyout of departing partner or winding up.