Agency, Partnerships, and LLCs
General Rule: LLC principles are based on general partnership principles, and the rules for both are often identical because there is not a lot of law dealing specifically with LLCs as a business form.
A. Agents, Servants, and Independent Contractors
Agency—A fiduciary relation that results from the
1) manifestation of consent by one person that
2) the other shall act on his behalf
3) and subject to his control,
4) and manifestation by the other person to so act. (Restatement §1)
key: Anytime the factors of an agency are present, there is a principal/agent relationship, regardless of the terminology or other language used by the parties.
Agent—The person who acts. You always have to ask for whom the agent is acting.
Principal—The person for whom an agent acts.
Servant—An agent whose physical conduct in the performance is controlled or subject to the control of the master. Note that all servants are agents, but that not all agents are servants—agent is a broader term.
Master—The person for whom a servant acts.
note: Servant = Employee
Master = Employer
Independent Contractor—A person who contracts with another to do something for him but who is not controlled by the other or subject to the other’s right of control with respect to his physical conducts in the performance of the undertaking. (not defined in Restatement 3rd)
key: An independent contractor may or may not be an agent. They are never servants and are therefore not subject to worker’s comp. statutes.
note: Lawyers in outside law firms are independent contractors who are also agents, but an in-house counsel is usually a servant and therefore not an independent contractor.
Why does the label matter?
1) Contract—When trying to enforce a contract against someone other than the one who made it, we are trying to find a principal/agent relationship.
2) Tort—When trying to hold another liable for physical torts committed by someone else, we are trying to find a master/servant relationship.
note: Whether a principal/agent or master/servant relationship exists is a question of fact.
B. Statutory Modification of the Common Law Definitions
Rule: Statutes can modify the common law of agency. For example, the statutes on p. 1-4 to -6 modify the common law of who can be liable for failure to pay employee wages, particularly by making corporate agents and officers “employers” so that they are can be personally liable if they “knowingly permit their corporation” to fail to pay wages.
Note: This statute is limited because it only includes “knowingly” but it is remarkable because it imposes a pretty stiff personal liability burden on mere corporate agents.
C. Who is an Agent?
General Rule: Aperson is an agent if the general elements of an agency relationship are established, specifically:
1) The principal manifests consent that the agent
2) will act on his behalf
3) and subject to his control
4) and the agent manifests consent to so act on behalf of the principal.
Johnson v. Arbabi—Defendants who are husband and wife bought a condo, but the former owners failed to pay the property taxes. Subsequent to the purchase, the defendants separated. The husband directed any mail relating to the property to be sent to his former address, where his wife resided. She normally gave the mail to her husband, but failed in this case to give the notice of delinquency to the husband. The court held that by directing mail to his wife’s house and failing to change it was sufficient to establish an agency relationship. Thus, the husband was bound by the notice received by his agent (the wife).
key: A husband and wife are not automatically agents of each other—you must look at the elements in each specific case. Here, the court said wife was an agent, and implicit in that was that she was authorized to accept mail for the husband.
Rule: Aperson need only the capacity necessary to create a contract in order to appoint an agent.
Defining the Partnership and the Limited Liability Company
A. What is a Partnership?
General Rule: A partnership is an association of two or more persons to carry on as co-owners of a business for profit. § 33-41-310.
Note: SC courts have said that the determination of whether something is or is not a partnership is a question of fact, but presumably there could be cases where that is almost a question of law.
1) An association of two or more persons
2) To carry on as co-owners of a business
i. Right of control (required as part of co-owner)
ii. Ownership interest (required as part of co-owner)
iii. Contribution is not required, and thus there is no consideration requirement.
3) For profit.
Note: There is no requirement of a writing; there does not have to be a document. Partnerships, once formed, are automatically subject to the statutes governing partnerships.
· Sharing profits is prima facie evidence that a partnership is created unless the sharing of profits is merely in satisfaction of a debt or as payment of wages. §220
· Failure to decide how to share profits is irrelevant—the default rule is that losses follow profits.
· Co-tenancies and joint tenancies do not alone establish the existence of a partnership. §220
Assignees—An assignee is not a partner and the assignee is not allowed to interfere in the management of the partnership, or to inspect the books or receive other information. The assignment only entitles the assignee under the assignment contract to receive the profits the assigning partner would otherwise receive. § 33-41-740.
note: A simple assignment does not dissolve the partnership.
Control and Management—Default rule is that all partners have equal rights in the management and conduct of the partnership business, and there must be a majority of partners to decide matters on behalf of the partnership. § 33-41-510.
note: This can be changed by agreement. However, no act may be done in contravention of the partnership agreement without the consent of all the partners. § 33-41-510..
Profits—The default rule is that partners share in profits equally. This can naturally be changed in the partnership agreement.
Sharing Losses—Default rule is that losses follow profits. The default rule on sharing profits is that they be divided equally among the partners, so in the absence of agreement the losses will be shared equally.
Joint Adventure Distinguished—A joint adventure is not a partnership. These usually turn up in the form of a car wreck where the people in the car are engaged in a common enterprise. This is also different from joint venture, which is a partnership that is merely limited in its scope to a single or defined undertaking.
Gangl v. Gangl— Four brothers running family farm. The court held that there was not a partnership because one member of the family had all of the control—nobody else had any control in the purported partnership. Thus, the family farm could not be a partnership.
Rule: There can be no partnership where a party lacks control in the partnership. The key is that the partners can delegate control to another partner, but there must be some kind of delegation. When control is not handed over (when things just are the way they are), there can be no partnership.
Grissum v. Reesman—The court held the family farm was a partnership because the brother and sister each had control, even though the brother ran everything and the sister just helped out. The brother consulted the sister on partnership affairs, she wrote checks and did other work, etc. They had started putting everything in joint names before brother died in order to save in estate taxes.
Beck v. Clarkson—First question – did these folks have a partnership? There was letterhead, they jointly worked to find property, they were holding out to 3rd parties that they were partners, and then Clarkson decided she would rather work with her family in this venture, so she takes a hike and takes the venture. The court held there was sufficient evidence of an inadvertent partnership because:
1) The parties agreed to share profits or losses,
2) The partner referred to the business as “his”
Rule: A partnership can be implied (it does not have to be express) and does not have to be reduced to a writing. Also, the parties don’t have to intend to form a partnership. Just have to meet statutory definition.
Partnership At Will—A partner can quit at any time and it is not an act of wrongful dissolution.
Term Partnership—A partner quitting can lead
e Uniform Partnership Act. §33-44-1205
C. The LLC Form
Note: The LLC articles of organization does not require the “organizer,” the person who fills out the form, to list the members of the LLC. This is a good way to organize a business entity without disclosing its owners.
Key: The form requires the organizers to make two critical decisions:
1) Whether the LLC will be at-will or for a term—This is important for determining when people get to quit and when they get what they are owed. Term LLCs are more stable, but the problem is that you want to be able to get out when there is bad blood among the members.
2) Whether the LLC will be member-managed for manager-managed—To make sure your kids get an interest, you want the LLC to be member-managed, but it may be better for tax and economic reasons to have it manager-managed.
Note: You do not have to be a lawyer to organize an LLC for someone else.
Optional Provisions: There is a section in the articles of organization for optional provisions. There is one provision that if you don’t put in, it is malpractice per se [come back to this].
Partnership by Estoppel
A. The Statute
General Rules: Under certain circumstances, even if you are not a partnership per §210, you may be treated as a partnership in spite of that, and this may make you personally liable for obligations of the business, or if you do something, it may make the business personally liable for your behavior. §380 sets for the circumstances where a court will find a partnership by estoppel. Part (1) applies to direct representations to someone, part (2) applies to a public holding out to the world. In part (1), we hold the person being represented liable, in part (2), we hold the persons holding out as being liable for the activities of the person they held out.
Section 380(1): Liability of Apparent Partner – Person being represented gets stuck with liability
1) If a person holds himself out to be, or consents to another person holding him out to be, a partner, the person is liable to any person to whom that communication is made directly if the third party extended credit in reliance on that representation. [liability of apparent partner for direct communications]
2) If a person holds himself out to be, or consents to another person holding him out to be, a partner, the person is liable to any third party—regardless of whether the communication is made directly—who extends credit in reliance on the representation. [liability of apparent partner for public holding out]
a. When a partnership liability results, the apparent partner is liable as though he were a partner.
b. When no partnership liability results, the apparent partner is liable jointly, if any, to the other persons consenting to the holding out.
Section 380(2): Liability of Partnership for Acts of Apparent Partner – the party who is doing the representing gets stuck with the liabiltiy
3) When a person is represented as being a partner in an actual partnership, he is an agent of whoever consents to that representation to the same extent as though he were an actual partner with respect to persons who rely on the representation.
a. When all the members of an existing partnership consent, then a partnership obligation results.
b. When only some of the members consent, it is only the joint act or obligation of those partners.
Issue: What parties are entitled to take advantage of the statute?