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Business Associations/Corporations
University of South Carolina School of Law
Burkhard, James R.

BUSINESS CORPORATIONS
BURKHARD—SPRING 2002
 
 
CH.1: INTRODUCTION
 
The Role of Agency Law in Business Associations
Ø       Restatement 3rd of Agency: P.4
 
Ø       Agency: fiduciary relationship that arises when the principal manifests consent to an agent that the agent acts on his behalf, subject to principal’s control, and the agent consents so to act.
Ø       Labels aren’t important, only the elements of this definition
Ø       Consent is manifested through the written word, the spoken word, or other conduct if person has notice that he can infer consent from the words or conduct.
Ø       Agent’s Fid Duties: P.1192-93 // Principal’s Fid Duties: P.1193 bott
 
Ø       Servant/Employee: A servant is just like an agent except the master/principal has the right of physical control over a servant. (SC cases say that a master-servant relationship can exist in other scenarios besides physical control.)
Ø       For principal to be liable in tort, tortfeasor must be a servant.
Ø       For Principal’s contract liability, tortfeasor must be an agent.
 
Ø       Independent Contractor: person who contracts with another to do something for him but who is not controlled by the other. (may or may not be an agent) (Ex: attorney)
Ø       How to tell agent or IC? Look at the degree and character of the control exercised over the work being done by the IC (and look at the factors in FN #20 P.1195)
 
Ø       Authority: (look to whether the A has one of these and can bind the P)
Ø       Actual Authority: there’s a manifestation to an agent that the agent has the power to deal with others as a representative of the principal (direct communication—P told A to do it) (PàA)
Ø       Incidental authority: no direct communication, but A can reasonably determine from some conduct or statements. (ex: “you’re the manager”—its implied that you can go buy supplies) (P – – ->A)
 
Ø       Apparent Authority: arises from the manifestation of a principal to a 3rd party (directly or indirectly) that another person is authorized to act as an agent for the principal. (this binds the principal to the 3rd party) (an agent cannot create this by himself)
Ø       Inherent Authority: arises from the agency itself and without regard to actual or apparent authority
 
Ø       Terminating authority: P.7 top
 
Ø       Disclosed Principal: 3rd party knows the identity of the P at the time the transaction is entered into
Ø       Partially Disclosed P: identity is unknown but the 3rd party is on notice that the agent is acting on behalf of some principal.
Ø       Undisclosed P: 3rd party is not aware that the agent is acting on behalf of anyone, when in fact he is. Here the agent is personally liable to the 3rd party b/c he thought he was dealing directly and solely with the agent as the real party in interest. Principal may be liable if agent was acting within scope of actual authority.
 
HYPO: AB Furniture Store (A is the money man, B is the day-to-day operations man, A wants a veto power, they split profits after B takes a $3000 salary)
Ø       This is not agency—right to control is missing (A’s veto power is not enough)
Ø       This is a Partnership—it meets requirements of §6,7 UPA (association, voluntary, profit sharing)
Ø       Since they are partners, they are agents of the partnership
Ø       SC Partnership statute says that they’re J&S liable (you don’t have to sue both, but you can sue either)—if you’re a partner, you’re liable. (15b says jointly liable—this was a problem b/c you had to join all partners and you could have service of process problems—SC fixed it.)
Ø       What if business fails and there’s a debt? Both are personally liable–§15b
 
Introduction to Business Forms
1.       Sole Proprietorship: business owned by a single person
Ø       Good: simple
Ø       Bad: all liability is on you—no legal separation between business and you
2.       General Partnership: default form for businesses owned by more than one person
Ø       Good: tax treatment
Ø       Bad: liability, easily dissolved by any P expressing his will to do so
3.       Limited Liability Partnership (LLP): general partnership that has filed with Sec of State annually—you get some limitations on liability (no personal liability on obligations that exceed assets—in SC there’s immunity only to tort claims)
4.       Limited Partnership: general partnership that has filed with Sec of State. Has some limited partners (protected) and some general partners (exposed). You become a GP, and thus become liable, if you “take part in control of the business.” If an LP takes control of the business, he is liable only to those 3rd parties who transacted with the partnership reasonably believing due to conduct, that the LP was a GP. But, nobody’s liable if there is a corporate general partner (here, individuals are LP’s and officers, directors, or shareholders of the corporate general partnership)
5.       Limited Liability Limited Partnership: an LP with GP’s and LP’s, but all the GP’s are protected (we don’t have these in SC)
6.       Limited Liability Companies (LLC’s): partnership where P’s enjoy limited liability—so its like a corporation except that that it has the tax treatment of a partnership. (limited liability of a Corp and tax treatment of a partnership)
7.       Corporation: all investors and participants have limited liability but there’s tax disadvantages and procedural requirements that make it costly.
 
CH.2: The Partnership
 
The Need for a Written Agreement
Ø       There is no requirement for a written agreement (you satisfy §6 and §7 and you’re a partnership, like it or not)
Ø       Advantages to a written agreement:
Ø       You can write around the statute
Ø       Prevents future disagreements
Ø       Focus attention on trouble spots that don’t come up in a handshake deal
Ø       What happens in death or retirement of a partner
Ø       Allocate tax burdens amongst partners
Ø       Necessary when real estate is involved (statute of frauds)
 
Sharing of Profits and Losses
Ø       Absent an agreement, profits and losses are shared equally (§18a)
Ø       You can change this with the agreement—you always share losses along the lines of the profit ratio.
Ø       It matters not how much each put into the business (unless you agree otherwise).
Ø       Various ways to divide profits: P.31-32
Ø       Loss Sharing: Agreements as to liability are enforceable under §18 (ex: “A is not liable over $100,000”)
Ø       Partners are personally liable for obligations of the partnership but…
Ø       Indemnification: If one partner is sued, §18b and §40d govern the process of indemnification
Ø       §18b: partnership must indemnify as long as the liability occurred during the “ordinary and proper conduct of the business” or “for the preservation of the business property”
Ø       §40d: all partners contribute—if any of the P’s is insolvent, not subject to the process, or refuse to contribute, the other partners pay their share and the freerider’s share, in proportion to how they take profits.
 
Ø       Contribution: Partner may have to pay this upon dissolution to cover his share of the losses. Upon dissolution, each partner’s capital account (this is what each one put in and what he can “draw” from—its increased by profits and earnings and decreased by losses and distributions to the partner) is reduced to zero. This means its either paid out to the partner, or he has to contribute to make it zero.
 
Law Firm Partnerships
 
Bane v. Ferguson (P.54)
Ø       Law firm dissolves and retirement plan terminates. Retiree sues.
Ø       P is out of luck–§9(3)(c) gives no remedy, no contract claim, and there is no fiduciary duty to him! (contrast Meinhard)
 
Limited Liability Partnerships (LLP’s)
Ø       S.C. Code Ann. §33-41-370 (1994)
Ø       No liability for negligence, wrongful acts, or misconduct (Partial Shield, as opposed to a full shield which also protects against K claims)
Ø       Exception: individuals may become liable due to their own conduct/negligence or the negligence of someone under your direct control (you’re only really protected from your partner’s negligence)
Ø       Excep

do not have a right to assign it.
Ø       Subject to agreement
Ø       Upon death of one partner, property goes to remaining partners
Ø       While partnership creditors can proceed against individual property, individual creditors cannot proceed against partnership property.
 
§26: Nature of Partner’s Interest in the Partnership
Ø       They have a right to profits and surplus; its treated as personal property (so if someone inherits all the partner’s personal property, their partnership property is included—even if the partnership property was real estate its not counted as real estate!)
 
Charging Order: (§28) Court order that says an individual partner’s creditor can satisfy its claim from the partner’s interest in the partnership. Creditors need only apply to a competant court. (see P.87 for what one of these things does)
Ø       §28(2) says there is a right to redeem “before foreclosure.”
 
Rights of Assignee or Transferee of a Partnership Interest: (§27)
Ø       she is not a partner (18g)
Ø       she cannot participate in management or administration
Ø       she can’t require info as to transactions nor inspect the books
Ø       she can only receive profits that the assignor partner would’ve gotten
Ø       she cannot order dissolution
Ø       she is not liable
 
Rights of Assignor Partner
Ø       He retains all rights of a partner except interest in the distribution
 
Partnership Accounting
Ø       See P.89 charts and figures
 
Partnership Dissolution
Ø       Dissolution: (§29) a change in the legal relationship “caused by any partner ceasing to be associated in the carrying on of the business.” (occurs when a partner dies or leaves the partnership—In SC, partnership is dissolved with the addition of another person)
Ø       §31 gives you the Causes of Dissolution
Ø       §32 gives you Dissolution by Decree of Court
Ø       Following the dissolution is “winding up” (§30) which leads to “termination.” Dissolution does not mean termination, its just the first step. Partnership agreements usually give the procedure for the business to continue following dissolution—the remaining partners continue the business and the withdrawing partner is paid off in cash. The whole thing is dissolved and reformed every time there is a change in legal relationship among partners. However, if there’s no agreement, withdrawing partner can order a winding up (§38(1)). Winding up is the process of collecting claims, satisfying liabilities, and reducing assets to cash for final distribution.
(Dissolution à Winding Up à Termination)
 
Collins v. Lewis (P.96)
Ø       Cafeteria—one P is the money man and the other P is the manager. They go way over budget and it costs $600,000 additionally to open the doors. 
Ø       RULE: Legal rights to dissolution rest in equity. A court of equity will not assist the partner breaking his K to procure a dissolution of the partnership, because, upon familiar principles, a partner who has not fully and fairly performed the partnership agreement on his part has no standing in a court of equity to enforce any rights under the agreement.
Ø       Here, the partnership agreement made it a partnership for a term—so getting out early is a breach of K.
Ø       How does this case come out under UPA?