Business Associations
Dammann
Fall 2013
· Sole Proprietorship
o Federal income tax paid only once
o Unlimited personal liability.
· Partnership:
o Definition: “Two or more persons form an association to carry on a business as co-owners for a profit.”
§ Co-owners: This is not an employer-employee relationship; partners are equals.
o Liability: Joint and several liability.
§ Partners are each liable for up to 100% of any partnership debts, although they can get contribution from other partners when possible.
o Taxes:
§ Partnership is not a separate legal entity for tax purposes and doesn’t pay separate taxes.
§ Partnerships do have to file a separate tax return, which essentially just accounts for where the partnership’s money went to make sure all of the money it pays out to the partners is accounted for.
o Partnership law regimes: Covered by state law, vary from state to state.
§ Uniform Partnership Act of 1914 (UPA) or the Revised Uniform Partnership Act of 1997 (RUPA).
· RUPA mostly incorporated in Texas.
§ What’s the difference?
· Partnerships as a separate legal entity:
o UPA didn’t consider partnership as a separate legal entity.
o RUPA does consider partnerships as separate legal entities, but this has very few substantive consequences.
· Substantive differences? Usually the same outcomes under either RUPA or UPA, but rules are structured differently, etc.
· Limited partnership:
o Essentially a partnership with different kinds of partners:
o Liability:
§ General partners: Same as partners in normal partnership; must be at least one.
§ Limited partners:
· General rule/RUPA rule: Limited partners are not personally liable beyond what they agreed to invest into the business.
· However, in some states, including DE and TX, if limited partner participates in the running of the business like a general partner and third party deals with him, thinking he’s a general partner, the LP is liable for that debt.
o Taxes: Same as for partnership; tax return but not a separate entity for tax purposes.
o Formation: Can only be formed with a special permit, the “certificate of limited partnership” with the state’s secretary of state; merely saying “we are a limited partnership” forms a general partnership.
· Limited Liability Partnership:
o Liability: Depends on the state…
§ In some states, no liability for partners whatsoever.
§ In other states (including Texas), you can be liable if you…
· Participated in the action.
· Supervised the person who commits a tort (i.e. partner who supervises associate who commits malpractice)
· Should have known about and prevented a problem but failed to do it (surgeon allows obvious nonfunctional alcoholic colleague to perform open heart surgery and kill a patient).
o Tax: Same as the other forms of partnership.
o Formation: Same as limited partnership; statement of qualification is required.
· Corporation:
o Liability: Limited liability.
§ Only the corporation itself can be held liable.
§ Shareholders are generally not liable unless veil is pierced, which happens rarely and only in the case of small corporations.
o S-Corporation:
§ Taxed using “pass-through” taxation like a partnership.
§ Must have 100 or fewer shareholders.
· The vast majority of corporations in the US are S-Corporations.
o C-Corporation
§ Corporate profit are taxed separately: Corporation pays corporate tax and shareholders pay income taxes on their share of the profits.
§ Two exceptions to avoid stacking corporate tax rates costing a ton of money:
· Consolidated tax returns: Groups of corporations with at least 80% cross ownership can file only one tax return for the whole group.
· Dividends received deduction: Corporation that receives dividends from a wholly or partially owned subsidiary can deduct most of that money.
o Deduction is NOT for corporations that actually earn that money nor for the shareholders who ultimately get it, just for corporations who have money kicked up to them as dividends.
o Deduction amount:
· 0-20% cross ownership: 70% is deductible.
· 20% cross ownership: 80% is deductible.
· 80% cross ownership: 100% is deductible.
· Limited liability company:
o Includes limited liability protection of a corporation and tax advantages of a partnership.
§ How they work varies a lot from state to state and there isn’t a lot of case law on LLCs; this unpredictability is kind of risky.
§ IRS won’t let publically traded companies operate as partnerships or LLCs and avoid taxes; they’ll just tax you anyway.
Agency Law!
· The agency relationship:
o Agency law is governed by common law, but there’s a restatement, the Third Restatement of Agency, which is the law as far as we’re concerned.
o For a principal-agent relationship to exist, there must be:
§ (1) An agreement that…
§ (2) Agent shall act on principal’s behalf, and…
§ (3) Agent will be subject to principal’s control.
· Control in fact is not enough to satisfy this requirement (i.e. a manipulative girlfriend isn’t a principal)
· Also, arrangements where a debtor has to have creditor’s approval to do things are not agency relationships.
§ Formation can happen regardless of whether parties actually wanted to form agency relationship.
§ Termination: Either agent or principal can terminate agency relationship at any time, even if it breaches a contract.
o Principals:
§ Disclosed: The third party knows or should know (i.e. be on notice) that there is a principal and who the principal is.
§ Undisclosed: Third party has no reason to think there is any principal; as far as third party knows, he’s dealing/contracting with the principal.
§ Unidentified: Third party knows or should know that there is a principal, but doesn’t know who specifically it is.
· Contracts binding the principal: Two elements as to whether agent has power to bind.
o Did the agent act on behalf of the principal?
§ Disclosed principal situation: This is based on whether the third party reasonably believes that the agent acted on behalf of the principal.
§ Unidentified principal situation: This is based on whether the third party reasonably believes that the agent acted on behalf of the principal.
§ Undisclosed principal situation: We look at the intention of the agent. Third party doesn’t know, so his perspective doesn’t count for much.
o Did the agent have the power to bind the principal? Three ways agents can have the power to bind the principal…
§ Actual authority: Authority co
Unidentified principal:
· Agent is always liable, even if he actually had authority. Third party can’t go after the agent because he doesn’t know who he is.
· Tort Liability:
o Direct liability:
§ Principal is liable if he…
· Authorized the commission of the tort.
o Doesn’t have to be intentional; if principal authorizes negligent aspect of conduct, he’d be liable.
· Ratified the tortious conduct.
· Acts at least with simple negligence in selecting/supervising/controlling her agent.
o “You may have been convicted of murdering people by pushing fridges out of windows, but you’re a fellow UT alum so welcome aboard to the fridge moving company!”
· Had a duty of care to protect another person or another person’s property, delegated that duty to an agent, and the agent did not perform the relevant duty.
o Museum security guard falls asleep on the job and art is stolen, museum is liable.
o Vicarious Liability:
§ 2.04: Principals are liable for torts committed while acting in the scope of employment.
§ RST of Agency 7.07: “Employee acting within the scope of employment.”
· “An employee is an agent whose principal controls or has the right to control the manner and means of the agent’s performance of work.”
· Scope of employment
o When performing work assigned by the employer or engaging in a course of conduct subject to employer’s control.
§ A waitress spilling soup on someone accidentally is acting within the scope of her employment. So would a debt collector beating up someone to get money for his loan shark boss.
o Not within the scope when it occurs within an independent course of conduct not intended by the employees to serve a purpose of the employer.
§ A waitress, noticing an ex-boyfriend eating at the restaurant, purposefully spills soup on him is NOT acting in the scope of her employment but rather exacting personal revenge.
§ Arbelaez v. Just Brakes Corp.
· Worker goes to get breakfast for everyone and gets in an accident. Was it in the scope of the employment?
· Yes. Court observes that he was routinely asked to do it, reimbursed for the gas money used in this trip, and the trip benefitted all the JB employees.
§ Humble Oil v. Martin
· Humble held liable for employee’s tort because of catch all clause stating that he had to perform other duties that may be required of him.
§ Hoover v. Sun Oil
· Gas station sells Sun Products; can Sun be vicariously liable?
· No! Degree of control is determinative:
o No Humble type catch all clause, only recommendations.
Station could sell competing products, but bore risk of not selling enough.
