I. Introduction
a. 2 different forms of business associations:
i. unincorporated
1. sole proprietorship
2. partnership
a. general partnership
b. limited partnership (LP)
c. limited liability partnership (LLP)
d. limited liability limited partnership (LLLP)
3. limited liability company (LLC)
ii. incorporated
1. closely-held corporation (CHC)
2. publicly-held corporation (PHC)
b. always want to be thinking in terms of risk
i. risk assumed in entering a certain type of business association
ii. risk assumed in doing business with a certain type of business association
iii. risk assumed in lending money to a certain type of business association
Partnerships
II. Formation
a. general partnership
i. § 6(1): association of 2 or more persons to carry on as co-owners a business for profit
1. intent to form partnership is not necessary à can form inadvertent partnership
2. “person” defined by § 2: includes individuals, partnerships, corporations, and other associations
3. “carry on”: for the most part, a partnership involves an ongoing venture
a. joint venture: partnership formed to accomplish a particular undertaking
b. with joint venture, there has to be an explicit agreement on how losses are going to be shared
4. partnership turns on whether individuals are co-owners
a. right to control business affairs
b. § 7(4): profit-sharing is prima facie evidence that individual is a partner
c. can look to business name and tax records for additional evidence
ii. liability of partners
1. § 15: nature of partner’s liability
a. (a) partners have joint and several liability for everything that arises under §§ 13-14
i. practically, this applies to torts committed in the course of business
ii. joint & several liability: can sue any one or some of the partners for the full amount of the obligation
1. will almost always go after the richest partner
2. do not have to go after the partnership first
iii. § 13: partnership liable if partner was acting in the ordinary course of business or with the authority of partnership
iv. § 14: partnership bound to make good a loss if money or property of third person is misapplied in ordinary course of business
b. (b) joint liability for all other debts and obligations
i. practically, this applies to Ks made in the course of business
ii. joint liability: Π must join all partners as ∆s
c. rationale for greater liability in tort than K: in theory, a third party has the ability to protect itself in advance with a K
d. cannot K around this provision
i. it is intended to protect third parties, not the partners
ii. should form an LLC or LLP if you want to limit liability
2. liability under RUPA §§ 306-307
a. § 306(a): partners in a general partnership are jointly and severally liable on all partnership obligations, whether they arise in K or tort
b. § 307(d): unless a partner is personally liable, a third party is required to first exhaust partnership resources before going after any of the partners individually (TX statute mirrors this)
3. liability of incoming partner
a. § 17: partner admitted after the obligation is incurred is liable for that obligation, but it can only be satisfied out of partnership resources
b. RUPA § 306(b): incoming partner not personally liable for any obligation incurred before being admitted as a partner
iii. profits and losses
1. § 18(a): if no agreement, split profits 50/50
a. profit sharing under default rule is not determined by capital contributions
b. losses
i. general partnership: losses will be split in same proportion as profits (50/50 default)
ii. joint venture: must have an explicit agreement on how losses will be shared
2. capital vs. services
a. § 18(a): unless otherwise agreed, each partner shall be repaid his contributions in proportion to the share in the profits
b. § 18(f): no partner is entitled to remuneration for acting in partnership business, unless otherwise provided for in agreement
c. Richert: partner who invests hard capital entitled to recover capital, but partner who invests services cannot recover for services
i. rationale: difficult to calculate value of services
ii. can be counter-intuitive because it seems unfair to partner who contributes services
d. arguments for repayment of services
i. others, not a general partnership, but a sole proprietorship
ii. services provided have value
1. Kovacik v. Reed: services and capital of equal value
2. § 18(a) & (f) could not have possibly been meant to burden service provider with half the contribution
b. limited liability partnership (LLP)
i. formation
1. filing requirement: must file with the Secretary of State and pay fee
2. notice requirement: must indicate nature of partnership in name
3. insurance: some states have insurance requirements
a. protects third parties
b. TX: $100K policy requirement
ii. liability
1. limited liability for all partners
a. general partnership without vicarious liability for torts of others
b. exception: individual still responsible for torts committed by himself, committed under his supervision, or committed with his knowledge
c. liability shields
i. narrow shields: protect partners from tort liability, but not K liability
ii. broad shields: protect partners from tort and K liability (TX)
2. RUPA §§ 306-307
a. exactly like a general partnership, with the exceptio
is incurred is liable for obligation, but only satisfied out of partnership resources
III. Management
a. business organizations can only act through agents because they are not people
i. monitoring costs: costs that the principal incurs in having to monitor the agent because agent might screw up or put his own interests above the principal’s
ii. bonding costs: cost of bond/insurance purchased by the agent to put the principal’s mind at ease
b. Actual vs. Apparent Authority
i. actual authority and apparent authority derived from § 9(1): every partner is an agent for the partnership for the purpose of conducting business and the act of every partner for apparently carrying on in the usual way of the business binds the partnership
1. exceptions under § 9(1):
a. partner so acting has no authority to act for the partnership in the particular matter, and;
b. person with whom he is dealing has knowledge of the fact that he has no such authority
2. statement of partnership authority
a. RUPA § 303(a)(2) (no analog in the UPA): allows the partnership to confer or limit authority of any partner in an official way by filing with the Secretary of State
b. (d): statement is effective against a third party if it limits the ability of the partner only in the conveyance of real property and if a copy of the statement is on record with the county recording office where the property is located
i. statement considered constructive notice because third party will presumably look to records for information on liens, etc. during the course of a transaction involving that property
ii. same limitation does not apply to other forms of transactions because it is not presumed that a third party would look to a public record for any other transaction
ii. actual authority: principal’s manifestations to the agent
1. actual authority of agent can be created by words or conduct of principal
a. may be express or implied
b. silence can impute authority
2. if there is actual authority, it does not matter what the third party thought
3. § 18(h): when limiting the actual authority of an agent in a matter of ordinary business, it must be decided by a majority of the partners
a. § 18(e): all partners have equal rights in the management and conduct of the partnership business
b. Nabisco v. Stroud:if there are only two partners, one partner cannot constitute a majority and strip the other of his authority to conduct the business of the partnership
iii. apparent authority: based on reasonable belief of the third party as to agent’s authority
1. principal did something to create the appearance of the agent’s authority in the mind of the third party
equitable doctrine designed to protect the reasonable
