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Business Associations/Corporations
University of Toledo School of Law
Barrett, John Q.

Business Associations– Professor Barrett

Introduction
I Choice of Business Form
A Determines the ____ of “owners” à
1 legal relationship
2 financial rights
3 responsibility for business’s debts/obligations
4 tax liability

II Statutes
A Uniform Partnership Act (1914) = UPA
B Revised Uniform Partnership Act (1997) = RUPA
C Revised Uniform Limited Partnership Act (1976) = RULPA
D Uniform Limited Liability Company Act (1996) = ULLCA
E Model Business Corporation Act (*amended – 2002) = MBCA*
F Model Business Corporation Act (1969) = MBCA

III Agency – R.3d of Agency Law
A Definition of Agency–§ 1.01
1 Definition
i The fiduciary relationship that arises when one person (“principal”) manifests assent to another person (“agent”) that the agent shall act on the principal’s behalf and subject to the principal’s control AND the agent manifests assent or otherwise consents to so act
2 Overview of Agency
i Agency Formation:
a created by mutual consent of both principal + agent
(i) words or conduct can form agency
b can be terminated at any time by either party
(i) Exception:
1. if agency is coupled w/ an interest
c creates a fiduciary relationship
(i) each party has to duties to each other
(ii) Agents must act w/in parameters/scope of their duties
ii Capacity to form Agency:
a Infirmities of Principal carry through but à infirmities of Agent do NOT
(i) *agents can lack capacity but à principals can NOT
1. Ex.
a. If I appoint a 10 yr. old as agent & we sign a K = I am bound
b. If 10 yr. old appoints me as agent & we sign K = Avoidable K at the decision of 10 yr. old
B Manifestation – § 1.03
1 A person manifests assent or intention through writing/spoken words/or other conduct
i *NO consideration OR writing needed to form agency
C Terminology – § 1.04
1 Definitions
i Co-Agents =
a Two or more different people acting as agents for the same principal
ii Dual-Agents =
a One agent representing more than one principal
(i) *agent acts on behalf of several principals
iii Sub-Agents =
a Agent acting on the behalf of another agent
(i) *may be appointed by the principal OR by agent by “actually/apparent authority” authorized by the principal
(ii) can be expressly OR impliedly authorized
(iii) Agents duties may be ministerial (routine/no description)
(iv) OK if customary to business AND necessary OR incidental to completing the job task
(v) Sub-Agent can be held liable to principal
iv Disclosed Principal =
a Agent & 3rd party interact à the 3rd party has notice that the Agent is acting for a Principal + notice of the Principal’s identity
v Undisclosed Principal =
a Agent & 3rd party interacts à 3rd party has NO notice that Agent is acting for a Principal
vi Unidentified Principal =
a Agent & 3rd party interacts à 3rd party has notice that Agent is acting for a Principal but NO notice of the Principal’s identity
2 Notice:
i A person has notice of a fact ifà
a knows
OR
b has reason to know
OR
c has received an effective notice
OR
d should have known the to fulfill a duty owed to another
ii Notice to an agent is imputed to the principal à principal will be charged w/ the knowledge of his agent (if acting in an official capacity)
a Exceptions:
(i) Information gained by Agent from a confidential source OR under privilege
1. Ex: attorney-client privilege
AND
(ii) If the Agent is acting adversely to the interests of principal
3 Person:
i A person isà
a individual
b organization OR association
c Gov’t/Political Subdivision/any instrumentality or entity created by Gov’t
d any other entity (w/ legal capacity to posses rights to incur obligations)
D Actual Authority – § 2.01
1 Definition:
i Those acts for which the Agent ® believes to be both in accordance w/ the Principal’s manifestations to the Agent AND in furtherance of Principal’s desires/goals
2 Two Types of Actual Authority
i Express:
a Statements actually made by Principal à to Agent
ii Implied:
a Acts which the Agent ® believes he has the power to do AND® believes are w/in the scope of his authority from Principal
(i) Ex: Agent told to sell car (express) and he puts ad in the paper (implied)
3 Effect of:
i If act was w/in scope of Agent’s authority (either express OR implied) àPrincipal is bound by Agent’s act
ii If Agent represents that he is acting on behalf of principal, he makes à
a an “implied warranty of authority”
AND
b will be liable for “breach of the warranty” to 3rd party if did NOT have authority
(i) *Principal would also be liable to 3rd party under “apparent authority” but can sue Agent for “breach of fiduciary duties”
4 Scope of Actual Authority – § 2.02
i Rule:
a Agent has “actual authority” to act w/in the scope of the Principal’s express/implied manifestations which are necessary ORincidental to achieving the Principal’s objectives àas the agent ® understands them @ time of act
(i) Agent’s interpretation of the Principal’s manifestations is ® ifà
1. it reflects any meaning known by the agent to be ascribed by the principal
AND
2. a ® person in the Agent’s position would interpret these manifestations in the same manner under the same circumstances & w/ same knowledge
(ii) Agent’s understanding of the Principal’s objectives is ® ifà
1. it accords w/ the principal’s manifestations & the inferences that a ® person would draw from the circumstances creating the agency
E Apparent Authority – § 2.03
1 Definition:
i Authority held by Agent to bind Principal to obligations w/ 3rd parties if à
a 3rd party has a ® belief that Agent has authority to act on behalf of the Principal AND belief is traceable to the Principal’s manifestations/conduct
2 Creation of Apparent Authority
i Agent can NOT create “apparent authority” in himself
a *Principal has to have given 3rd party a ® basis for such belief à can NOT be purely Agent’s acts
ii Key conceptà
a ® belief of 3rd party
AND
b must be traceable to principal’s actions or words
(i) Exception:
1. If president of company OR partner of partnership allow a person (“agent”) to talk of such authority in presence of a 3rd party à this can create ® belief in + “apparent authority” (used to be called “inherent authority”)
iii Two Circumstances where Principal will be Bound:
a Principal’s statementà
(i) Ex:
1. Bill Gates contacts supplier and states that he will be sending a man named John Barrett. A man named Barrett goes down to supplier, fits the description, and the supplier gives him the product. Barrett does NOT have “actual authority,” but principal will be bound under the law of apparent authority.
b Course of Conductà
(i) Ex:
1. Former assistant is fired and no longer has “actual authority” but people dealing w/ him in past still have ® belief that there is an agency relationship unless à Principal

arent authority”
(i) “apparent authority” ends when it is NO longer ® for the 3rd party w/ whom the agent deals to believe that the Agent continues to act w/ “actual authority”

IV Business Forms
A Sole Proprietorship
1 Business owned by a single individual
i *personal liability for ALL business obligations
ii *NO separation between owner and business
iii *taxed and files as one entity
iv *NO perpetual existence
B General PartnershipàG.P.
1 Two or more persons engaged together in business for purposes of making profit
i *do NOT have to be natural persons
a Ex: © partner
2 All partners share equally in profits, losses, control, and management (default rule)
i *unlimited liability for the conduct of all other partners in partnership (contract & tort)
3 All partners are “agents” of partnership
i *can act for / bind the partnership
4 Only entity that requires NO filing w/ State
i *no need to file paperwork or gain certification
ii *partnership agreement can be express or implied/written or oral
5 Default entity for all business associations
i *if no filing w/ state + two or more persons = G.P.

Structure of General Partnership

GP1 GP2 GP3

Partnership

C Limited PartnershipàL.P.
1 Natural person as GP + Natural person[s] as LP
i Must have at least 1 general partner AND at least 1 limited partner
a General Partner:
(i) Full control of management
1. *runs day-to-day management of partnership
(ii) Agents of partnership
1. *can bind partnership to obligations w/ 3rd parties
(iii) Unlimited liability
1. *tort & contract
(iv) May or may not have salary in addition to % of profits/losses
b Limited Partner:
(i) Limited liability
1. *liable to extend of capital investment in partnership
(ii) NO control in operations AND limited control over management
1. *limited voting rights over matters substantially affecting partnership
(iii) NOT agent of partnership
1. can NOT bind partnership
ii L.P.’s typically used as investment vehicles
a Passive investors contribute most of the capital investment à get share of profits/losses + limited liability
2 Corporation as GP + natural person as LP[s] i = corporation acts as GP and controls management/operations of partnership
a Effect of Structure:
(i) corporate GP is subject to double taxation
(ii) SHs of © GP have limited liability b/c of corporate structure
(iii) LPs have limited liability
b Ways to Get Around Double Tax:
(i) grant © GP only minimal % of L.P.’s profits à give remainder to LPs