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

INTRODUCTION
Choice of business forms
Determines the __________ of “owners”
legal relationship
financial rights
responsibility for business’ debts/obligations
tax liability
AGENCY: 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 act so.
Overview
Agency Formation
Created by mutual consent of both P + A (words or conduct can form agency)
Can be terminated at any time by either party by death, incapacity, or insolvency.
Exception: if agency is couple w/an interest (if the agency was formed based on a financial relationship, the agency is not terminated until the economic interest is terminated)
Creates a fiduciary relationship (each party has duties to each other & agents must act within the scope of their duties)
Principals
Types
Disclosed P: TP has notice that the A is acting for the P and has notice of P’s identity.
Undisclosed P: TP has no notice that the A is acting for P
Unidentified P: TP has notice that A is acting for P but doesn’t know P’s identity
Duties
To pay A at the contracted rate
Reimburse A for expenses incurred w/i scope of duty
Agents
Sub-Agent: acts on behalf of the A
Permitted only if authorized by P (express or implied)
Permitted if act is ministerial (routine)
Permitted if agency allows subagents
Permitted if necessary
Misconduct makes both A and sub-A liable to P (will be made whole by one or the other)
Dual Agent: One A representing more than one P
Authority
Actual: A agent reasonably believes, in accordance w/the principal’s manifestations to the agent, that the principle wishes the agent so to act
Effect of
If the act was w/i the scope of A’s authority, P is bound by A’s act
If A represents that he is acting on behalf of P, he makes
an “implied warranty of authority”; AND
will be liable for “breach of the warranty” to 3rd party if did NOT have authority
*Principal would also be liable to 3rd party under “apparent authority” but can sue Agent for “breach of fiduciary duties”
Apparent: Authority held by Agent to bind Principal to obligations w/ 3rd parties if à 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
Agent can NOT create “apparent authority” in himself
*Principal has to have given 3rd party a ® basis for such belief à can NOT be purely Agent’s acts
Key concept à ® belief of 3rd party AND must be traceable to principal’s actions or words
Exception:
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”)
Two Circumstances where Principal will be Bound:
Principal’s statement à
Ex: 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.
Course of Conduct à
Ex: 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 provides notice that assistant has been fired. Assistant then goes and gets an item w/out principal’s authority à Principal will be held liable under “apparent authority” since 3rd party still has ® belief that agency exists. 
*However à Principal can sue agent for acting “outside of scope of authority”
Three Types of Authority
Express = what powers Principal expressly states to Agent (actual authority)
Implied = what powers Agent ® believes he has to attain Principal’s objective/goals (actual authority)
Apparent = what 3rd party ® believes the Agent has power to do
Principal must create impression on 3rd party that Agent has authority OR NO ® basis for belief
Agent can NOT create “apparent authority” in himself
Exception: Agent can state his position (president, partner)
Respondent Superior – An employer is liable for the for tortuous conduct of its employees while acting w/in scope of their employment
Liability of Principal for the acts of his Agent
Contract:
Principal is responsible for contractual obligations entered into by Agent if à
agent had actual authority
                                                                  OR
agent had apparent authority
Torts:
Principal is liable for the negligent conduct of his Agent if à agent was “acting w/in the scope of his agency” =(must be an employee-employer relationship)
Principle is liable for the intentional tortuous acts of his Agent if à Agent was “trying to further the goals of the Principal,” even if the act was strictly forbidden by the Principal
Respondent Superiorà doctrine creates liability to Principal for the tortuous acts of his Agent
Principal will be liable for such tortuous acts of agent if àAgent was an employee of Principal
Independent Contractor v. Employee: (use control test – How much control did Principal have over Agent?)
AND
Agent was acting “w/in the scope of his employment”
Exception: Frolic & Detour à employer will not be held liable for substantial deviations from scope
Liability of Agent (for his own acts)
To TPs
Contract:
Agent is liable to 3rd parties for contract obligations if à if Agent had NO authority (breaches implied warranty of authority) or
if Principal is undisclosed OR unidentified à Agent may be held liable
Undisclosed à 3rd party does NOT know who Agent is getting authority from.
Ex: A signs K w/ B as agent for C, but B does NOT know that A is an agent for C
3rd party can sue either Principal or Agent but NOT both
NOT apparent authority b/c there is NO ® belief by 3rd party
Unidentified à 3rd party knows you are acting as an agent but does NOT know who Principal is
Torts:
Agent is always liable for his own tortuous acts (if respondent superior is invoked à J&S liability for Principal & Agent)
Principal can seek a contribution action (indemnity) against Agent for $$$ paid to 3rd party
To Principal: Agent is liable to Principal for breaching fiduciary duty & acting outside actual authority
Agency by Estoppel – § 2.05
Rule: A person (principal) who has NOT created an agency relationship w/ an actor (agent) will be liable under the “agency by estoppel” if à
3rd party is induced to make a detrimental change in its position
AND
person (principal) intentionally OR carelessly caused the belief
OR
had notice of the belief & did NOT take ® steps to notify 3rd party of the true facts 
Restitution of Benefit – § 2.07
Rule: Principal who is unjustly enriched by the action of an Agent (or person who appears to be an agent) must make restitution to the Agent
Termination of Agency
Actual Authority – § 3.10
Rule: An agent’s actual authority can be terminated by à
Agent renouncing agency relationship
OR
Principal revoking “actual authority”
When Effective? Termination is effective when the other party has notice
Apparent Authority – § 3.11
Rule: Termination of “actual authority” does NOT terminate Agent’s “apparent authority”
“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”
BUSINESS ENTITIES
Sole Proprietorship: Business owned by a single individual
personal liability for ALL business obligations
NO separation between owner and business
taxed and files as one entity
NO perpetual existence
General Partnership (GP): any association of 2 or more people who carry on a business as co-owners. It can come into existence by operation of law, with no formal papers signed or filed. Any partnership is a “general” one unless the special requirements for limited partnerships are complied with.
Characteristics:
All partners share equally in profits, losses, control, and management (Default Rule)
Unlimited liability for the conduct of all other partners in partnership (Contract & Tort Rule)
All partners are “agents” of the partnership and can bind
Limited Partnership (LP): Can only be created where (1) There is a written agreement among the partners; and (2) A formal document is filed with state officials
Natural person as GP + Natural person[s] as LP : Must have at least 1 general partner AND at least 1 limited partner
Two types of partners
General Partner (GP):
All partners are jointly and severally liable for the obligations of the partnership.
Enjoy full control of the management (run day to day operations of pship)
Unlimited liability (tort & contract)
May or may not have salary in addition to % of profits/losses
 
Limited Partner (LP):
Liable only up to the amount of their capital contribution (A limited partner will lose on his liability if he actively participates in the management of the partnership – in acting like a GP)
No control over operations and limited control over management (limited voting rights over matters substantially affecting pship)
Not an agent of the pship, cannot bind
L.P.’s typically used as investment vehicles
Passive investors contribute most of the capital investment à get share of profits/losses + limited liability
Corporation as GP + natural person as LP[s] corporation acts as GP and controls management/operations of partnership
Effect of Structure:
corporate GP is subject to double taxation
SHs of © GP have limited liability b/c of corporate structure
LPs have limited liability 
Ways to Get Around Double Tax:
grant © GP only minimal % of L.P.’s profits à give remainder to LPs
Make SHs also LPs in the partnership
“wear different hats”
Problem àLP’s can NOT take part in management of partnership OR lose limited liability shield
 
Limited Liability Partnership (LLP): Same structure as GP but partners are NOT held personally liable for partnership liabilities which exceed the assets of the partnership
However à partners have full personal liability for claims arising from their tortuous conduct  
Limited Liability Limited Partnership (LLLP) : Same structure as L.P. w/ GPs & LPs but some or all of the GP’s are NOT held personally liable for the partnership’s obligations
Less than ½ states have LLLP statutes
GPs have à
No personal liability for Torts of the partnership
full personal liability for Contract obligations of the partnership
Limited Liability Company (LLC): If corporation & partnership laws differ à court will look at both (case by case) to determine what entity the particular LCC “most closely resembles
Two Types:
Member-Managed
Decentralized Management (all owners take part in control & management of LCC)
Limited Liability (all owners are liable ONLY to the extent of capital investment)
Partnership Taxation (taxed as “conduit” entity à owners file one income tax return)
Manager-Managed
Centralized Management (control ONLY given to some members – owners)
Limited Liability (owners are liable ONLY to the extent of capital investment)
Partnership Taxation (taxed as “conduit” entity à owners file one income tax return)
Corporations
Three Layer Structure
Shareholders (SHs)
Give consideration ($$$) for shares/stock in the corporation
SHs can NOT participate in management of © other than voting on BoD AND certain substantial decisions affecting corporation
SHs are ONLY liable up to their capital investment (NO personal liability for obligations of ©)
Board of Directors (BoD)
SHs vote on BoD
Directors make policy + all substantial decisions of corporation
Ex: hiring of Officers, decisions on acquisition & mergers
BoD owe fiduciary duties to corpor

addition to surplus
flat percentage basis
Liabilities of Pship
Liabilities of Partners  
All Partners are à UPA §15
“Jointly & Severally” liable for tortuous acts of partnership; AND
“Jointly” for all contract claims of the partnership but à partners can modify obligation to satisfy contractual obligations in partnership agreement
Liability of Partners RUPA §306
All partners are “Jointly & Severally” liable for all obligations/liabilities of the partnership
Exception: “newly admitted partner” is NOT personally liable for any partnership obligation incurred prior to admission (only to extent of capital contribution)
Liability of Pship UPA §13
Partnership + all Partners are liable to the same extent as tortious Partner ifà
partner commits the tortious act “w/in ordinary course of business” of the partnership; OR
w/ authority of co-partners which causes injury to 3rd party
Partnership bound by Partner’s Breach of Trust UPA §14
Partnership + all Partners are liable for Partner’s “breach of trust” ifà
Partner was acting “w/in scope of his apparent authority” AND misapplies the property/$$$ received from a 3rd party; OR
Partnership “in the course of its business” misapplies the property/$$$ received from a 3rd party while in the partnership’s custody (based on ® expectations of the “public or 3rd party)
Liability of Incoming Partner UPA § 17
“Incoming Partners” are liable for all partnership obligations which are present at time of admission but à ONLY to extent of their capital contribution
Rights & Liabilities of “Limited Partners” RUPA §303
Limited partners are NOT liable unless à they are a GP OR is Limited Partner who participates in “control” of the partnership
Limited Partners may have be able to have a “limited voice” in operation of partnership
Ex: “veto power” if this right is part of partnership agreement + is limited in scope
consultation w/ GP
attendance at meetings
approve/disapprove of certain matters related to business
Management of Pship
Agency
Agency of each Partner – UPA §9
Every partner is an agent of the partnership for purposes of its business AND
Acts of any Partner will bind the partnership unless à
the partner had NO authority to act for the partnership in the particular matter; AND
the 3rd party had notice of lack of authority (includes obligations made in partnership name for apparently carrying on in the usual way the business of the partnership of which he is a member)
All Partners = Agents of the partnership
ALL partners start w/ actual authority to act on the behalf of the partnership “if w/in the scope of the partnership’s business” (must be normal business activities à can NOT sell all capital & put make insolvent)
Right to Modify “agency authority of partners”
Partners can agree to limit these powers in the partnership agreement
Requirements to Limit Agency Powers:
unanimous consent; OR
majority vote to amend partnership agreement
However à even if a partner has NO actual authority, he still has apparent authority & partnership may still be bound
Actual v. Apparent Authority
Actual Authority: real power to bind partnership (no relation to 3rd party beliefs)
Created by:
can be limited/broadened by partnership agreement; OR can modify by unanimous consent of all partners
Default Rule à ALL partners are agents & can act to bind partnership
Apparent Authority (if no actual à go through apparent analysis)
3rd party’s ® belief that partner has “agency authority” to bind partnership
If YES à partnership is bound
Created by à
Course of Conduct
past dealings w/ 3rd party
partnership’s act of paying for purchases à acquiescence
Status
partnership truthfully representing that you are a partner à creates “apparent authority” + 3rd party’s ® belief of authority
Can NOT created apparent authority in yourself
Exception: if partners allow person to hold himself out as having authority à creates apparent authority
Must provide 3rd parties w/ notice of partner’s limited agency powers to prevent apparent authority & 3rd parties ® belief in authority
Authority Analysis à
Is there actual authority?
If NO à go to “apparent”
Is there apparent authority?
Did 3rd party have a ® belief that partner had authority to bind partnership?
If “status” of partner is involved, 3rd parties are allowed to make a ® inference about his authority to bind partnership in relation to the scope of the business à the further outside the scope = less ®
Duties of Partners to Each Other
Fiduciary Duties: “The punctilio of an honor most sensitive, stricter that the morals of the market place”
Duty to Render Information – UPA §20
Partners must render true & full information regarding all things affecting the partnership upon demand from à