Business Organizations Outline

GENERAL INFORMATION

I. TYPES OF BUSINESS ORGANIZATIONS
A. Generally: there are six common types of business organizations:
1. Unincorporated Business Forms:
a. Sole proprietorship: one person owns the business. Many businesses are still conductedthis way.
i. If someone works for the sole proprietor, that person is typically an agent and a servant.
b. Partnerships: the operation of business by co-owners.
c. Limited Liability Partnerships: the operation of a business with co-owners, with somebeing liable for partnership debts, while others are not.
2. Corporations:
a. General Corporations: a corporation is a fictitious legal entity separate from the owners andshareholders which is created by filing with the secretary of the state and the payment of a filing fee.
i. Corporations can be publicly held, or closely held.
b. Limited Liability Companies: is a company that is drawn from a mixture of forms ofbusiness organizations; that is, they look like corporations but have different rules for tax and liability purposes.
B. G/R: Practitioner (i.e. exam) Notes:the general practitioner will have to know how to generally deal withthese corporations, and the basic understandings of:
1. Advise clients who are going into business how to:
a. formulate;
b. what documents to file, and where to file;
c. what is the best business organization for the corporation.
2. Advise the client on which factors to consider:
a. what has to be done;
b. the structure of management;
c. the internal operation of the business;
d. transfers of interest;
e. responsibility for losses and profits; and
f. dissolution prossiblities.
g. *[Tax law also enters into the equation].
3. For litigation purposes, business organizations are essential because you have to know who is the proper defendant to sue.
II. OTHER UNINCORPORATED BUSINESS FORMS
A. GENERALLY
1. G/R: Types of Unincorporated Ventures: there are nine main types of unincorporated business ventures, however, this list is not exhaustive:
a. The proprietorship (for single-owner business) or the general partnership (for multi-owner business);
b. the general partnership which elects to be a limited liability partnership (LLP);
c. the limited partnership with one or more individuals as general partners;
d. the limited partnership with a coporation or other other limited liability entity as a general partner;
e. the limited partnership which elects to be a limited liability limited partnership;
f. a member mananaged limited liability partnership;
g. a manager managed limited liability company;
h. a corporation for tax purposes may be a “C” or “S” corporation; and
i. a professional corporation, if the owners are engaged in a profession which is prohibited from incorporating under the general business corporation statute.
III. LIMITED PARTNERSHIP
A. Generally: the limited partnership as a form of business is exclusively a creature of statute; and in the absence of a statute, or the failure to comply with mandatory provisions of an applicable statute, all partners are general partners no matter what their private understanding is or how they are designated in the partnership agreement.
1. The typical modern limited partnership is a federal income tax driven business in which there are scores or hundreds of limited partners and one or two general partners that are usually corporations or other limited partnerships rather than individuals.
2. The modern limited partnership seems closer, economically, to a close corporation than a general partnership.
B. G/R: Difference:a limited partnership differs from a general partnership in that there are two classes ofpartners: (a) one or more general partners; and (b) one or more limited partners, who are not personally liable for the debts of the partnership and who are not expected to participate in the partnership’s day to day affairs.
1. In effect, limited partners, are passive investors, who stand to lose what the y have invested in the enterprise but no more.
2. Partners who are not specifically identified as limited partners, are general partners, and are unlimitedly liable for the debts of the business.
C. ULPA: limited partnerships, in States which have adopted them (Wyoming has NOT), are governed byULPA.
1. ULPA §1105: in any case not governed by the ULPA, the provisions of [R]UPA govern.
a. This means that limited partnerships, are not a default entity, if the provisions of ULPA are not followed, the entity is a partnership.
D. G/R: Holding a Limited Partner, in a Limited Partnership Liable:there are two theories for holding alimited partner liable:
1. Filing Defect: if everything is not filed correctly, in order, and registered with the Secretary ofState, a LP does not because it is not a default entity. Under ULPA all the entity is required to do to become a LP is to follow the provisions of the Act, and file with the state.
2. Control: A limited partner shall not become liable as a general partner,UNLESSin addition to theexercise of rights and powers as a limited partner, he takes part in the control of the of the business. However, if the limited partner participates in the control of the business, he is only liableto person who transact business with the limited partnership, reasonably believing, based on the limited partner’s conduct, that the limited partner is a general partner. [ULPA §303(a)].
a. ULPA §303(b)(6): gives a list of things a limited partner can do, and still have limitedliability, in participating in “control” of the partnership.
b. UPLA §304(b): describes the situations in which a person erroneously believing that he is
c. limited partner, may be held liable as a general partner.
E. G/R: to form a limited partnership, an entity has to use the term “limited partnership” withoutabbreviation and the name of a limited partner cannot be used [ULPA §102(a),(b)].
F. G/R: Fiduciary Duty:general partners owe a fiduciary duty to limited partners [In Re USACAFES, LPLitigation].
IV. LIMITED LIABILITY COMPANIES
A. GENERALLY
1. Definition:the LLC is an unincorporated business organization that contains dissolution, management,and transferability provisions similar to those of a general partnership but that can be easily altered to resemble the limited partnership approach or to approach the corporate model.
a. A related unincorporated business entity, the limited liability partnership (LLP) essentially operates as a general partnership for business purposes, while offering the partners either partial or total liability protection.
2. Generally: the LLC offers a domestic entity that tax advantages of the of a partnership with limitedliability protection for all members, an advantage commonly associated with corporations. The LLC is a hybrid of the corporate and partnership forms. The LLC is best understood in terms of four general characteristics:
a. Limited liability;
b. partnership tax features;
c. the ability to choose between centralized and direct member management (almost complete internal flexibility); and
d. creditor protection provisions.
3. G/R: Scope of Liability:all LLC statutes provide that members, like corporate shareholders, are not liableas such for the debts of the LLC.
a. LLC statutes do not protect members from liability for:
i. agreed contributions and excessive distributions;
ii. for members own wrongs (torts); or
iii. for the debts the members contractually assume or guarantee.
4. G/R: Two-Member Requirement:Many LLC statutes either explicitly require the LLC to have twomembers or require that at least two people from the LLC at the time of the creation, and do not permit the LLC to have only one member.
5. G/R: Piercing the Veil:an LLC, like a corporation, may have its veil pierced. Therefore, on equitablegrounds, the courts may impose liability on members of the LLC that have complied with statutory formalities. [Hamilton v. AAHLC].
a. The court, like in corporation cases, will use a multi-factor test focusing on undercapitalization, following corporate formalities, co-mingling of funds; alter-ego test, and a mixture of funds.
6. G/R: Comparison with Corporation:an LLC is superficially similar to a corporation:
a. It is a separate legal entity that is formed by filing articles of organization with the Secretary of the State;
b. It may be formed for any lawful purpose, subject to exceptions for certain kinds of businesses such as banking and insurance;
c. An LLC has regulations and an operating agreement (instead of bylaws);
d. The owners are called members (rather than shareholders);
e. LLC’s have managers (rather than directors) and the mangers are chosen similar to a way in which shareholders choose directors of a corporation.
f. Remember: an LLC can closely resemble a corporation incorporated under §7.32.
7. G/R: Comparison with Partnership:LLC’s are also similar to partnerships:
a. An LLC may elect to assume a management structure that is virtually identical to that of a general partnership (with the sole exception of avoidance of unlimited liability).
b. The operating agreements in many LLCs more closely approximates a partnership agreement than corporate bylaws.
c. Membership interests in an LLC are also similar to partnership characteristics:
i. under some statutes, transferees of membership interests may be admitted only with unanimous consent of the members;
ii. death, bankruptcy, or retirement of a member may constitute a dissolution (or disassociation) of the LLC unless a majority in interest of the remaining members votes to continue the LLC.
d. Member-Managed LLC’s: statutes defining member managed LLC’s follow the partnership model:
i. They provide that each member is an agent of the LLC for the purpose of its business; that each member has the right to posses LLC property for business purposes and so forth.
ii. These statutes may also provide for partnership type duties of care and loyalty.
8. G/R: Comparison with a Limited Partnership:the LLC differs from a limited partnership in that allparticipants must actively take part in control of the business without restriction and fear of personal liability for business obligations.
a. The source of limited liability provided by an LLC is analogous to that provided by limited partnership statutes for limited partners.
i. A limited partnership files a certificate with the secretary of State, and the limited partners thereby obtain the shield of limited liability. Similarly, the LLC files articles of organization with a designated state official, and the members of the LLC thereby obtain the shield of limited liability.
B. WYOMING’S LIMITED LIABILITY COMPANY ACT: W.S. §§17-15-102THROUGH 17-15-144
1. 17-15-103: Purpose:(a) Limited liability companies may be organized under this Act for any lawfulpurpose, except for the purpose of banking or acting as an insurer.
2. 17-15-104: Powers:(a) Each LLC organized and existing under this Act may:
a. Sue and be sued, complain and defend, in its name;
b. ….deal in or with real property;
c. Sell, convey…transfer and otherwise dispose of all or any part of its property or its property assets;
d. Lend money to otherwise assist its members, managers or employees;
e. Purchase, …own, hold, vote, use, employ, …and otherwise use and deal in and with shares or other interests in or obligations of other LLC’s, corporations, or partnerships
f. make contracts and incur liabilities…;
g. lend,…invest…its funds and hold real property and personal property …
h. conduct its business, carry on its operations and have and exercise the powers granted by this act in any state….
i. elect or appoint managers….
j. make or alter operating agreements, not inconsistent with the articles of organization…
k. indemnify a member or manager of the LLC against expenses actually and reasonably incurred by him or it in connection with the defense of an action, suit or proceeding, civil or criminal, in which he is made a party by reason of being a manager….
l. cease its activities and surrender its certificate of organization;
m.have and exercise all powers necessary or convenient to effect any or all of the purposes for which the LLC is organized
3. §17-15-105: Name: [Magic Words]: (a) the words “limited liability company” or its abbreviations “LLC” shall be included in the name of every limited liability company formed
a. Omission of the words “limited liability company” or “LLC” in the use of the name of the LLC shall render any person who participates in the omission, or knowingly acquiesces in it, liable for indebtedness, damage or liability,occasioned by the omission.
i. –“occasioned by the omission” means that there is a causation element required before onecan be held liable under the act.
4. §17-15-106: Any person may form a limited liability company which shall have two or more members.
5. Wyoming LLC case: the Court basically held that the articles of organization are important. The Courtsaid when you contribute to an LLC you get:
a. profit sharing and losses;
b. management;
c. transferability; and
d. the articles of organization are important in deciding what rights the individual has.

AGENCY LAW

I. INTRODUCTION **SEE pp. 1-44: Statutory Supplement.
A. Generally: Basic agency and employment relationships underlay virtually all commercial dealings. As such, they define the rights and responsibilities of individuals who work for or on behalf of the business.
1. A corporation, an artificial legal construct that has no physical being of its own, can act only through agents for everything it does.
2. Partnerships similarly involve the law of agency, with each partner being an agent for the partnership.
3. Whenever one person performs services for, or acts on behalf of, someone else, the principles of agency define the relationships and responsibilities of both participants and of person who deal with them.
a. The most common agency relationship is the employment relationship, but agency law is applicable in many other situations as well.
II. BASIC CONCEPTS
A. G/R: Agency: agency is the fiduciary relation, which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control and consent [Rst. (2) Agency §1(1)].
1. Agency can also be defined as a consensual relationship in which one person agrees to act for the benefit of another.
a. Artificial entities such as corporations, trusts, partnerships, or LLC’s can act as principals or agents.
b. Thus, the law agency is involved whenever a corporation acts, whether it is writing a check, selling a product, or entering into a billion dollar merger.
2. An agency relationship is based on conduct by the principal and agent, the principal manifesting that he is willing to have another act for him and the agency manifesting a willingness to act.
a. The relationship may be contractual, but it need not be. Persons acting without compensation are still agents.
i. These agents are unpaid or gratuitous agents.
B. G/R: Elements of Agency: for the agency relationship to be formed, generally three elements have to be met:
1. Manifestation: the principal must manifest that the agent will act for him; consent of the principal[Rst. (2) § 15];
2. Acceptance: the agent must accept the undertaking; act on behalf of the principal [Rst. (2) § 15];
3. Control: an understanding that the principle is the party in control [Rst. (2) § 14].
C. G/R: Principal:a principal is the person or entity whom the agency works or takes action for (i.e. theboss) [Rst. (2) §1(2)].
1. The person for whom the agent is acting is the principal.
D. G/R: Agent:the person who is acting (works) for another is the agent (i.e. employee) [Rst. (2) §1(3)].
E. G/R: Master:a master is a principle who employs an agent to perform service in his affairs and whocontrols or has the right to control the physical conduct of another in the performance of services [Rst. (2) § 2(1)].
F. G/R: Servant:a servant is an agent employed by a master [Rst. (2) §2(2)].
1. In determining whether one is acting for another the following factors are considered:
a. extent of control the master has over the details of work;
b. whether the employee is engaged in another business;
c. whether the work is usually done under direct supervision;
d. the skill required for the particular occupation;
e. who supplies the equipment (i.e. tools, place of work, etc…);
f. length of time the person is employed;
g. the method of payment;
h. whether work was part of the regular business of the employer;
i. intention of the parties in creating the relationship; and
j. whether the principal is or is not a business. *[Rst. (2) §220].
2. Servants are generally employees. For example, a CEO of a large corporation can be a servant. a. In some instances, a party may be an agent, but not a servant. For example, a lawyer in certain situations.
G. G/R: Independent Contractor: an independent contractor is someone who contracts with another, but is NOT controlled by him [Rst. (2) §2(3)].
III. FIDUCIARY DUTIES
A. G/R: Agency Relationship: the agency relationship is a fiduciary relationship; that is, a relationship or trust and confidence and the expectation of trust that arises from the relationship.
B. G/R: Agent’s Fiduciary Duty: The agent is a fiduciary with respect to matters within the scope of his agency [Rst (2) § 13].
1. Scope of Agency: the scope of agency is usually determined by contract between the principal and the agent or by the nature of the instructions given by the principal to the agent. The scope of the agent’s fiduciary duty may be shaped by the terms of the contract, but the fiduciary obligation exists even though the contract is silent as to the duties of the agent or purports to abolish this duty
a. Duty: This means the agent is accountable to the principle for any profits arising out of thetransactions he is to conduct on the principles behalf [Rst. (2) § 388].
b. Breach: The agent breaches his fiduciary duty to the principal if he acts either to benefithimself or someone else other than the principle [Rst. (2) § 387].
c. This fiduciary duty prevents the agent from acting:
i. adversely to the interest of the principle [Rst. (2) § 389];
ii. in a way to assist an adverse party to the principle in connection with the agency [Rst. (2) § 391];
iii. in a way that competes with his principal concerning the subject matter of the agency [Rst. (2) § 393].
d. The agency must act to preserve and protect property entrusted to his care by the principal, and is liable for its loss if he disposes of the property without authority to do so, or it is lost or destroyed because of his neglect or because he intermingles it with his own property [Rst. (2) §§ 402-404A].
i. The agent may be required to account for his actions for for property of the principal entrusted to him.
2. Caveat: when parties are dealing at arm’s length, one party usual