Business Organizations
Joshua Fershee
Fall 2013
Business Organizations
Intro
Business Forms: Sole proprietorship, partnership (joint proprietorship), limited partnerships, limited liability partnerships (LLPs), limited liability companies (LLCs), and corporations. (Also professional limited liability partnerships- PLLCs).
Most organizations are LLCs or partnerships.
With clients: What do they want to accomplish? Best form, best state? Conversational pattern is desired. Minimize (not eliminate) litigation. Lawyer’s job is to make the pie as big as possible.
Corporations are taxed separately, everything else is flow-through taxation. LLCs, LLPs, and corporations have liability shields.
Transaction costs- costs necessary to make the transaction actually happen (broker’s fees, bank financing, etc…)
Agency costs- costs of having someone act on your behalf in the course of business.
Coase Theorem- market will lead to an efficient outcome. Bargaining costs force some people to forego enforcing their rights- wouldn't be worth the money.
Default rules are provided for most business actions, but not all are mandatory. Almost every rule can be contracted around. Done more with LLCs and such because corporations have a more “off-the-rack” type of nature.
Creditors have to go after a partnership’s money before they can go after the personal assets of the owners. The partnership is an entity itself. Hard to get out with a partnership- can’t easily find someone willing to buy your share. Corporate stockholders can simply sell their shares.
A corporation could have taxable income of 0. It could just pay all of its managers’ salaries and shareholders’ dividends.
Secured creditors- get first right to repayment, generally have a loan secured by collateral.
Regular creditors- get what’s left after secured creditors have been paid.
Equity- money left after repayment of creditors.
Uniform Partnership Act (UPA) and Revised Uniform Partnership Act (RUPA)- enacted in most jurisdictions.
Partners or directors in a corp can contract out of obligations to each other if they wish, but they cannot contract out of obligations to third parties.
Need to lay out everything at the outset, and have an exit plan. Not like a marriage.
Losses follow allocation of profits (not income) unless contracted otherwise. Generally an even split if no other split is stated explicitly.
Decisions that are in the everyday course of business require a majority vote. Fundamental changes require a unanimous vote.
Each partner is a fiduciary to each other partner and the partnership.
Partnership- Association of two or more persons to carry on as co-owners a business for profit.
Entity Theory:
· Partnership is a legal entity, separate from the partners.
· Partnership as a legal aggregate. Legal aggregate has few purposes. Partnership pays no federal income taxes, and partners are jointly and severally liable.
Partnership Formation:
· Duration-
o Partnership for term, or
o At will. Agreements can be oral unless the Statute of Frauds requires it to be in writing, but you want everything in writing ideally and practically
· Capacity of the partners-
o Partners must have legal capacity.
o UPA allows corporations to be partnerships.
Limited Partnerships: Must have at least 1 GP and 1 LP.
· 1 or more general partners- they manage the partnership and have unlimited liability. Involved in the day-to-day. Management.
· 1 or more limited partners- no liability above the amount invested in the partnership. Not involved in the day-to-day. Investors usually.
· Must submit filings to be a limited partnership.
· If a corp is a GP, shareholders’ liability is capped at their shares.
Partnership requires to formalities at creation- just need agreement between the partners and compliance with the law.
UPA §7: Rules for Determining the Existence of a Partnership
(4) The receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business, but no such inference shall be drawn if such profits were received in payment:
a. As a debt by installments or otherwise,
b. As wages of an employee or rent to a landlord,
c. As an annuity to a widow or representative of a deceased partner,
d. As interest on a loan, though the amount of payment vary with the profits of the business,
e. As the consideration for the sale of the good will of a business or other property by installments or otherwise.
In Re Marriage of Hassiepen
· Man and second wife had an electrical business going. She handled a lot of the day-to-day administrative things and put in some money up front. They explicitly said that they were not partners, but they conducted themselves just like a partnership. Court looked at their actions- looks like a duck, sounds like a duck, it’s a duck.
· Courts will to look at objective intent over subjective intent. Doesn't matter what they call themselves, if they appear to third parties as a partnership, they’re held as a partnership.
Martin v. Peyton
· PPF gave a $2.5M loan to KNK. KNK gave back dividends from profits of $500K max, $100K minimum, and 40% of anything in between. Also gave veto power, inspection rights, and option to buy equity. Question of whether it was a partnership relationship or a debtor-creditor relationship. Had a key-man provision in the agreement on PPF guy.
· Investors of KNK were suing, trying to say PPF was a partner because it could pay. If PPF is a creditor, then it gets paid first from KNK instead of having to pay out to investors.
· Court looked at how profits were split. They weren’t split evenly, which tends to lean toward not being a partnership. Degree of is usually a determinative question. They were involved with each other enough to be a partnership.
Minute Maid v. Cold Storage
· Issue whether a supplier-customer relationship or a partnership. Cold Storage and United (MM distri
Agency
Agency triangle- PAT (Principal, Agent, Third party)
P + A manifest assent (Assent to act)
A to act on P’s behalf (Behalf)
A subject to P’s control (Control)
Assent to Act + Behalf + Control = Agency
GPs are agents of each other.
Intermediaries (middlemen businesses) create agency questions sometimes.
Suppliers are not agents.
Gay Jenson Farms Co. v. Cargill, Inc.
· Cargill had line elevators for grain. Farmers sold grain to Warren, who had a deal with Cargill. Warren was the middleman agent. Question as to who was the P and T. Warren had a loan with Cargill, and when it ran out of money, the farmers went after Cargill claiming Warren was Cargill’s agent.
· Cargill kept loaning money to Warren, even when it was bleeding so badly. Probably wanted to keep the grain coming in. Cargill looked to be a creditor principal and Warren was the debtor agent.
· No profit sharing, so no partnership. Cargill had a good deal of control over Warren, so the court said that Warren was an agent of Cargill.
· Negative power doesn't hold the same weight as affirmative power. Ability to make decisions is more significant than veto power.
5 Theories for Creating Agency:
1. Actual expressed authority- What you want, generally no questions.
2. Actual implied authority- Taken from context, industry customs, and prior practices.
3. Apparent authority- Courts will use this if T relies on A’s holding himself out as having authority from P.
4. Inherent authority- P’s manifestation to T. Fallback if no actual or apparent.
5. Ratification- If P gives the ok after A does something unauthorized originally, it is considered valid authorization.
Liability placed on the best cost-avoider. Hard to determine apparent authority. Did the agent hold himself out as an agent? Did a third party rely on it?
Essco Geometric v. Harvard Industries
· Harvard made chairs and bought foam from Diversified. New president (Kruske) wanted to phase diversified out, but the purchasing manager (Gray) didn’t know and he let them bid.
· The court said Gray held himself out as an agent, so he had apparent authority. Harvard is on the hook for that contract. Court looked at how the previous purchasing manager did it, and Gray’s actions were consistent with that.
· Court may have decided differently if it was de novo, but it let the jury determination and the court’s decision below stand.
