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Business Organizations
WMU-Cooley Law School
Larson, JoniD.

BUSINESS ORGANIZATION OUTLINE
Prof. Larson Spring 2010 / Text: Business Structure by Epstein


I. AGENCY

(a) Introduction

Types of Business Organizations
1.                  Sole proprietorship
2.                  Partnership
·         General (mostly what we’re covering in this class)
·         Limited
·         Limited liability
Corporation
·         C corporation
·         S corporation
Limited Liability Company (won’t spend time on it)

Distinction mostly tax related in regards to C and S corporations

(b) Agency

Agency = agreement b/w a principal and an agent where the principal agrees the agent is going to work for the principal or act on behalf of the principal; the agent agrees and accepts responsibility for acting for the principal, and the principal is the one who is in control of the relationship

Four ELEMENTS to have an agency relationship
Agreement between principal and agent
Principal agrees Agent will act for principal
Agent agrees to accept undertaking
Principal is in control of relationship

Agency appears in each type of entity:
Situation where principal and agent have an agreement
Principal agrees agent will act for the principal
Agent agrees to accept the undertaking
Principal is in control of the relationship

Principal = person for whom the agent acts; is in charge and if they enter into an agreement w/ an agent, they are the one who is going to be bound by the actions of the agent

Agent = person who agrees to act on behalf of another and subject to the other’s control
Agent can enter into a K with a third party on behalf of principal
i.e. Agent talks to Mr. G about having his house painted BUT principal doesn’t want to paint; Mr. G’s recourse on the principal even though only had contact w/ the agent but entered into an agreement w/ the agent = this will bind the principal as long as agent was within the scope of his authority

Transaction is legally binding IF:
(1) Agent was within the scope – if not, then CANNOT bind; or
Had actual or apparent authority
(2) If principal ratifies the act or transaction
Even if agent didn’t have the authority in the first place – this is another way to bind principal to the transaction!

Two Types of Authority
1.      Actual
Express
Implied
1.      Apparent

Actual Authority = what a reasonable agent believes principal authorized – between agent and principal only

(1) Express: whatever principal tells agent he has authority to do; “actual words”; very straightforward
i.e. Principal contracts w/ agent to sell his car
Express = the authority given to sell the car
Implied = would be if agent detailed the car before selling

(2) Implied: even though principal didn’t tell agent it was implied by the authority given
Acts reasonably necessary to accomplish the agency
Acts usual and incidental to act directly authorized
Any means which business custom or usage would suggest as appropriate steps by agent in accomplishing task
Acts physically necessary by agent to perform the task
Acts necessary to comply w/ prevailing law

Apparent Authority = no actual authority and agent as RP would believe principal authorized agent to so act
Moves beyond express and implied to what the third party reasonably believed to be the case from the actions of the principal that would lead the 3rd party to believe agent has authority – involves third party
Key thing is to look and see if principal did something to make third party think agent had authority



Hayes v. National Service Industries (1999)
Issue was whether atty acted within the scope of his authority when he negotiated and settled the dispute for an amount on behalf of his client when client claims that he didn’t authorize atty to settle
Ct binds the parties to the settlement as a result of apparent authority (when her atty spoke to opposing counsel and said I’m her agent) but also b/c we have some express authority here which came from the state statute which says the atty has the authority to settle all cases on behalf of their client – this makes it actual authority b/c we have a relationship b/w an agent and principal dictated by statute

ELEMENTS of Apparent Authority
Third party must have acted in good faith belief that the transaction was within the actual authority of agent;
Belief must rest upon the acts, omissions, or statements of the principal; AND
Belief of the third party must be objectively reasonable

EXAM TIP! When doing an apparent authority analysis, the focus is on the principal and the other focus is on the principal b/c they have to have a reasonable belief that the P gave the A authority

(c) Ratification (if there is no authority)  

Ratification = when agent acted outside of the scope
Principal can still agree to the K if we see that the principal ratified the K

ELEMENTS for ratification: (only comes into play when no actual or apparent)
(1) Agent had no authority
(2) Principal has subjective knowledge of the material facts of the K and either totality
Affirms agent’s conduct OR
Acts as if he affirmed agent’s conduct

This is retroactive – like agent had authority to create the deal with the third party in the first place
When is this timing relevant – more of a SOL issue – look at day agent entered into the K to cloak the agent
It’s not when the principal ratified the K, it

tegories:
o   (1) Employee / Employer – employer dictates what employee does
o   (2) Independent Contractor – employer doesn’t give details, not controlling on how tasks are to get accomplished

Note – Agent could also be an employee or IC

(h) STEPS to analyze the agency issue
(1)     Look first at relationship b/w principal and agent – was there actual authority?
(2)     Was there actual or implied?
(3)     If no actual, was there apparent?
·         If do not meet any of the above three = agent does NOT have authority
(4)     Since has no authority, did principal ratify?

(i) Different types of agency relationship
(1)     Fully disclosed – disclose that they are acting as agent and disclose identity of principal
(2)     Partially disclosed – disclose acting as agent but NOT identity of principal
(3)     Completely undisclosed – do NOT disclose acting as agent; agent enters into the K in agent’s name
(4)     Termination – agent’s authority may be terminated at will



II. FINANCIAL RECORDS

Balance Sheet
Lists the assets and the liabilities of the entity
Assets = the liabilities = what is left over is equity (amt of equity will fluctuate)
Purpose is to show financial condition of company as of the date of the statement
The asset will be shown as booked and when accessing the worth of the asset, the current FMV needs to be seen
Snapshot of a particular entity on a particular day

Stuff goes on the balance sheet at the time you buy it and nothing really changes except for a small exception we’ll talk about later
Real prop nothing changes
Machinery depreciates – does value reflect this?
Want to know what is it worth now?
Balance sheet is just a starting point

FORMULAS (balance sheet):
Assets – Liabilities = Owner’s Equity
Assets = Liabilities + Owner’s Equity

Income Statement
Measures income over a period of time
Statement covering a period of time
Purpose is to give a summary of earnings between balance sheet dates
Example: made $1k, will it change the balance sheet for next month?
Cash goes up by $1k, equity will also go up by $1k

Difference is
Balance sheet = snapshot