NWCU Law - 2L - Business Associations

Establishing the Agency Relationship:

An agency relationship can be established in three ways: 1) by agreement, 2) by ratification, and 3) by estoppel.

Agent for Two or More Principals

An agent may represent two or more principals, owing each a fiduciary duty. Multiple agency relationships require the consent of each principal. Absent consent, a principal may void any subsequent act taken by agent.

Inherent Powers of Agents

An agent possesses inherent powers that cannot be taken away by the principal. These inherent powers include the power to make express or implied warranties and the power to make representations regarding the agency subject matter. Usually inherent powers will only be recognized when protecting the interests of third parties.

C Corporation:

A C corporation is a standard corporation, in contrast with an S corporation. Taxation of C corporations can involve double taxation since the corporation pays taxes on profits through a corporate tax return; then shareholders pay taxes again on dividends through their individual tax returns.

Corporation

A corporation is a legal entity, created in accordance with statutes, that is separate and distinct from the persons who own its stock or manage it.

Formation of Corporation

A corporation must be formed in compliance with formalities specified by statute in the jurisdiction, such as by filing with a designated government office or agency (in California, the Secretary of State) articles of incorporation, which are signed by the promoter, and which identify the name of the corporation, its purpose, its address, an agent for service of process, and the initial number and classes of shares.

Limited Partnership

A limited partnership is a partnership formed by two or more persons under the laws of the state in which it is located, and having one or more general partners and one or more limited partners. A limited partnership requires a formal document to be filed with the state.

Formation of Limited Partnership

A limited partnership must be formed in compliance with formalities specified by statute in the jurisdiction, such as by filing with a designated government office or agency (in California, the Secretary of State) a certificate of limited partnership, which is signed by the general partners and which identifies the name of the limited partnership, its address, an agent for service of process, and the names of the general partners.

Authority of Partners

A partner may enter into enforceable contracts with third parties on behalf of the partnership, and may convey real property on behalf of the partnership if the transaction is conducted in the normal course of partnership business.

Partners Jointly and Severally Liable for Tort

A partner will be held jointly and severally liable for partnership's tortious actions.

Partnership

A partnership is an association of two or more persons to carry on as co-owners a business for profit.

Exceptions to Partner's Authority

A partnership is barred by the Uniform Partnership Act from contracting with a third party to dispose of partnership goodwill, submit partnership litigation to arbitration, or execute any agreement having the effect of making it impossible to carry on business.

Partnership by Contract

A partnership may be contractually formed by a written or oral agreement. A writing will be required in instances where the partnership is to exist for a periods exceeding one year. If there is no specified time period, the partnership will be presumed to be a partnership at will and terminable at any time. In order to become a partner, the party must have the ability to legally contract

Subagent's du

A subagent, hired by agent with principal's consent, is bound by same fiduciary duty as the agent. If subagent is not authorized by principal, there is no fiduciary duty running between the principal and the subagent and the principal is not obligated to compensate the subagent.

Agency Derived from Actual Authority

Actual authority is derived from duties expressly assigned to the agent by the principal. Actual authority may also be implied from customary usage of the express contract terms, or the principal's behavior. Actual authority will exist even if the authority was fraudulently obtained by the agent.

Agency by Agreement

Agency by agreement requires a valid, legal purpose and both parties must exhibit a manifestation of intent to be bound. Additionally, the principal must have capacity to contract. Generally, agency agreements do not require contractual formalities nor consideration to be valid.

Agency Derived from Ostensible Authority

Agency derived from ostensible authority applies when a principal has intentionally and negligently misled a third party that the agent has power to act for principal. Estoppel is invoked to prevent principal from denying the agency relationship and requiring the principal to compensate the third party for his/her losses.

Agency

Agency is the legal relationship that involves on person (the agent) acting on behalf of another (the principal.)

Agent's Duty to Perform

Agent is obligated to use reasonable care, skill, and diligence when performing under the contract, even if the agent is providing services gratuitously. Agent's failure will create contractual liability. Additionally, tort liability may be imposed for agent's negligent actions or performance.

Termination of the Agency Relationship

Agent's authority to represent principal may be terminated by: 1) expiration of the agency term, 2) agency's purpose has been completed, 3) substantial change of agency's subject matter, 4) incapacity or death of principal or the agent or, 5) agreement or actions of the agent or principal, such as a unilateral renunciation or revocation.

Powers Delegated to Subagent

Agent's powers can be delegated to subagent upon 1) consent of principal, or 2) if the delegated act is one of mechanics, 3) if the agent cannot lawfully perform the act but the subagent can, 4) if it is necessary to appoint a subagent or, 5) if it is customary to appoint a subagent.

S Corporation

An S corporation has elected a special tax status with the IRS which allows "pass through" taxation. This means individual shareholders report corporate profits and losses on their individual tax returns, avoiding the double taxation that occurs with C corporations.

Master-Servant Relationship

The master must either possess actual control, or possesses the right to control, the physical conduct of a servant in the discharge of his duties. The most common example is the employer/employee relationship.

Scope of Agent's Authority

The powers of the agent are strictly construed by the courts and generally the duty to determine scope of agency has been placed upon the third party. The third party should determine scope subsequent to agreement. If specific powers are not given to the agent, the agent has implied power reasonably necessary to complete the agency contract and is also given implied powers to preserve principal's interest in emergencies.

Principal's Liability for Agent's Injury

The principal is usually liable for injury to agent under state worker's compensation law.

Principal's Duty to Cooperate

The principal may not interfere with agent's discharge of duties. Conversely, the principal must aid in discharging agent's duties.

Contractual Relationship Between Agent and Principal

The principal-agent relationship is governed by the contract instituting the relationship.

Separateness (Alter Ego) Test

The separateness or "alter ego" test is one method of deciding whether the corporate veil will be pierced to hold its shareholders personally liable for corporate debts. Under the test, the court is likely to pierce the corporate veil if the shareholders have failed to follow corporate formalities, such as by failing to issue any stock, hold directors' meetings, or where there is commingling of personal and corporate funds.

De Facto Corporation

Under common law, a de facto corporation was a defectively formed corporation, which is treated as a valid corporation with regard to the limited liability of shareholders because there was a good faith attempt at proper formation of a corporation. In most jurisdictions, this doctrine has been abolished.

Ultra Vires

Under common law, an act beyond those allowed by the articles of incorporation was ultra vires, and unenforceable. Modernly, the articles of incorporation for most corporations allow the corporation to do any lawful act.

Employer bound by Independent Duties to Third Parties

An employer may be found liable for breaching an independent duty of due care to the third party for hiring the tortious employee.

Ratification of Actions

An employer may only ratify those actions which could have been originally authorized. Ratification may be accomplished through acceptance or retention of benefits.

Employer Liable for Torts of Employees

An employer will be liable for the torts of his or her employees if the employer directly authorizes, allows, or subsequently ratifies the employee's tortious action.

Conflict of Interest

An incompatibility between one's own interests and one's duties owed to another.

Independent Contractor

An independent contractor is an individual with authority to act without principal's approval. Independent contractor must simply fulfill his/her duty to the principal. The independent contractor does not receive direction from the principal.

Fellow Servant Cannot Bring Suit Against Master

If a fellow servant is injured by another servant working in a similar capacity for the master, the injured party cannot bring action under a theory of respondeat superior.

Partners Claiming Third Party as Partner

If a partner makes false representations regarding the partnership of a third party, the partner will be determined to have elected the third party to act as an agent and will be bound by their actions.

Exception to Inapplicability of Respondeat Superior to Independent Contractor

If the independent contractor has been hired to conduct highly dangerous activity such as demolition, then the principal will be remain liable for harm resulting from the dangerous activity.

Agency by Ratification

If the principal accepts the benefits, or confirms conduct of agent through verbal or other means, an agency relationship by ratification is created. A partial ratification of conduct by principal is considered ratification of the entire agency relationship.

Liability to Third Parties

In cases where the agent acts for an undisclosed principal, and there is no statement within the agreement indicating agency, the agent is liable to a third party, but if the agent acted with actual authority, then principal will also be liable to third party. Additionally, if the third party has notice that the agent acts for another, extrinsic evidence will be allowed to show that the principal and agent did not intend for the agent to be bound.

Limited Liability

Limited liability is an attribute a Corporation's shareholder has. Usually shareholders are not personally liable for the business debts of the corporation. A shareholder risks only what he has agreed to invest in the corporation and nothing more.

Officers

Officers are hired or appointed by the board of directors to administer the day-to-day affairs of the corporation.

Authority of Officers

Officers perform the day-to-day duties of running the business. Officers are appointed by the board of directors and may be removed by the board.

Ratification Relates Back

Once an act is ratified, all liabilities and benefits relate back to the date of the original authorization. Exceptions to this general rule include: 1) where the action is illegal, 2) the principal lacks capacity, 3) where rights of third parties would be prejudiced.

Rights of Partners

Partners have equal rights in the management and conduct of partnership business, unless the partnership agreement states otherwise.

Fiduciary Duties of Partners

Partners owe each other the fiduciary duties of reasonable care, good faith, and loyalty. Included in the fiduciary duties owed to each other, partners owe a duty to: 1) account for profits and divide among partners according to the partnership agreement, 2) provide equal access to management, 3) hold assets as trustee for other partners, 4) make books and records accessible to all partners and, 5) not to compete against partnership.

Piercing the Corporate Veil Doctrine

Piercing the corporate veil" refers to the ability of creditors to reach the stockholders of a validly formed corporation and hold them personally liable for debts of the corporation.

Principal's Duty to Pay Agent

Principal has duty to pay agent, unless services are gratuitous.

Partnership Property

Property of a partnership includes all property originally brought into the partnership or subsequently acquired so long as the partners intended to devote property to the partnership. Intent can be determined by clear expression of intent or the surrounding circumstances of the property ownership.

Breach of Fiduciary Duty:

Remedies for breach of fiduciary duty include contractual as well as tort recovery. Remedies include damages, imposition of a constructive trust, and rescission of agency contract. Principal also has a right to indemnification for any loss resulting from agent's breach of contract.

Shareholders

Shareholders are the owners of the corporation in that they own shares of the corporation's stock.

Authority of Shareholders

Shareholders have the power to elect and remove directors, amend the articles of incorporation or bylaws, and approve or disapprove of fundamental corporate changes.

Board of Directors

The board of directors is elected by and represents the shareholders and has the legal responsibility for governing and supervising the corporation.

Bylaws

The bylaws set forth the provisions adopted by a corporation for its government. The bylaws are subordinate to the articles of incorporation, but typically include details about how the corporation is to be run.

Articles of Incorporation

The governing document that sets for the basic terms of a corporation's existence, including the number and classes of shares, and the purposes and duration of the corporation.

Items Acquired During Agency Relationship

Everything acquired by agent, during life of agency relationship, is property of the principal.

Ratification Shown by Conduct

For there to be an effective ratification, the principal must act in a fashion which displays his/her intent to ratify. Actions displaying intent: 1) voluntarily retains benefits of transaction, 2) takes some type of legal action protecting the act in question, 3) or her failure to repudiate the unauthorized act

Master Servant Relationship Does Not Apply to Independent Contractors

Generally independent contractors have the right to control their own actions and are not considered servants; therefore respondeat superior does not apply. In the independent contractor context, the principal has merely bargained for the finished product and has no right to control the independent contractor's actions.

Rights Against Third Parties

Generally, only the principal is entitled to enforce the contract against third parties. But where the agent has power to contract and an interest in the agreement, he/she is entitled to recover from a third party.

General Partner

A general partner manages the business and has unlimited personal liability for the business's debts.

Limited Liability Company:

A limited liability company is a hybrid business structure that combines the limited liability found in corporations with the tax benefits of partnerships. LLC owners are not personally liable for business debts.

Formation of Limited Liability Company

A limited liability company must be formed in compliance with formalities specified by statute in the jurisdiction, such as by filing with a designated government office or agency (in California, the Secretary of State) articles of organization, which are signed by an organizer for the LLC, and which identify the name of the LLC, its purpose, its address, and an agent for service of process.

Limited Liability Partnership

A limited liability partnership does not have a general partner; instead, every partner can participate in the management of the business. Additionally, in an LLP, every partner has limited liability for business debts.

Limited Partner

A limited partner cannot participate in managing the business, but makes an investment in the partnership and therefore has an ownership and profit-sharing interest. The limited partner's liability is limited to the amount of his or her investment.

Dissolution of Partnership

A partnership may be dissolved by: 1) expiration of partnership term, 2) purpose of partnership becomes illegal, 3) bankruptcy of a partner, 4) death of a partner (unless the deceased partner is a limited partner), or 5) by decision and act of any partner who complies with the terms of the partnership agreement governing dissolution. Furthermore, the Uniform Partnership Act allows for a court to dissolve a partnership upon any of the following: 1) insanity or permanent incapacity and, 2) improper conduct by partner. The partnership continues until its business is completed through the process of winding up.

Subagent

A person to whom an agent has delegated the performance of an act for the principal.

Fiduciary

A person who is required to act for the benefit of another on all matters within the scope of their relationship, and who owes the duties of good faith, trust, confidence, and candor.

Agent's Authority

A principal can be bound by agent's actions if one finds: 1) actual authority, 2) apparent authority, 3) ostensible authority, or 4) power arising from agency relationship which does not depend upon principal's authority.

Imputed Knowledge

A principal will not be subject to imputed knowledge unless the facts concern the subject matter of the agency and the facts fall within its scope.

Imputed Notice

A principal will not be subject to imputed notice unless the agent had actual or apparent authority to receive notice from a third party.

Promoter

A promoter is a person who organizes or founds the corporation

Sole Proprietorship

A proprietorship is a business owned by a single person who has the sole right to manage, is solely entitled to the profits, and has unlimited personal liability for the debts of the business.

Public Corporation

A public corporation is a corporation with shares owned and traded by members of the general public. Public corporations are usually registered under the Securities Exchange Act of 1934, and their shares are usually traded on a securities exchange or through brokers "over the counter

Principal's Knowledge of Material Facts:

A ratification is deemed proper only if the principal was aware of all material facts at the time of affirmance. If the principal was not in possession of such information, or was mistaken as to the facts, he/she may rescind the ratification absent a third party's detrimental reliance.

Rights of Third Party

A third party has the right to bring an action against both the principal and the agent, but possesses a right to recover against only one party. Some jurisdictions hold that filing against one party releases the other party, but a majority of jurisdictions hold that the third party may file against both, and must make final decision regarding recovery prior to the court's judgment

Close Corporation

Close Corporations are Corporations with few shareholders and no regular markets for their shares. Since there is no public offering of shares, the shares are usually subject to restrictions on transfer.

Corporation by Estoppel

Corporation by estoppel" is a doctrine which prevents a third person from holding a member of a nonexistent corporation personally liable on an obligation entered into in the name of the nonexistent corporation, on the theory that the third person relied on the existence of the corporation and is now estopped from denying that the corporation existed.

Authority of Directors

Directors have authority to manage the corporation. The board appoints and supervises officers, who carry out the day-to-day business.

Partner's Interest

Each partner has a "tenant in partnership" with the other partners in all partnership property. A tenant in partnership allows a non-assignable equal right to possession for partnership purposes. Upon death this right will vest in surviving partners.

Partner's Personal Property

Each partner possesses a personal property interest in the profits of the partnership.

Agency by Estoppel

If a third party detrimentally relies upon principal's misleading representations regarding agent, principal will be estopped from denying relationship.

Partnership by Estoppel

If a third party has detrimentally relied upon a party's representations regarding existence of alleged partnership, individuals may be estopped from denying existence of partnership.

Third Party Claiming as Partner

If a third party holds herself out as a partner in an actual or implied partnership, she will be liable to third parties acting upon such representations.

Principal's Breach of Contract:

If agent's contractual agreement is breached by the principal, the agent is allowed to recover under a theory of set off, a right of indemnification from principal, by placing a lien against principal's property, by nonperformance of remaining obligations, and by demanding an accounting.

Principal Not Liable if Agent Acts Without Authority

If an agent acts without authority, the principal will not be held liable unless he/she ratifies. The agent will be solely liable to the third party. If agent's representations regarding authority is intentional, he/she may be held liable in tort. A third party who subsequently performs based upon agent's representations, may be able to bring an action against principal to regain the bestowed benefit.

Master Servant Relationships May Extend to Subagent

If an agent is authorized to hire a subagent, the master servant relationship will run from principal to the subagent. If the agent is not authorized to hire a subagent, the principal will not be liable for the tortious acts of subagent. If the agent hires a subagent in an emergency situation and in the best interests of the principal, then principal may be found liable for tortious acts of subagent.

Ratification of Agent's Actions

If an agent's unauthorized act is ratified, the ratification establishes the agency relationship as well as the agent's authority. The ratified act relates back to the date of the original agreement. Ratification exposes principal to liability for agent's actions.

Dissolution Resulting from Death

If dissolution occurs as a result of a partner's death, the remaining partners have a right to possession of partnership property as well as a duty to complete partnership business.

Significance of the Form of Agreement

If nothing within the agreement indicates an agency relationship, then the agent and principal will be held jointly liable. If there is evidence of the agent's signing in a representative capacity, then the principal will be solely liable.

Apparent Authority derived from Apparent Ownership:

If principal gives agent the indicia of ownership, the agent may deal with the property as if he/she had actual ownership. But apparent ownership is not derived from possession alone.

Agency Derived from Apparent Authority:

If principal leads a third party to believe that another acts as her agent, an agency relationship based upon apparent authority arises. If the third party reasonably relies upon the statement, the principal is contractually bound to th

Principal Liable when Agent Acting with Authority

If the agent acts within his/her capacity, and contracts in the name of the principal alone, only the third party and the principal will be bound by the agent's contract. If the agent contracts in his/her own alone or in both his/her name and the principal's name, liability depends upon the form of the agreement.

Partner May have Right to Recover Damages on Dissolution

If the dissolution of a partnership violates the terms of the partnership agreement, the non-dissolving partners may have a right to recover damages from dissolving partner. If the dissolution is within the terms of the partnership agreement there will be no action for damages.

Factors Indicating Partnership

In the absence of affirmative evidence of an agreement to create a partnership, the courts will consider joint ownership of property, contribution of capital, and the sharing of income. These factors do not conclusively establish existence of partnership.

Ratification Not Allowed

Neither actions violating public policy, nor actions completed on behalf of someone other than the principal, can be subject to ratification.

Undercapitalization Test

The "undercapitalization" test is one method of deciding whether the corporate veil will be pierced to hold its shareholders personally liable for corporate debts. Under the test, the court is likely to pierce the corporate veil if the corporation was established without sufficient capital to meet its foreseeable business needs.

Agent's Fiduciary Duty to Principal

The agent is bound by a fiduciary duty to the principal. A fiduciary duty demands loyalty and notification of items material to the agency.

Notice Required for Valid Termination

To terminate a valid agency relationship between principal and agent, the termination must be communicated to the other party, except in situations of death or incapacity. If a third party has relied upon the apparent authority of an agent, the third party must receive notice that the agent no longer has authority. This third party requirement is subject to a death and incapacity exception

Partner Liable for Partnership Debt Even if Dissolution Occurs

Upon dissolution, the partners remain jointly liable for partnership debt. If a new partnership emerges from the old form, the new partnership assumes debt of the old partnership. The only exception to this rule is the case of a retired partner. The retired partner will not be liable for the debt acquired after her departure.

General Limits Placed upon Ratification

When ratifying, the principal must ratify the entire act and not just a portion. Additionally, an offer by a third party is considered an offer and can therefore be withdrawn at any time prior to acceptance by ratification. Death of an offering third party also ends the principal's ability to ratify.