Business Associations
Termination of agency
1. When the stated time period expires 2. when the purposes of the agency have been accomplished 3. By mutual agreement 4. by death or bankruptcy of either party 5. or by either party by reasonable notice to the other
UPA
A partnership is dissolved and must wrap up or wind up its business whenever any one of the partners departs for any reason.
Frolic
Activities performed by an employee during working hours that are not considered to be in the course of his or her employment, since they are for the employee's personal purposes only.
Agreement (agency)
Agent agrees to act on behalf of principle orally or in writing. Express agency example would be real estate agent; implied agency example is retail shop employee
Two Ways Agency Relationship Created
Agreement and Estoppel
Estoppel
An agency relationship that arises because it would be inequitable to allow the principle to deny the relationship.
Liability for Agent's Torts
An agent is liable for her own torts (civil wrongs). Such torts might include: assault; battery; negligence; fraud; malpractice. The principle is liable for the torts of his agent if committed in the course and scope of the agency.
Accounting
An agent must account to the principal for all money or property paid out or received on the principal's behalf. The principal's funds must be maintained separately from the agent's. The funds must not be commingled.
Notification
An agent must disclose all information relating to the agency to her principal. An agent selling a house for home owners may not decide for herself, "this offer is so low I won't bother telling the owner's about it." In agency law, it is presumed the principle knows all that the agent knows
Performance
An agent must perform the work or duties required by the principal, whether set forth in a written agreement, included in an oral agreement, or implied from the nature of the agency relationship. The agent must perform these duties with reason diligence and due care.
Lack of Continuity
Because sole prop is so closely related to sole proprietor, sole prop generally terminates upon death of sole proprietor. If the business debts descend to an heir who continues to run the business, a new sole prop has been created.
Principal's owes three duties to Agent
Compensation; Reimbursement and Indemnification; Cooperation
S Corporation
Corporation that passes all income to its shareholders, who pay tax on income
DBA
Doing business as; another name for a fictitious business name statement
Unlimited Personal Liability (General Partnership)
Each partner has unlimited personal liability for debts and obligations of partnership. Personal assets (savings accounts; art collections) are vulnerable to seizure by partnership creditors (assuming no statutes exemptions exist). Joint and Several liability applies. Can try to protect with insurance
Advantages of Sole Proprietorship
Ease of Formation; Managerial discretion; retention of profits; pass-through tax status
Advantages of Partnership
Ease of formation (filing not needed with state or local agency); flexible management (GPs share management); ease of raising capital (can request capital from partners) ; pass-through taxation (partnerships do not pay federal taxes; earned income is passed through to individual partners)
Employer (principal) Liability for Employee (agent)
Employer-principal's may also be liable for failure to supervise an employee properly, for improper selection of an employee (as is the case when an employer hires an obviously unqualified employee), or for wrongful retention of an employee (as is the case when an employer does not terminate employment although the grounds for termination exist, such as acts of violence and threats by the employee).
Business name
Generally, if all the partners' surnames are included in the business name, it is not a fictitious name.
Fictitious Business Name Statement
If the business name includes the sole prop's last name and does not imply that others are involved (ex: and company; brothers; and associates) no statement needs to be filed. LAST NAME
Unlimited Personal Liability
Makes sole prop personally liable for the debts and obligations of the business. The sole prop liability extends beyond what has been invested in the business to her personal assets. May include money in bank accounts, art collections, and furniture. Sole prop is also liable for torts (civil wrongs) of committed by employees in the scope and course of their employment. (In some cases may purchase insurance to protect against liability; not all risks are covered)
Partnership Management Rights
Partners have the right to participate in management of the partnership, usually through voting at partnership meeting. Not a transferable right.
Partnership Property Contributions
Partners may contribute cash, property, or services to the partnership. Once contributed, unless a partner specifies otherwise, the property then becomes the property of the partnership entity and the contributing partner cannot retrieve the property. Partners should agree on stated value of contributions (cars, furniture, etc). All items acquired by partnership is property of partnership, not partners.
Duties and Rights of Partners (General Partnership)
Partners owe each other fiduciary duties and must deal with each other in good faith.
Limited Liability Partnership
Partnership providing protection against personal liability for wrongful conduct of other partners (also called registered limited liability partnership)
Agents owes these four duties to Principal
Performance; Notification; Loyalty; Accounting
Compensation
Principle must pay agents for their services. If no fixed compensation is agreed upon, the agent is entitled to compensation in a reasonable and customary amount
Partnership Property
RUPA section 501 provides that a partner is not a co owner of partnership property and has no interest in partnership property that can be transferred. Property owned by entity and is therefore safe from creditors of partners.
fictitious business name statement
Record filed with public officials to identify the owner of a business operating under a name other than the owner's surname
RULPA
Revised Uniform Limited Partnership Act; the model for limited partnership legislation in most states
RUPA
Revised Uniform Partnership Act; model for partnership legislation in about three fourths of the states; retains most of the basic features of UPA, but includes changes involving breakups of partnerships. Attempts to provide more stability and continuity to partnerships providing that only certain departures trigger a dissolution.
2001 Act
Revised version of Uniform Limited Partnership Act; fully adopted in 19 jurisdictions, providing significant protection from liability for all partners
Difficulties in Raising Capital
Sole prop is limited in the methods of raising money (v a corp that can sell stock). If a bank won't give loan to sole prop, the sole prop may collapse
Continuity of Existence
Some enterprises such as corporations are capable of existing perpetually. Others such as sole proprietorships do not have such continuity of existence.
Loyalty
The agent must act solely for the benefit of the principle and may not engage in any transaction that would be detrimental to the principal or that would conflict with the principal's interest. Thus, generally, an attorney may not represent both the plaintiff and the defendant in a lawsuit unless each party consents.
Ease of Formation
The ease with which a business can be formed should be carefully considered. Ex: A sole proprietorship is easy and inexpensive to form, whereas a corporation requires compliance with state statutes and can be expensive to form and maintain.
Difficulty in Transferring Partnership Interest
The only transferable right in a general partnership is right to profits. Other partners didn't agree to do business with a newcomer.
Cooperation
The principal must not hinder the agent in the performance of her duties. This duty to cooperate includes a duty to provide the agent with what she will need to perform duties, such as a credit card, an office, necessary equipment, and so forth
Reimbursement and Indemnification
The principal must reimburse the agent for costs and expenses incurred on the principal's behalf. For example: employers routinely reimburse employees for their travel expenses incurred on behalf of the employer. The principal is also generally required to indemnify or compensate the agent for liability incurred by the agent while performing duties for the principal. The agent will not be indemnified for fraud or for reckless or willful misconduct, but the agent will be indemnified for acts directed or authorized by the principal.
Partnership Profits
The right to profit from partnership is a right that can be assigned to another. Can be seized by a partner's creditor. Ex. Dean owes child support. Can have partnership write a check each month from Dean's share of profits rather than paying Dean then having Dean pay support.
Retention of profits
The sole prop may keep all profits generated by the business
Management Vulnerabilities
The sole prop may not have all expertise needed. Sole prop is sole decision maker and may need funds to hire outside consultants and expertise.
Pass-Through Tax Status
The sole prop's income is passed through to the sole proprietor who pays taxes at her appropriate individual rate. The business itself pays no taxes
Managerial Discretion (sole prop)
The sole proprietor is free to make all decisions regarding the business. The sole prop may select the name of the business, establish its location, hire employees, and decide what products and services will be offered. The owner is not vulnerable to the negligence of a partner and may sell the business without securing approval from anyone.
Ease of Formation (sole prop)
The sole proprietorship is easily and inexpensively formed and operated
Partnerships Governed by their state statutes
UPA (Uniform Partnership Act) and RUPA (Revised Uniform Partnership Act--37 states and district of columbia) Louisiana follows its own statutes
Lack of Continuity (General Partnership)
Under UPA, a partnership cannot survive the death or withdrawal of a partner unless partners have specified otherwise. Provides less stability than a corporation which can exist perpetually. RUPA tries to help by providing that partnerships no longer dissolve every time a partner departs.
Dissolution and Winding up --UPA
Under the UPA, dissolution of the partnership triggers winding up, namely a wrapping up of the business affairs of a partnership.Causes of dissolution: the ending of the term of the partnership; the withdrawal at will of any partner; unanimous agreement of all partners; death, expulsion, or bankruptcy of a partner. Any time a partner leaves the partnership the partnership is dissolved and must wind-up its affairs.
UPA
Uniform Partnership Act; model for partnership legislation in about one fourth of the states; acts as safety net or default rules for partnerships. If a dispute arises on some issue in which the agreement is silent (does not spell out). Then UPA (or RUPA) dictates.
Disadvantages of Partnership
Unlimited Personal Liability; lack of continuity; difficulty in transferring partnership interest
Disadvantages of Sole Prop
Unlimited personal liability; lack of continuity; difficulties raising capital; management vulnerabilities
Fiduciary Duties
While partners may eliminate or vary many UPA or RUPA provisions by their agreement, under RUPA section 103(b) they may not eliminate the duty of due care each partner owes to the other partners and to the partnership
foreign limited partnership
a limited partnership doing business in a state other than the one in which it was formed
Domestic limited partnership
a limited partnership doing business in its state of formation
limited liability partnership
a limited partnership providing protection from limited liability to its general partners; recognized fully in 19 states
limited partner
a member of a limited partnership who does not participate in controlling the business and whose liability is limited to amount invested in the business
Interest in the partnership
a partner's right to profits (or share of losses)
partnership interest
a partner's share of partnership profits (and losses)
partnership at will
a partnership with no specific term
Profits and losses
a sole proprietor retains all business profits, but she is also solely liable for all losses.
joint venture
a type of partnership formed to carry out a single enterprise
General partnership
a voluntary association of two or more persons to carry on a business for profit
general partnership
a voluntary association of two or more persons to carry on a business for profit
ratification
acceptance of an act
event of withdrawal
action by general partner that usually causes dissolution of limited partnership
doing business
activities enumerated by a state that require an entity to qualify before entering the state to transact business
express authority
actual authority granted by one to another, in writing or orally
Upon termination of the agency relationship
agent no longer has authority to bind the principal
limited partnership agreement
agreement among partners in a limited partnership, usually written but may be oral
RUPA
allows a general partnership to convert to a limited partnership and vice versa or to merge with other partnerships to form a new entity
Express Agency
an agency agreement, written or oral
agency by estoppel
an agency arising from acts that lead others to believe an agency relationship exists
implied agency
an agency relationship in which there is no express agreement, but the parties' words, conduct, or prior dealings show the existence of their agency relationship
partnership agreement
an agreement by two or more persons to do business together as a partnership; may be oral or written
apparent authority
authority that arises through words or conduct of principal leading others to believe agent has authority to act for principal
limited partnership
business created under a state statute in which some partners have unlimited personal liability and others have no liability beyond the amount contributed to the business
limited partnership
business entity created in accord with state statutes that provides limited liability to some of its members, called limited partners
limited liability company
business entity providing limited liability for its members
sole proprietorship
business owned and operated by one person
non-compete clause
clause in agreement restricting signatory from competing with another during and after parties' relationship terminates
Transferability
clients must consider how easy it is to "get into" and "get out of" the business enterprise. It may be difficult to withdraw from a partnership, but it is usually easy to sell stock and transfer out of a corporation. If clients foresee a need to liquidate their investment in a business for cash, they should consider how easy or difficult it will be to transfer out of the enterprise
dissociation
departure by a partner from a partnership
wrongful dissolution
departure from a partnership in breach of partnership agreement
judicial dissolution
dissolution of an entity ordered by a court
nonjudicial dissoclution
dissolution of an entity without court involvement
statement of denial
document filed with secretary of state denying information in statement of authority
statement of authority
document filed with secretary of state providing notice of partners who are authorized to act for partnership
statement of dissociation
document filed with state to identify dissociating partner and to limit period for which partnership will be liable for dissociating partner's acts
fiduciary duties
duty to act in utmost good faith and fair dealing
recitals
introductory clauses in agreements setting forth basis for agreement
due dilligence
investigation conducted prior to entering an agreement or consummating a transaction
business corporation
legal entity existing under the authority of the state legislature
personal libility
liability extending beyond business assets to personal assets
personal liability
liability for business debt, which extends beyond what is invested in a business to include an individual's personal assets
respondent superior
liability imposed on employers for acts of employees
vicarious liability
liability imposed on one for another's acts, without regard to actual fault
general partner
member in a limited (or general) partnership who controls the business and has unlimited personal liability
check the box
method by which businesses may elect how they wish to be taxed, namely, as a corporation
capital
money used to form and operate a business
fictitious name
name that must be registered with state or local officials because it does not disclose the surname of the business owner
Agent
one who acts for or represents another
sole proprietor
owner of a sole proprietorship
marshaling of assets
partnership theory requiring creditors to first exhaust partnership assets before pursuing partners' individual assets
implied authority
power to perform acts customarily performed by agents
Joint and Several liability
principle that each partner and the partnership are liable to pay all of a debt or obligation
RUPA
provides that a partnership is a separate entity and thus property may be acquired in the partnership's name, and the partnership may sue and be sued in its own name.
close corporation
small corporation whose shareholders are active in managing the business and that operates informally
Full shield states
states in which partners in an LLP are fully protected from personal liability, whether arising in tort or contract
Partial shield states
states in which partners in an LLP retain personal liability for contractual obligations
general agency
the authority of a partner to act for and bind teh partnership and other partners
limited partnership certificate
the document filed with a state that creates a limited partnership
principal
the person for whom an agent acts
agent for service of process
the person or entity that receives service or process on behalf of a business entity
pass-through tax status
the tax status of a partnership in which all income is passed through to partners who pay taxes at individual rates