Agency & Non-Corporate Entities

Articles of partnership

Covers: 1. basic partnership structure 2. capital structure 3. how profit/losses are shared 4. management 5. accounting 6. dissociation and dissolution

Wrongful Dissociation

Leaving of the partnership leaves partners high and dry or there is only 1 other partner left, this means one has wrongfully dissociated. (violation of fiduciary duty)

Fisk Ventures, LLC v. Segal

(1) LLC agreement regulates terms by which members control LLC & ct won't insert itself into agreement to decide which member's biz judgment was more in line w/ LLC's best interests. (2) The fiduciary duties may be expanded, restricted, or eliminated by LLC agreement.

Defining characteristics of a partnership

- 2 or more ppl get together to run biz or trade. - sharing of profits & losses (doesn't mean that it is equal but must be greater than 0) - joint ownership of business (does not have to be equal but everyone needs to be able to call themselves an owner) - equal rights to be involved with management. (just because you have a right does not mean you exercise this right)

Sole Proprietorship

- Business owned by 1 person - Easy exit to fold biz - Single owner keeps all the profits - Taxed once as personal income - If owner dies, Biz dies

Duties of Principal to Agent:

- Can't interfere - Must follow K - Must indemnify agent for losses (if Agent liable in Tort, P pays)

Duties of Agent to Principal

- Disclose all info (notify) - Act only as authorized - Act w/care, competence, & diligence

LLP Liability

- LLP shields the limited partners from personal liability for another partner's or the LLP's misdoings - Each partner liable only for her own wrongful acts; except that any partner who supervises another partner or a partnership employee who commits a misdeed is personally liable for that misdeed

LLC (Limited Liability Company)

- Owners called members by purchasing shares - Must file articles of organization + costs - Limited liability - Taxes-single taxation - active role in the business (optional)

LP (Limited Partnership) liability

- Pass through taxation for LP too - equal percentage to contributions - Managers liable to 3rd parties w/knowledge &/or reasonable belief

LLP (Limited Liability Partnership) personal liability

- partners only responsible for their OWN malpractice and those that you DIRECTLY supervised - if you had influence on a day to day decision, then you are a supervisor.

Order of Dissolution Operations ($)

1. Pay debts to: Outside Creditors (Non-partners) 2. Pay debts to: Partner creditors 3. Capital contributions returned 4. Distribute remaining capital among remaining partners

Order of Dissolution Operations

1. end business 2. pay debts 3. distribute remaining capital among remaining partners.

General Partnership

2 or more ppl carrying on as co-owners of a biz for profit.

Gateway Potato Sales v. G.B. Investment Co.

A limited partner may be personally liable for partnership debts if the limited partner has performed substantially the same role as a general partner, even if the limited partner had no interaction with the creditor.

Pepsi-Cola Bottling Co. v. Handy

A member of LLC is protected against liability for claims arising solely by reason of being a member or acting as a manager of the company.

Collins v. Lewis

A partner does not have a legal right to force dissolution of a partnership if the other partner fulfills his or her duties under the partnership agreement. (Only damages you can get are accounting)

Singer v. Singer

A partner has a fiduciary duty not to compete with other partners, or with the partnership itself, in the absence of a partnership agreement stating otherwise. (Can K away duties)

Premier Van Schaack Realty, Inc. v. Sieg

A sale or exchange does not occur when a property owner conveys his property to a partnership or joint venture in which he is a member if he retains an ownership interest in the property.

Piercing the Corporate Veil

Action in which ct disregards corporate entity and holds shareholders personally liable for corporate debts and obligations.

Authority types:

Actual, Incidental, Apparent & Inherent

Agency relationship

Agents have ability to bind each other to decisions w/o running decisions by each other first - agents have the power to do things on your behalf without talking to you beforehand (partnerships)

Kaycee Land and Livestock v. Flahive

An aggrieved party may pierce the LLC veil in the same manner as it would pierce the corporate veil.

Balance Sheet Equation:

Assets = liability + net worth

Incidental authority:

Authority that an agent must have in order to perform the biz authorized by a principal.

Why doesn't everyone want an LLC?

Bc shares may not be publicly traded. If your shares aren't publicly traded than that limits the amount of revenue that you can raise for your company. ** trading shares publicly is HARD, lots of hoops to jump.

How are partnerships taxed?

Pass through taxation

Meinhard v. Salmon

Co-adventurers, like partners, have a fiduciary duty to each other, including sharing in any benefits that result from the parties' joint venture.

Revised Uniform Partnership Act (RUPA) requires:

DEFAULT RULES AND GAP FILLERS. HAVE TO FOLLOW THESE things below: 1. fiduciary duty of good faith and fair dealing 2. unanimous vote to ALL PARTNERS MUST BE ON BOARD: - add new partners - change capital structure - alter essential nature of business - engage in new business if something's not addressed, UPA will apply (separate entity view)

LLC personal liabilities

EXACTLY the same as corporate share holders. - liable to the extent of the LLC. (No personal liability for the debts of a business!) - but... all that stuff of - piercing the corporate veil

National Biscuit Company v. Stroud

In a general partnership with two partners, each party has the power to bind the partnership in matters pertaining to the partnership's business.

What responsibility do partners have to each other?

Fiduciary Duty. Personal interest inferior to what's best for the company. Public Policy: Promotes biz & commerce!

How to form a partnership

Formed through agreement of the 2 or more parties (Articles of partnership). Can be written or verbal

Summers v. Dooley

In a general partnership, each partner has an equal right in managing the partnership's business.

Joint and Several Liability

If 2 or more ppl are jointly or severally liable for a debt or other obligation, they just have to see that the debt gets paid. (occurs in partnerships) - doesn't mean that we pay =, doesn't mean that both have to contribute to it. Not same thing as profit or losses (debt doesn't mean loss)

Taghipour v. Jerez

If manager managed, manager can bind the LLC to mortgages

Kessler v. Antinora (Financial Rights and Obligations)

In the absence of a partnership agreement, it is assumed that partners intend to share equally in the profits and losses of the enterprise, regardless of the amount of money they contributed to the partnership.

LP (Limited Partnership) Personal liability

MUST BE AT LEAST 1 GENERAL AND LIMITED partner. - general partner responsible for EVERYONE. take advantage of management - limited partner, only responsible for own malpractice. THE MINUTE YOU DECIDE To use your management right, you become a general partner & lose the liability protection from others bad acts. (If acting like gen parter held to liabilty as gen partner)

Actual authority:

Manifestation of principal and agent relationship principal: you do work for me!

Income Statement:

Movie-like, results of operation over time (bridge between 1st and last balance sheet)

Any protection for owners of a partnership?

NO PROTECTION for owners of partnership (no limited liability)

What does it mean that partnership are a separate legal entity aside from the partners?

Owners are legally separated from the thing they own. Like shareholders to a corporation. - it is considered a legal fiction for partnerships. Does not protect you from liability

Who is responsible for liability or debt in a partnership?

Owners/partners are RESPONSIBLE for it. There is NO protection built in for the partners

Meehan v. Shaughnessy

Partner has a fiduciary duty to provide, on demand of another partner, true and complete information of any and all things affecting the partnership.

Bane v. Ferguson (Duty of Care)

Partner has fiduciary duties to other partners, NOT former partners. Partners have fiduciary duties to each other. Among the fd partners have to each other, one is fiduciary care. The fd of care, is apparently limited by the Business Judgment Rule.

Kus v. Irving

Partner in LLP not liable for obligations & liabilities of partnership or other partners (unless involved + supervising)

Dreifuerst v. Dreifuerst

Partner is entitled to payment in cash of his partnership assets upon dissolution and wind-up of the partnership.

Dissociation

Partner leaves a partnership even though the partnership is still doing business - normally entitles remaining partners to buy dissociating partner's interest

What are partners to one another?

Partners are Agents to one another (Agency relationship between em)

Ederer v. Gursky

Partners in LLP are shielded from personal liability for partnership debts to 3rd parties, BUT not protected from debts to other partners.

Dissolution

Partnership comes to an end and ceases to do business. IT DISSOLVES. - winding up. Must do this to end partnership

Partnership for a term

Partnership created for a fixed duration or a specific purpose

Partnership at will

Partnership created with no fixed duration

Term partnership

Partnership in which the partners agree in advance how long it will last

Implied partnership

Partnership lacking a written agreement, but parties involved conduct business like a partnership

Bohatch v. Butler & Binion

Partnership not liable for expelling partner for purely business reasons, to protect relationships w/in firm & w/ clients, or to resolve fundamental schism in the partnership BUT liable for breach of partnership agreement by not giving notice of reducing tentative distribution.

Apparent authority:

Principal tells third-party that another is OK to work as his agent.

Authority by estoppel:

Principal's conduct may have led to third party's belief (apparent authority)

Income Statement Equation:

Revenue - Expenses = Net worth

Winding up/Liquidation

Selling off partnership's assets, paying off creditors, and settling up profits/losses b/n partners

LLP (Limited Liability Partnership)

Type of partnership in which all partners are limited partners

Inherent authority:

Undisclosed principal can still be bound. Power of agent exists solely from agency relationship + exists for protection of persons harmed by dealing w/agent.

UPA

Uniform Partnership Act - Created in 1914, National Conference of Commissioners on Uniform State Laws promulgated it. Model act that codifies general partnership law. (Aggregate view)

Rapaport v. 55 Perry Co.

Unless otherwise provided in the partnership agreement, the right to assign one's partnership interest without consent does not include the right to unilaterally add new partners to the partnership.

Ratification:

Validates agent's right to act on principal's behalf. - Express ratification: oral/written status. - Implied ratification: principal has knowledge of unauthorized transaction but acts positively & accepts it/its benefits.

Lupien v. Malsbenden

Where 2 parties exercise joint control over a biz & share in its profits, a partnership exists, regardless of how parties view or refer to their relationship.

At will partnership

Where the partners have not agreed to remain partners until the expiration of a definite term or the completion of an undertaking. (Default form)

Expressed Partnership

Written articles of partnership talking about partnership

LLC taxability

You make a choice. if you do not make a choice, it is that of a pass through entity. - if more than 1 member, can stick by default OR could choose to be double taxed like a corporation. *Why would anyone want to be double taxed? bc pass through entities can be taxed more than that of corporation rate. if you don't have dividends, you don't pay those taxes and get taxed as a corporation.

9. If an auditor believes that a company may not continue as a going concern, what must it do? a. Issue a qualified opinion stating that. b. Bring in another accounting firm to check its work. c. Declare that it is no longer independent and cannot continue with the audit. d. None of the above.

a. Issue a qualified opinion stating that. (If auditor concerned)

19. Presume for the purposes of this question only that before Paul had any dealings with Sam he (Paul) and Peter created a limited liability company (LLC). It was manager-managed with Paul the manager and Peter a member. As above Paul knew of the code violations but Peter did not. Paul then sold the building to Sam without disclosing the code violations and Sam again now faces multiple lawsuits because of them. Who if anyone is liable to Sam for his potential damages there? a. Paul only. b. Peter only. c. Both Paul and Peter. d. Neither Paul nor Peter.

a. Paul only. (via piercing the veil)

4. Presume for the purposes of this question only that Sam and Ruth agreed to end their business after two years. At that time, it had no assets remaining and the firm had lost $200,000. Presume also that Sam has no claim for any salary. What are the financial rights and liabilities of the parties a. Sam will have to pay Ruth $50,000. b. Sam will owe Ruth nothing c. Sam will have to pay Ruth $100,000. d. None of the above.

a. Sam will have to pay Ruth $50,000.

8. What is the difference between a traditional general partnership (GP) and a limited liability partnership (LLP)? a. Unlike a GP, the partners in an LLP have limited liability. b. Profits in a GP are taxed twice whereas in an LLP they are not. c. Both "a" and "b." d. Neither "a" nor "b."

a. Unlike a GP, the partners in an LLP have limited liability.

7. Amy started a business to sell watches. Jason loaned her $10,000 to finance it. Jason however took no regular payments of interest or principal. In addition, he often showed up at the business and when Amy left for an extended vacation he ran it. During that time Jason also ordered $5,000 of watches from Matt, a watch wholesaler. Will Matt be able to hold Jason liable for that $5,000 expenditure? a. Yes, under these facts Jason will most likely be considered a partner. b. Yes, but only if Amy and Jason made a specific agreement that Jason would be her partner. c. No, because Jason is merely a creditor of the business. d. No, because Jason would just be considered an employee.

a. Yes, under these facts Jason will most likely be considered a partner. (Lupien v. Malsbenden)

12. Alex owned a clothing store and hired Karen as its manager. He told her however that she had no power to discount prices of the apparel it was selling. On her own, however, Karen did just that and sold Pat a shirt for 50% less than Alex had priced it for. Is Alex bound by that transaction. a. Yes, but only if he ratified it. b. Yes, because Karen had apparent authority to set that price. c. No, because Karen had no actual authority. d. No, unless Alex held Karen out as the owner of the store.

b. Yes, because Karen had apparent authority to set that price. (Name tag from Alex tells customers Karen is Mgr>Apparent)

1. Which statement is true of a company's balance sheet? a. It shows the company's income for the past year. b. It discloses the capital accounts of its owners. c. It is based on this equation: "A company's assets are equal to its liability plus its net worth." d. None of the above.

c. *Balance Sheet Equation: Assets = liability + net worth.*

16. Ray sent an email to Fran telling her she could sell Ray's vintage Chevy to Paul for $5,000. Ray also sent a copy of that email to Paul. What type of authority does Fran have? a. Actual authority. b. Apparent authority. c. Both "a" and "b" d. Neither "a" nor "b."

c. Both "a" and "b" (Actual b/n principal + Agent. Apparent: Principal told 3rd party)

20. Presume for the purposes of this question only that Paul has made an agreement with Sue, a real estate broker, to pay her a commission upon the sale of the apartment building that he and Peter own. Paul and Peter then again create an LLC and deed the building to it. Each of them takes a 50% interest in the LLC. Sue learns of this and demands her commission. What would be a good legal theory for her to assert to recover that? a. When Paul and Peter deeded the building to the LLC, a sale took place because they received consideration for that transfer. b. Since an LLC is a separate entity from its members, the ownership of the building has been legally transferred for value. c. Both "a" and "b." d. Neither "a" nor "b."

c. Both "a" and "b."

3. Presume for the purposes of this question only that Ruth and Sam have filed a certificate of limited partnership for their business listing Sam as the general partner and Ruth as a limited partner. Which of these statements describes Ruth's situation? a. Without any further activity on her part Ruth can only lose her $500,000 investment in the business. b. If Ruth takes an active role in managing the business she may lose her limited liability. c. Both "a" and "b." d. Neither "a" nor "b."

c. Both "a" and "b." (a is gen true + risk of management)

17. Barry, a partner in a law firm, supervised the work of Karen, an associate. The firm was organized as a limited liability partnership. If a client believes she has been injured by malpractice committed by Karen, who is potentially liable? a. Karen only. b. Barry only. c. Both Karen and Barry. d. Every partner in the firm.

c. Both Karen and Barry. (Each partner liable only for own wrongful acts; except Mgrs for their inferiors)

Questions 18 - 20 are based on these facts. Paul and Peter were two brothers who owned an apartment building. 18. Presume for the purposes of this question only that Paul and Peter have made no public filings to create a legal entity. Paul offered to sell the building to Sam but did not tell him that it was in violation of many provisions of the city's building code. Peter was unaware of those problems. Sam has purchased the building but now faces multiple suits by the city for those code violations. Who is potentially liable to Sam? a. Paul only. b. Peter only. c. Both Paul and Peter. d. Neither Paul nor Peter.

c. Both Paul and Peter. (No public filing + 2 guys = GP & Paul could've found out!)

Questions 2-5 are based on these facts. Ruth and Sam decided to start a furniture store. Ruth furnished all the initial capital, $500,000 and Sam promised to manage the business. They also agreed that Ruth would be paid 75% of the profits and Sam would receive 25%. In addition, Sam would be paid an annual salary of $30,000 for his services. 2. Presume for the purposes of this question only that Ruth and Sam have made no public filing about their business. They advertised their store as selling furniture but agreed between themselves that it would sell only modern furniture. Sam then ordered $20,000 of antique furniture from Bill who was a wholesaler of that. Bill had no reason to know of the agreement that Ruth and Sam made that the store would only sell modern furniture. Who is liable to Bill for the $20,000? a. Ruth b. Sam c. Both Ruth and Sam d. No one.

c. Both Ruth and Sam (2 co-owners + no public filing = gp)

15. Ellen skillfully forged documents that presented her as a representative of Acme Printing. Using those she secured a contract from Super-Foods, a grocery chain, to have Acme print all their advertising materials and got payment from Super-Foods for that. Ellen has now run off without Super-Foods getting any of the advertising material it believes it is entitled to from Acme. May Super-Foods recover damages from Acme? a. Yes, because Acme will be estopped to deny that Ellen was its agent. b. Yes, because Ellen had inherent authority to act for Acme. c. No, because a putative agent cannot bootstrap her authority. d. No, unless Ellen's documents would convince a reasonable person that she was Acme's representative.

c. No, because a putative agent cannot bootstrap her authority. (Can't pin your fraud on 1 who didn't do anything wrong)

14. Hank formed an LLC and got funding from Sam, a venture capitalist who became a member and co-manager of the enterprise. As part of Sam's financing deal he secured the right to demand that Hank convert the LLC into a corporation and make a public stock offering. Sam is now making that demand but Hank resists claiming that such a move would be premature and injure the company. Will Sam be successful in forcing the company to go public? a. No, because a Court would find that Sam as a manager was breaching a fiduciary duty that he owed the LLC. b. No, because Sam would be violating an implied covenant to only exercise his rights in good faith. c. Yes, members of an LLC are entitled to structure their relationship by contract. d. Yes, but only if the business judgment rule does not apply here.

c. Yes, members of an LLC are entitled to structure their relationship by contract. (Fisk - LLC K regs terms by which members control LLC & in which fiduciary duties may be expanded, restricted, or eliminated)

6. Frank and Sandra want to open up a bicycle shop. They do not want their personal assets to be liable for any losses that the business suffers but they both want to be able to take an active role in the business. They also want to have only a minimum of legal formalities. What legal form would you recommend they use for their business? a. A general partnership b. A corporation c. A limited partnership d. A limited liability company

d. A limited liability company (best/most popular form for these reasons)

5. Presume for the purposes of this question only that while they were running their business Ruth and Sam leased their store from Phil. After they ended their relationship, Phil offered to rent the store to Ruth only and she agreed to do it without telling Sam. She again operated it as a furniture store which became profitable. If Sam now demands that Ruth give him a share of its profits, what would be a good argument for him? a. Ruth has breached a fiduciary duty to Sam. b. Ruth's new business was a continuation of the one she ran with Sam. c. Ruth failed to offer Sam an opportunity to join her as a partner in the new business. d. All of the above.

d. All of the above. (Meinhard v. Salmon)

11. Which of these would be a good reason for a small business to be organized as an LLC. a. There will be no double taxation of its profits. b. Its members will have the freedom to structure their relationship as they see fit. c. Its members will have limited liability. d. All of the above.

d. All of the above. (Owners = members by buying shares, Limited liability, Single taxation, Active role in biz (optional))

10. Bill owned and operated a pet store. One day he went out for lunch and left it open. Jack snuck in and went behind the counter pretending to be an employee. While there he took $500 from Lucy, a customer, and promised to get her a dog with a rare pedigree. Jack has run off with the money. Lucy comes back and demands that Bill either get her the dog or refund her money. Is Bill liable to Lucy here? a. No, because Jack was not an employee of the store. b. No, unless the dog would be difficult for Bill to obtain. c. Yes, because Jack had actual authority to bind Bill. d. Yes, because Bill will be estopped from denying Jack's authority.

d. Yes, because Bill will be estopped from denying Jack's authority. (Bc Bill left it open of course one went in>Lucy reasonably believed Jack worked there)

13. Kevin owned a high-fashion women's apparel store. He however wanted to remain in the background and arranged for Jill to appear as the proprietor. Kevin did not like one of the prominent designers of women's clothes, Harry Kellis. Kevin therefore told Jill she could not purchase any apparel designed by him to sell in the store. The Harry Kellis brand however was very popular and Jill did order some of the clothes he designed from a manufacturer. Jill has now run off and that manufacturer discovers that Kevin is the true owner of the store. May he recover from Kevin for the Harry Kellis designed clothes he has sold to the store? a. No, because Jill acted against Kevin's instructions. b. No, unless the manufacturer knows that Kevin does not like clothes designed by Harry Kellis. c. Yes, because Jill had apparent authority to make those purchases. d. Yes, because Jill had inherent authority to make those purchases.

d. Yes, because Jill had inherent authority to make those purchases. (Bc agency relationship & no other relief > inherent)

Pass Through Taxation

profits and losses pass through biz & are dealt with all the owners (in this case a sole proprietor) personal income tax form at their personal income tax rate. NO SEPERATE BUSINESS TAX. Goes straight to owner - eligible to deduct up to 20% of qualified business income pre-tax

Balance sheet:

snapshot, status of business at particular time

National Conference of Commissioners on Uniform State Laws

they drafted model legislation about business issues. - took draft laws and took it to various states. - still exist not interested in just business but in other issues