Agency and Partnership Flashcards
Agency Generally
Fiduciary relation
Results from the manifestation of consent
By one person to another
That the other shall act on his behalf and subject to his control
And consent by the other so to act
Agency Elements
Consent
On Behalf of
Control
Capacity
No Writing Required
Equal Dignities Rule
Agency agreements must be in writing when agent is to enter into certain contracts within statute of frauds or agency agreement itself would fall within statute of frauds
Ie. contract to buy land
Agent’s Duties to the Principal
Care
Loyalty
Obedience
Agent’s Duty of Care
Carry out agency with reasonable care
Duty of Loyalty
Undivided loyalty
Includes:
May not use position to profit for themselves
Must act solely for the benefit of the principal
Refrain from dealing with principal as adverse party or with adverse party
May not compete with principal based on subject matter of the agency
May not use principal’s property or information to benefit self
Duty of Obedience
An agent must obey all reasonable directions of their principal
Liable to principal for losses from failure
Principal’s Remedies for Agent’s Breach of Duties
When it comes to breach of fiduciary duty, note that a wide range of equitable remedies are available to a court. In general, a court can do whatever it wants to “do justice” in the situation.
Principal’s Duties to the Agent
Not fiduciary in nature
Indemnify agent’s losses in carrying out principal’s instructions
Compensate agent for services
Actual Authority
Based on agent’s reasonable belief. If reasonable person in agent’s position would believe principal gave them authority.
Requires principal’s manifestation
Express: Conveyed by principal in words
Implied: Agent reasonably believes it exists
Termination of Actual Authority
Revokes after:
Specified time
Specified event
Reasonable time
Change of circumstances
Breach of fiduciary duty
Unilateral act by either party
Death
When agent has notice
Apparent Authority
Based on third party’s reasonable belief
If principal’s words or conduct would lead a reasonable person in 3Ps position to believe agent has authority to act
Power of position: Based on agent’s title or position
Ratification
After-the-fact authority
Express or implied
Express: oral or written
Implied: Principal accepts benefits
For ratification to occur, the “principal” must:
Have knowledge of (or have reason to know) all material facts regarding the contract
Accept the entire transaction (meaning the “principal” cannot merely ratify a portion of the transaction) AND
Have capacity (be competent and of legal age)
Who is bound on a contract? (Agency)
Actual authority, apparent authority, or ratification: principal bound.
Undisclosed or partially disclosed principal: agent also bound.
Vicarious Liability
Master liable for torts in scope of servant’s employment
Servant vs Independent Contractor
Not just task but how task must be accomplished = servant
Factors for Right to Control:
Skill required more likely independent contractor
Tools and facilities
Period of employment (longer = employee)
Basis of compensation
Time: employee favored
Job: IC favored
Business purpose
Distinct business
Detour vs Frolic
Detour:
Minor deviation from employer’s directions still within scope
Frolic:
Substantial deviation
Intentional torts Agency and Exceptions
Employer generally not liable for employee’s intentional torts
Exception:
Conduct natural from nature of job
Motivated to serve employer
Authorized by employer
Direct Liability for Torts
Every person is liable for their own torts.
Thus, an employer is liable for their own negligence if they fail to properly train or supervise employees or independent contractors, or
fail to check an employee’s or independent contractor’s criminal record or job history
Exam: Discuss both theories of liability: Direct and vicarious
Partnership definition
Two or more persons associate to carry on as co-owners a business for profit
Do not need to intend partnership
Partnership Formation factors
Profit sharing
Receive a share of profits, then legal presumption of partnership
Doesn’t include paying back debts or rent
Sharing of gross returns does not count as profit sharing, revenue is without losses cut out
Right to participate in control of business
Loss Sharing
Partnership by Estoppel
Partner liability imposed when a party is not a partner in fact.
Hold self out to the world as if they were partner and 3P relies on that
Exam: Rely on provisions of a partnership agreement first then fall back on statutory provisions
General Partnership Voting Default Rules
Unless otherwise agreed:
One partner, one vote
Ordinary business decision = majority vote
Extraordinary business decision = unanimous vote
General Partnership Salary Default Rules
Unless otherwise agreed, no compensation
Because you get profits distributed at end of year
General Partnership Profit/Loss Sharing Default Rules
Profits shared equally
Losses shared in same manner as profits
Partnership Liability
Partnership = principal under agency law
Partner = Agent under agency law by statute
Tort
Liable for loss or injury caused to a person by a partner in course of partnership
Contract
Liable for all contracts entered into by a partner in the scope of partnership business or with actual or apparent authority of the partnership
Partners entering into contracts
And usually have apparent authority for whole partnership
Cannot waive away 3P rights such as apparent authority
Statement of Authority exception to partner contracts
Document filed publicly limiting partner’s authority to transfer real property
Gives constructive notice that partners can’t transact with real property, only real property
Liability of Partners
Each partner is jointly and severally liable for partnership obligations
P must exhaust partnership resources before collecting from partners, so partners are guarantors
Able to get indemnified by partnership
Cannot limit 3Ps rights
Admitting new partners
Default rule: Unanimous vote
Not liable for obligations that arose before becoming partner
Partnership Duties
Care
Loyalty
Duty of Disclosure
To each other AND partnership
Cannot eliminate these duties
Partners Duty of Loyalty
Account to partnership for any benefit
No taking adverse positions to partnership
No competing with partnership
Partners Duty of Care
No grossly negligent or reckless conduct
Duty of Disclosure
A partner also has a duty to provide complete and accurate information concerning the partnership.
Statutory, not fiduciary duty
R.U.P.A. provides that each partner and the partnership shall furnish to a partner
(1) without demand, any information concerning the partnership’s business and affairs reasonably required for the proper exercise of the partner’s rights and duties; and
(2) on demand, any other information concerning the partnership’s business and affairs (except to the extent the demand or the information demanded is unreasonable or otherwise improper under the circumstances)
Can eliminate this duty
Partnership Property
Belongs to partnership if bought in partnership name or by partner and it is apparent in document they’re acting for the partnership
Presumed partnership property if partnership funds used
Presumed partner property if bought in their name without partnership funds and no sign of using property for partnership
Rights in partnership property
Totally unrestricted
Partnership owns partnership property
Partner right
Not a co-owner of partnership property
Partnership interest
is the partners ownership stake in the partnership
Ownership interest in partnership
Management rights
Financial rights
Rights:
No Unilateral Transfer of Management Rights
–Unless otherwise agreed, a partner cannot unilaterally transfer his management rights and thereby make the transferee a “partner.”
Unilateral Transfer of Financial Rights Permitted
–Unless otherwise agreed, a partner can unilaterally transfer his financial rights.
Ie: only able to transfer financial rights
Dissociation
Partner’s withdrawal from partnership
Methods:
(1) oral or written notice of the partner’s express will to withdraw;
(2) happening of an agreed event;
(3) valid expulsion of the partner;
(4) the partner’s bankruptcy or the appointment of a receiver for a partner;
(5) the partner’s death or incapacity to perform partnership duties;
(6) the decision of a court that the partner is incapable of performing a partner’s duties; or
(7) termination of a business entity that is a partner
Wrongful Dissociation
A partner will be deemed to have wrongfully dissociated if the dissociation is in breach of an express term in the partnership agreement.
A dissociation is also wrongful in a term partnership if the partner withdraws, is expelled, or becomes bankrupt before the end of the term.
A partner who wrongfully dissociates is liable to the partnership for any damages caused by the dissociation.
At-will Partnership
No agreement to remain partners (default)
Term Partnership
Agreement to remain partners for amount of time or until completion of project
When a partner dissociates from a partnership:
one of two statutory avenues is implicated:
Dissolution: Partnership ends, business is wound up, assets are sold off
The partnership continues in existence with the dissociated partner becoming entitled to a buyout of their partnership interest
Dissolution
Two circumstances are of particular importance:
In general, when a partner dissociates by express will in an at-will partnership, the partnership is dissolved and its business must be wound up.
In a term partnership, if one partner dissociates wrongfully, or if a dissociation occurs because of a partner’s death or bankruptcy, dissolution and winding up of the partnership are required only if, within 90 days after the dissociation, at least one-half of the remaining partners agree to wind up the partnership.
Buyout
Dissociating partner’s right to be paid value of partnership interest by continuing partners
Liability After Dissolution
Remains liable for pre dissociation partnership obligations
And post-dissociation partnership obligations for 2 years
Protect self by letting creditors know directly or
Public statement of dissociation
In 90 days, constructive notice
Apparent Authority of Dissociated Partner
A partnership can be bound by an act of a dissociated partner undertaken within two years after dissociation (assuming that dissolution has not occurred) if:
(1) the act would have bound the partnership before dissociation, and
(2) the other party to the transaction
(a) reasonably believed the dissociated partner was still a partner
(b) had notice of dissociation
Dissolution General
When dissolution and winding up occur, partnership assets must be applied to the discharge of partnership liabilities. If the assets are insufficient, individual partners are required to contribute (“pay in”) in accordance with their loss shares. If there are excess assets, they are distributable to the partners in cash in accordance with their profit shares.
Distribution of Partnership Assets After Dissolution
First, to creditors
Second, to reimburse partners for capital contributions
Third, profits or losses if any
Partnership Continues After Dissolution Until
The partnership continues to exist after dissolution until the partnership is wound up.
Exam tip: look for partnerships failing to file documents that cut off apparent authority after a partner leaves
Apparent Authority—Partner’s Power to Bind Partnership After Dissolution
Apparent authority exists even after dissolution
The partnership can protect itself by notifying creditors directly of the dissolution (effective immediately).
In addition, any partner who has not wrongfully dissociated may file a statement of dissolution with the secretary of state; all persons are deemed to have notice of a dissolution 90 days after such a notice is filed.
Partners May Waive Dissolution and Continue the Business
Any time before the winding up of the partnership business is complete, the partners may decide to waive the dissolution and continue the partnership by unanimous vote of the partners who have not wrongfully dissolved.
Limited Partnership
Partnership with at least one limited member
Formed by:
A certificate of limited partnership must be filed with the secretary of state
Records Office
Agent for Service of Process
Name
Certificate of limited partnership
must be filed with the secretary of state
Needs:
(1) the name of the partnership,
(2) the names and addresses of the agent for service of process, and
(3) the names and addresses of each general partner
Records Office for Limited Partnership
A limited partnership must maintain in its state of organization an office with records of the certificate, any partnership agreements, and the partnership’s tax returns for the three most recent years.
Agent for Service of Process for Limited Partnership
A limited partnership must maintain in the state an agent for the service of process.
Name Requirement for Limited Partnership
Name must contain “limited partnership” or LP
Must alert public to limited liability nature of the business
Partnership Agreement
The real detail on the operation and governance of a LP is typically found in a partnership agreement. It can be written, oral, or implied.
Management by General partners
Each general partner has equal rights in the management and conduct of the LP’s activities.
Generally, any matter relating to the limited partnership’s ordinary business activities may be exclusively decided by the general partner or, if there is more than one general partner, by a majority of the general partners.
Management by Limited Partners
Usually no management rights but financial rights
That said, unless otherwise agreed, the vote of all partners (general and limited) is necessary for certain extraordinary activities
Financial Rights in Limited Partnership
The Uniform Limited Partnership Act’s (U.L.P.A.’s) provisions for distributions are very similar to the distribution provisions for corporations. Unless otherwise agreed, distributions from an LP are made on the basis of the partners’ contributions
Liability in Limited Partnership
General partners liable
Limited partners have limited liability
Only lose value of investments
Always liable for own torts
Fiduciary Duties in Limited Partnership
Limited partners have no fiduciary duties
No management power
Limited Liability Partnership
General partnership where all partners have limited liability
Limited Liability Limited Partnership: limited partnership rules but everyone has limited liability
Formation:
File a statement of qualification with the secretary of state
Name
Liability
Statement of qualification for LLP
Requires:
Name and address of partnership
Statement partnership wants to be an LLP
A deferred effective date, if any.
When filed, become LLP or day in statement
Name for LLP
The name of a limited liability partnership must end with the words “Registered Limited Liability Partnership” or “Limited Liability Partnership” or one of the abbreviations “L.L.P.,” “LLP,” “R.L.L.P.,” or “RLLP.”
Liability for LLP
A partner in an LLP is not personally liable (directly, indirectly, or by way of contribution) for the obligations of the LLP, whether arising in tort, contract, or otherwise
If partnership assets are insufficient to indemnify them for an obligation they incurred on behalf of the LLP, they forfeit the right to receive contributions from other partners in exchange for being relieved of the obligation to contribute to their personal liability.
Remember, no liability for co-partner torts but look to see if engaged in it
LLCs
Limited liability company
Hybrid of corporation and partnership where owners have limited liability and partnership tax treatment
NOT corporation or partnership, something separate
Members
Name for owners of an LLC
Formation of an LLC
Certificate of LLC Filing that must be made to form
Certificate of LLC Filing
Needs:
(1) the name of the LLC,
(2) address of the LLC
(3) the names and addresses of the agent for service of process
Name for LLC
Needs LLC in it
Operating agreement
Private doc for how business runs
Management for LLC
All of the members
Or can have it “manager managed”
Member managed: members manage it themselves
Manager managed: LLC where managers, who may or may not be members, handle management
Voting for LLC
Manager vote for regular decision
Unanimous for extraordinary
Finances for LLC
Profits and losses split based on contribution
Liability for LLC
Members not personally liable for LLC
Fiduciary Duties for LLC
Always with those who have management power
Duty of Care for LLC
Members (or managers if manager-managed) must act with the care that a person in a like position would exercise under similar circumstances, in a manner reasonably believed to be in the best interests of the LLC
BJR exists
Duty of Loyalty for LLC
No conflicts of interest
Transferability for LLC
Same as partnership: financial rights can be transferred, management cannot
Dissociation of LLC
A person has the power to dissociate as a member of an LLC at any time, rightfully or wrongfully, by expressly withdrawing as a member. Generally, the events that cause dissociation of a partner in a partnership will also cause dissociation of a member of an LLC. A wrongfully dissociating member may be liable to the LLC for damages
Dissolution of LLC
An LLC will be dissolved when any of the following events occurs:
(1) an event or circumstance that the operating agreement states causes dissolution;
(2) the consent of all the members; or
(3) the passage of 90 consecutive days during which the LLC has no members
Judicial Dissolution of LLC
Court may grant dissolution if:
The conduct of all or substantially all of the LLC’s activities is unlawful.
It is not reasonably practicable to carry on the company’s activities in conformity with the certificate of organization and the operating agreement.
The controlling members have acted, are acting, or will act in a manner that is illegal or fraudulent.
The controlling members have acted or are acting in a manner that is oppressive and was, is, or will be directly harmful to the member applying for dissolution.
Taxation for LLC
Partnerships and LLCs are taxed on a “pass-through” basis.
There is no entity-level tax; instead, business income is passed-through to the owners and reported on the owners’ individual tax returns (regardless of whether that business income is actually distributed to the partners).
By contrast, a corporation is subject to “double taxation.” The corporation pays taxes on its income, and the shareholders pay taxes on that income again when and if it is distributed to them. In today’s tax climate, pass-through treatment usually results in less taxes paid.
Pass-through taxation
Business entity does not pay taxes as an entity–instead, owners pay tax
Still must declare income even if not passed out through dividends
Conclusion on LLCs
LLPs and LLCs are generally the best vehicles for closely held businesses. They protect all of the owners from liability for the obligations of the business; they allow the owners to contract around almost all of the statutory provisions (so that the business can be run as the owners desire); they allow all of the owners to participate in the management of the business; and they provide pass-through income tax treatment.
