Agency and Partnership

Question 1

Agency

Answer 1

A fiduciary relationship that arises when one person(the principal) appoints another (the agent) to act on the principals behalf and the agent consents to act

Question 2

Methods of creating an agency relationship: The agency relationship may be created by:

Answer 2

Act of parties: Parties may create an agency by agreement between the principal and the agent(actual authority). Parties may also be bound to an agency relationship through holding out by the principal(apparent authority)

Estoppel: Virtually the same as apparent authority in that is requires third party reliance on the principals communication

Question 3

Duty of Care

Answer 3

An agent owes a duty to their principal to carry out their agency with reasonable care.
The degree of care is a “sliding scale” depending on any specialized skills the agent may have

Question 4

Duty of Loyalty

Answer 4

Duty of Loyalty: The agent owes a duty of undivided loyalty to the principal.
This includes the following obligations:
1. Not to engage in self-dealing,
2. Not to profit without disclosure, and
3. A duty to follow instructions

Duty of Obedience: An agent must obey all reasonable directions of their principal. If the agent disobeys a reasonable direction, the agent will be liable to the principal for any loss that the principal suffers

Question 5

Subagents

Answer 5

Agent appoint subagent to act on something the agent has consented to act to

An agent has absolute liability to the principal for breaches by a subagent

Duties: If principal authorized agent to appoint the subagent, the subagent owes the principal the same duties as the agent owes the principal. If the principal did not authorize the subagent, the subagent owes no duty to the principal but does owe duties to the agent

Question 6

Principals Duties to Agent

Answer 6

The principal owes the agent all off duties imposed by their contract, reasonable compensation, and reimbursement for expenses

Question 7

Actual Authority

Answer 7

Authority that the agent reasonably believes they possess based on the principals dealings with them.

Actual authority may be express or implied:
Express: Authority that is conveyed by the principals words(oral or written)
Effective even if it was granted mistakenly or because of misrepresentation

Implied: Authority the agent reasonably believes they have as a result of the principals words or actions

Question 8

Apparent Authority

Answer 8

Apparent Authority is that authority which a third party reasonably believes an agent possesses based on the principles holding out the agent as having such authority

Question 9

Agents Liability

Answer 9

If agent had authority to enter in contract for principal the agent may not be held liable

Exception: The agent may be held personally liable if the existence and identity of the principal are not disclosed or partially disclosed
Partially disclosed principal: At time of transaction, third party has notice agent is working for a principal but has no notice of who that principal is

Question 10

Principles Liability

Answer 10

A principal will be liable to the third party on a contract entered into by their agent, if the agent had valid authority(actual, apparent, ratification) to act.

If the agent did not have authority, the principal cannot be liable

Question 11

3rd Party Liability to Principal and Agent:

Answer 11

Disclosed Principal: When the principal is disclosed, only the principal, not the agent, may enforce the contract and hold the third party liable

Unidentified and Undisclosed Principal Situations: When the principal is unidentified or undisclosed, either the principal or agent may enforce the contract and hold the third party liable. All benefits go to principal

Question 12

Respondeat Superior

Answer 12

An employer is liable for the intentional torts of an agent if the agent:

1. Was acting in the scope of employment;
2. Made a minor deviation(a detour) from employment (rather than a frolic); or
3. The intentional tort was committed: for the principal’s benefit, because the principal authorized it, or one that arose naturally due to the nature of employment.

The agent is liable too under a theory of joint and several liability.

Question 13

Liability For Acts of Independent Contractors:

Answer 13

A principal will incur liability for the acts of an independent contractor where:

1. Inherently dangerous activities(blasting) are involved
2. Nondelegable duties have been delegated; or
3. The principal knowingly selected an incompetent independent contractor

Question 14

Partnership

Answer 14

A partnership is the association of two or more persons, to carry on as co- owners, a business for profit, whether or not the persons intended to form the partnership.

Question 15

Partnership Formation

Answer 15

Partnership Formation Factors: Where the parties intent is uncertain(not subjective intent but intent of two or more person to carry on as co-owners a business for profits) courts consider:
1. Profit Sharing
2. Right to participate in control of business
3. Loss Sharing

Profit sharing creates a presumption that a person is a partner unless the profits were received in payment of a debt, rent to a landlord, wages

Sharing of revenue does not presumptively make you a partner only sharing of profits
Can rebut profit sharing by showing that you don’t share in loss sharing to

Partnership Agreement(Exam Tip): While no partnership agreement is needed you should rely on provisions of partnership agreement if present, and fall back on statutory provision if needed

Partnership by Estoppel: If no partnership was formed in facts, parties may still be liable as if they were partners to protect reasonable reliance by third parties

Liability of partner held out: When person by words or conduct represents himself as a partner or consents to being represented by another as a partner, he will be liable to third parties who extend credit to the actual or apparent partnership in reliance on the representation

Liability of person who hold another out as partner: When a person holds another out as a partner, he thereby makes the person his agent to bind him to third parties

Question 16

Voting:

Answer 16

All partners have equal rights in the management of the business and equal votes

Majority vote wins for decisions in ordinary course of business

Exception: Extraordinary matters require a unanimous vote (e.g., admitting a new partner or selling land).

Compensation: Unless otherwise agreed, a partner has no right to compensation for services rendered to the partnership

Question 17

Sharing Profits

Answer 17

Unless otherwise agreed, profits are shared equally among the partners

Losses are shared in the same way as profits

Question 18

Liability of Partnership

Answer 18

Liability of the Partnership in Tort: A partnership is liable for loss or injury caused to a person as a result of the tortious conduct of a partner(or an employee) acting in the ordinary course of business of the partnership or with authority of the partnership

Liability of Partnership in Contract: A partnership is liable for all contracts entered into by a partner in the scope of partnership business or with actual or apparent authority of the partnership

Actual Authority: Authority a partner reasonably believes they have based on the communications between the partnership and the partner (can come from the partnership agreement or a vote of the partners)
Statement of Partnership Authority: Actual authority can be created by document filed publicly limiting partners authority to transfer real property

Apparent Authority(IMPORTANT): A partner is an agent of the partnership, and a partner has apparent authority to bind the partnership to transactions within the ordinary course of the partnerships business or business of the kind carried out by the partnership (Unless the third party is aware that the partner lacks actual authority to act)

Question 19

Liability of the Partners

Answer 19

Each partner is jointly and severally liable for all obligations of the partnership, whether arising in tort or contract.
However, the plaintiff must first exhaust partnership resources before seeking to collect from an individuals partner assets

Extent of Liability: Each partner is individually liable for the entire amount of the partnership obligations.
So where one partner pays the whole obligation of the partnership, they’re entitled to indemnification from the partnership.

An incoming partner is not personally liable for prior debts of the partnership

Outgoing partners are personally liable for debts incurred during their time at the partnership

Question 20

Duty of Loyalty

Answer 20

Each partners owes a duty of undivided loyalty to the partnership.
1. They may not usurp partnership opportunities for a personal advantage,
2. Engage in self-dealing, or
3. Compete with the partnership

Exam Tip: Elimination of Duties: A partnership agreement may not eliminate the duties of loyalty or care. An agreement that says its eliminating them is trying to trick you.

Question 21

Duty of Care

Answer 21

The duty of care requires each partner to refrain from engaging in grossly negligent, reckless conduct, or a knowing violation of law

Exam Tip: Elimination of Duties: A partnership agreement may not eliminate the duties of loyalty or care. An agreement that says its eliminating them is trying to trick you.

Question 22

Duty of Disclosure

Answer 22

A partner also has a duty to provide complete and accurate information concerning the partnership.

R.U.P.A provides that each partner and the partnership shall furnish to a partner:
1. Without demand, any information concerning the partnerships business and affairs reasonably required for the proper exercise of the partners rights and duties; and

2. On demand, any information concerning the partnerships business and affairs.

Question 23

Duty of Obedience

Answer 23

Requires the partner to obey all reasonable directions of the partnership and not act outside the scope of his or her authority

Question 24

Partnership Property

Answer 24

Partnership Capital: The property or money contributed by each partner for the purpose of carrying on the partnerships business

Partnership Property: Everything the partnership owns, including both capital and property subsequently acquired in partnership transactions

Property deemed to be partnership property: Title property is partnership property if it is acquired in the partnerships name or in a partners name where it is apparent from the document that they are acting for a partnership

Property presumed to be partnership property: Under the R.U.P.A., property is rebuttably presumed to be partnership property if it was purchased with partnership funds

Property presumed to be partners separate property: Under the R.U.P.A property is rebuttably presumed to be a partners property if:
1. It’s held in the name of one or more partners;
2. The instrument transferring title gives no sign that they’re acting for a partnership; and
3. Partnership funds were not used to acquire the property

Right in Partnership Property
The Partnerships Rights: The partnerships rights in partnerships property are totally unrestricted(this is because partnership owns the property)

A Partners Rights: A partner is not a co-owner of partnership property and has no interest in partnership property which can be transferred.
A partner can simply use partnership property for partnership purposes

The Partners Ownership Interest in the Partnership: A partners ownership interest in a partnership is called his “partnership interest

Restrictions on partnerships interests:
A partnership is comprised of :
1. Management rights: A partners right to participate in the management of the business, to obtain information about the partnership, and to be recognized as “partner”
2. Financial rights: The partners right to receiver his share of any profit distribution made by the partnership

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. The transferee merely has the right to receive profit distributions from the partnership that would have others gone to the partner.

Question 25

Creditors Claims

Answer 25

If a creditor has a claim against a partner, the creditor can obtain an interest in the partnership.
This includes profits but not management or voting rights.

If a creditor has a claim against the partnership, the creditor can try to collect from the individual partners.

Partners are jointly and severally liable for the obligations of the partnership.

Even if a partner enters a contract without actual authority to do so, the partnership and partners are bound (so long as the partner had apparent authority). The creditor must obtain a judgment against the partners personally to go after each partner’s personal assets.

Question 26

Dissociation

Answer 26

Dissociation: A change in the relationship of the partners caused by any partner ceasing to be associated in the carrying on of the business .
Simply means partners withdrawal from partnership

Wrongful Dissociation: A parter will be deemed to have wrongfully dissociated in two ways:
1. If the dissociation is in breach of an express term in the partnership agreement.
2. A dissociation is also wrongful in a term partnership if the partner withdraws, is expelled, or becomes bankrupt before the end of the term

Term Partnership: Agreement to remain partners for amount of time or until completion of project
At-Will Partnership: No agreement to remain partners. This is the default form of partnerships an most common

Consequences of Dissociation For Partnership: When partner dissociated from a partnership one of two statuary avenues is implicated:
1. The partnership is dissolved and that its business must be wound up. This means that the partnership business will be liquidated(sold off)
2. The partnership continues in existence with the dissociated partner becoming entitled to buyout of their partnership interest.

Consequences Of Dissociation For Partner: Upon a partner’s dissociation, their right to participate in management ceases.
The partnership must purchase(buy out) their interest at either liquidation or going-concern value, and must indemnify them against known pre-dissociation liabilities, as well as against post-dissociation liabilities not incurred by the dissociating partners acts.
Exception: However, a partner who wrongfully dissociates before the expiration of a partnership term or completion of a particular undertaking is not entitled too payment of the buyout price until the term expires or the undertaking is completed, unless they can establish that earlier payment will not cause undue hardship to the partnership business

Question 27

Dissolution

Answer 27

Dissolution: Dissolution are required only in limited circumstance, but two are of particular importance:
1. Dissociation By Express will: When a partner dissociates by express will(voluntarily) in an at-will partnership, the partnership is dissolved and its business must be wound up
- Dissociating partner can force partnership to dissolve

2. Dissociation By Term Partnership: If one partner dissociates wrongfully, or if dissociation occurs because of a partners death or bankruptcy, dissolution and winding up are only required if, within 90 days after the dissociation, at least one-half of the remaining partners agree to wind up the partnership

Buyout: Dissociation partners right to be paid value of partnership interest by continuing partners

Pre-Dissociation Liability: Generally, a dissociated partner remains liable for pre-dissociated partnership obligations (a creditor can agree to relate the withdrawing partner, however, from specific obligations)

Post-Dissociation Liability: A dissociated partner can be liable for post-dissociation liabilities incurred within two years after the dissociate(assuming that dissolution has not occurred) if:
1. When they entered the transaction the other party reasonably believed the dissociated partner was still a partner; and
2. Did not have notice of the partners dissociation
Exception: A dissociated partner can protect themselves by notifying creators directly of their dissociation(effective immediately) or by filing a public notice of dissociation(becomes effective after 90 days of filing).

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 gas in accordance with their profit shares

Priority of Distribution: Each level of priority must be fully satisfied before beginning the next level:
1. First, the partnership must pay all creditors
Creditors include “outside creditors”(for example, trade creditors, lenders, suppliers) and “inside creditors”(for example, partners who loaned money)
2. Second, the partnership must repay all capital contribution paid into the partnership by partners
3. Third, profits or losses, if any

Partnership Continues After Dissolution: The partnership continues to exist after dissolution until the partnership is wound up

Who May Wind Up: As a general rule, all living partners have a right to participate in the winding up of the partnerships business except partners who have wrongfully dissolved the partnership and bankrupt partners
If all partners have died, the legal representative of the last surviving partner may wind up,

Apparent Authority after Dissolution: Partners retain apparent authority to bind the partnership to a third party on new business even after an event required winding up,

Waiving Dissolution: At any time before winding up of the partnership business is complete, the partners may decide to waive the dissolution and continue the partnership by unanimous votes of the partners who have not wrongfully dissolved.

Question 28

LP/LLP

Answer 28

Limited Partnership: A partnership with at least one general partner and at least one limited partner

Formation: Certificate of Limited Partnership: A certificate of limited partnership must be filed with the secretary of state. The certificate must be signed by all members.
The information required in the certificate is minimal and includes:
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
If you fall to file this, remember, you are just a general partnership

Management and Operation: The LP is managed by the general partners. Each general partner has equal rights In the management and conduct of the LP’s activities. A majority vote of the general partners is required for ordinary business activities
Limited Partners: Limited Partners generally have no management rights unless the partnership agreement grants them rights.
Participation in management rights does not cause a limited parter to become personally liable for an obligation of the limited partnership.

Exception: That said, unless otherwise agreed, the vote of all partners(general and limited) is necessary for certain extraordinary activities including:
1. Amend the partnership agreement;
2. Convert the partnership to a limited liability limited partnership;
3. Dispose of all or substantially all of the limited partnerships property outside the usual and regular course of the partnerships activities
4. Admit a new partner; or
5. Compromise a partners obligation to make a contribution or to return an improper distribution

Financial Rights: Limited Partnership profit distribution are made on the basis of the partners contribution(in proportion to the value of each partners contribution)

Liability
General Partners: Jointly and severally liable of all obligations if the LP, just as they are in a general partnership
Limited Partners: A limited partner is not personally liable for an obligation of the LP solely by reason of being a limited partner
Limited partners have limited liability, meaning they can only lose the value of their investments
Exam Tip: A limited partner(As well as a general partner) is always liable for their own torts. The limited liability shield of any business organization does not protect a person from liability for her own torts

Fiduciary Duties
General partners owes the LP and the other partners the same fiduciary duties of loyalty and care that general partners owe in a general partnership.
However, a general partner does not automatically violate the duty of loyalty merely because the general partners conduct furthers his own interests
Limited Partner: Generally a limited partner owes no fiduciary duties to the partnership or any other partner solely by reason of being a limited partner

Limited Liability Partnerships
Limited Liability Partnerships: General partnership where all of the members have limited liability
Limited Liability Limited Partnership: Limited partnership rules, but everyone has limited liability

Formation of LLP: To become a LLP, a partnership must file a statement of qualification with the secretary of state. The statement must be executed by at least two partners

Liability
A partner is not personally liable for the obligation of the LLP, whether arising in tort, contract or otherwise.
As always, a partner remains liable for their own wrongful acts.
Exam Tip: Remember that limited liability only limits vicarious liability, not liability for a partners own wrongful acts.

Question 29

LLC

Answer 29

Limited Liability Company: A hybrid business organization between a corporation and and a partnership that:
1. Is taxed like a partnership(except for a single member LLC)
2. Offers its members the limited liability of shareholders of a corporation; and
3. Can be run like either a corporation or a partnership
An LLC is treated as a separate entity from its members
Members: Owners of an LLC

Formation
Formation: An LLC is formed by filing a certificate of origination with the secretary of state.
The LLC must have at least one members.
Contents: The information required in the certificate is minimal and must include:
1. The name of the LLC
2. The address of the LLC’s registered office; and
3. The name and address of its registered agent
Name: The LLC’s name must uncle LLC or L.L.C

Operating Agreement: The real detail on the operation and governance of an LLC is typically found in an operating agreement

Management and Operation: Management of the LLC is presumed to be by all members.
Each member has equal rights in the LLC’s management.
A majority vote of the members is required to approve most ordinary business decisions
Member-Managed LLC: LLC where members handle management of LLC themselves
Manager-Managed LLC: LLC where managers, who may or may not be members, handle management

Financial Rights
General Rule: Unless otherwise agreed, profits and losses and distributions are allocated on the basis of contributions

General Rule: Members and managers generally are not personally liable for the LLC’s obligations. They have limited liability and can lose only the amount of their investments
Piercing the LLC Veil: However, courts may pierce the LLC veil of limited liability to reach members and managers personal assets to satisfy LLC obligations under circumstances similar to those under which courts would piece the veil of a corporation.

The fiduciary duties owed by a member(if member-managed) or a manager (if manager-managed) to the LLC and to its other members are the fiduciary duties of care and loyalty
Duty of Care: Members or managers 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 interest of the LLC.
Business Judgement Rule Protection is Provided: This mean that despite the prior sentence, members or managers cannot be held liable for negligent decision but can be held liable for decision tainted by gross negligence or worse

Dissociation
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.

Dissolution
Events Causing Dissolution A LLC will be dissolved when any of the following events occur:
1. An event or circumstance that the operating agreement states causes dissolution;
2. The consent of all members; or
3. The passage of 90 consecutive day during which the LLCs has no members

Judicial Dissolution: A member may also apply for judicial dissolution. A court may grant an application for judicial dissolution if:
1. The conduct of all or substantially all of the LLCs activity is unlawful
2. It is not reasonably practicable to carry on the companies activities in conformity with the certificate of organization and operating agreement
3. The controlling members have acted, are acting, or will act in a manner that is illegal or fraudulent
4. 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
Partnerships and LLC’s are taxed on a “pass-through” basis. There is no entity-level tax instead business incomes is passed through to the owners and reported on the owners individual tax returns.

Pass-Through Taxation: Business entity does not pay taxes as an entity- instead owners pay tax

By contrast a corporations is subject to double taxation. It pays taxes on its income, and the shareholders pay taxes on the income agent when and if it is distributed to them,
In today tax-climate, pass through treatment usually results in less taxes paid