Agency and Partnerships

Question 1

Agency

Answer 1

An agency relationship is formed by mutual agreement that the agent will act for the benefit of, and under control of the principal. Agents acting with authority have the power to bind the principal to a 3rd party. Agents also have fiduciary duties of care, loyalty, and obedience. Here,

Question 2

Agency - Mutual Agreement

Answer 2

No formal written agreement is required (unless SOF). Principal must have full contractual capacity. Agent needs only minimal capacity. No consideration is required to serve as an agent. Here,

Question 3

Agency - Authority

Answer 3

A principal will be bound under a contract if the agent has actual authority (express/implied) or apparent authority. An agent will be bound if the principal’s existence and identity are undisclosed. An agent’s unauthorized acts may be later ratified by the principal. Here,

Question 4

Agency - Authority: Actual

Answer 4

Agent’s authority is granted orally or in writing (express), or the agent reasonably believes the principal has given him authority because of necessity, custom, or prior dealings (implied). Here,

Termination of actual authority occurs by either party’s unilateral termination, lapse of time, death of principal, occurrence of a specific event, agent’s breach of duty, etc. Here,

Question 5

Agency - Authority: Apparent (3rd Party)

Answer 5

Apparent authority is when the principal “holds out” another with the appearance of authority AND a third party reasonably believes authority exists. Apparent authority may be established by an agent’s title or position, or it can linger from past dealings. This doctrine is designed to protect innocent 3rd parties who reasonably rely on a principal holding out a person as an agent with authority. Here,

Question 6

Agency - Authority: Ratification

Answer 6

Even when an agent acts without authority, the principal will still be bound if he subsequently validates the act. Principal must have knowledge of all material facts and ratify the entire transaction (no partial). Ratification may be express or implied through the conduct of the principal. Here,

Question 7

Agency - Duty of Care

Answer 7

An agent owes a duty to carry out the agency act as a prudent person would under similar circumstances. Here,

Question 8

Agency - Duty of Loyalty

Answer 8

An agent owes a duty of undivided loyalty to the principal. This includes a duty to avoid self-dealing, a duty to disclose. Here,

Question 9

Agency - Duty of Obedience

Answer 9

An agent owes a duty to obey all reasonable direction of his principal. While the principal will be liable for the agent’s actions, the agent will be liable to the principal for any loss suffered due to not following the principal’s instructions. Here,

Question 10

Agency - Respondeat Superior

Answer 10

An employer is responsible for the tortious acts of their employees if the tort was committed within the scope of their employment. A minor deviation (detour) from the employer’s directions is usually within the scope of employment, but a substantial deviation (frolic) is not within the scope. Employers are usually not responsible for the intentional torts of their employees unless their job duties include the use of force (like a bouncer). Here,

Question 11

Agency - Respondeat Superior: Independent Contracts

Answer 11

An independent contractor is a person who is NOT under the control of another as to the manner and methods used to accomplish a specified task. Generally, the principal is not liable for the acts of an independent contractor unless 1) the contractor was engaged in an inherently dangerous activity, or 2) the duty now non-delegable by the principal. Here,

Question 12

Partnerships - General Partnerships

Answer 12

A general partnership (GP) is a voluntary association of two or more persons to carry on as co-owners of a business for profit No formal written agreement is required. Sharing of profits is the most important factor and raises a presumption of a GP (but not payment for debt, wages, rent, interest on a loan, or sale of goodwill of a business).

Generally, the Revised Uniform Partnership Act (RUPA) provides a default set of rules, but partners are free to create different rules through partnership agreements. Here,

Question 13

General Partnerships: Partner Liabilities

Answer 13

Each partner is jointly and severally liable for all the obligations of the partnership, whether arising in tort or contract. Each partner is an agent of the partnership and has the power to bind the partnership when acting within the ordinary course of business (authority). Even after dissociation, partners remain liable for pre-dissociation obligations. Here,

Question 14

General Partnerships: Partner Liabilities: Fiduciary Duty

Answer 14

Partners owe each other a fiduciary duty of care, loyalty, and disclosure to each other and the partnership. Here,

Question 15

General Partnerships: Partner Liabilities: Scope of Liability

Answer 15

Where one partner is compelled to pay the whole of a partnership obligation, he is entitled to indemnification from the partnership. Here,

Question 16

General Partnerships: Partner Liabilities: Partnership Property

Answer 16

Property belongs to the partnership if it is acquired in the partnership name or by a partner when acting for the partnership. Property owned by the partnership can only be used by partners for business purposes. A partner can transfer his financial interest in the partnership, but cannot transfer his management rights. Here,

Question 17

General Partnerships: Management and Operation

Answer 17

Generally, partners have equal rights in the management of the business and are jointly and severally liable for all obligations. Here,

Question 18

General Partnerships: Management and Operation: Voting

Answer 18

Decisions involving the ordinary course of business require a majority vote, but matters outside ordinary course require unanimous consent. Partners have no right to a salary, but can receive reasonable compensation for services performed Each partner has access to partnership books. Here,

Question 19

General Partnerships: Management and Operation: Profits/Losses

Answer 19

Unless otherwise agreed, profits are shared equally among partners and losses are shared in the same manner as profits. Here,

Question 20

General Partnerships: Dissociation and Dissolution

Answer 20

Dissociation refers to the withdrawal of partner due to express will, death, bankruptcy, or an agreed-upon event. When a partner dissociates, the partnership must dissolve or buy out the partner’s interest and continue.
When a partnership dissolves, it must repay 1) creditors, then 2) capital contributions, then 3) profits or losses. Here,

Question 21

General Partnerships: Dissociation and Dissolution - Partnership Interest Transfer

Answer 21

A partner cannot unilaterally transfer his partnership interest including management rights, but may transfer his financial rights, i.e. right to receive profits from distributions. The transferee remains a partner for liability purposes. Here,

Question 22

Limited Partnerships

Answer 22

A limited partnership (LP) is composed of one or more general partners and one or more limited partners. Valid formation of a LP requires filing a certificate of limited partnership with the secretary of state that is signed by all general partners.

The general partners manage the partnership and are personally liable for partnership obligations. The limited partners have no personal liability beyond their agreed-upon contributions. Profits are usually distributed according to partner contributions. Here,

Question 23

Limited Liability Partnership

Answer 23

An LLP requires filing a statement of qualification with the secretary of state and it operates like a general partnership, but it relieves all partners of personal liability for the LLP’s obligations. However, a partner remains personally liable for any wrongful acts. Here,

Question 24

Limited Liability Company

Answer 24

An LLC is a hybrid between a partnership and a corporation. Articles of incorporation must be filed with the secretary of state. The details of LLC operation are found in the operating agreement. A majority vote is required for ordinary decisions, unanimous for extraordinary decisions. Profits and losses are shared according to contributions. Members are not personally liable for the LLC’s obligations and can only lose the amount of their investment. Members owe fiduciary duties to the LLC and its members. Taxation is on a pass-through basis and therefore not subject to corporate double taxation. Here,