Agency // Partnership // Non-Incorporated Business Associations

Question 1

What is required to create an agency relationship?

Answer 1

A/: Consent by both the principal and the agent.

• Consent must be manifested by both the principal and the agent to create an agency relationship.
• Consideration is not necessary for the creation of an express statutory provision to the contrary, neither is a writing.
• It is not necessary for either party to be represented by counsel before entering into an agency relationship.

Question 2

______ is created where a principal holds another out as his agent to a third party.

Answer 2

A/: Apparent authority.

• Apparent authority is created where a principal holds out another as his agent to a third party.
• Apparent authority makes the principal a party to the contract- with contractual rights & liabilities.
• Actual authority is created when the agent and principal agree that the agency shall exist.
• Authority by proxy is incorrect terminology.
• Ratification is when the principal agrees to be bound by the previously unauthorized acts of another.

Question 3

Implied actual authority is the authority:

Answer 3

A/: An agent believes she has based on her communications and relationship with the principal.
- Implied actual authority is the authority the agent reasonably believes she has as a result of the actions of the principal.

Question 4

What is the primary overriding factor in determining whether a person is an EE?

Answer 4

A/: Whether the principal has the right to control the manner and method of performance.
- The single overriding factor in determining whether a person is an employee is whether the principal (i.e. the ER) has the right to control the manner and method by which the person performs his tasks.

Question 5

What elements are required to establish a principal’s liability under the doctrine of respondent superior?

Answer 5

A/: An EE-ER relationship & conduct w/in the scope of employment.

• To est. a principal’s liability under the doctrine of respondent superior, two basic elements must be established: (i) an ER-EE relationship, and (ii) conduct w/in the scope of employment.
• A principal may be vicariously liable in certain instances where her agent acted w/ apparent authority where respondent superior does not apply.
• A principal is NOT liable for the torts committed by an agent functioning as an independent contractor.

Question 6

A small or minor deviation from an ER’s directions, also known as a _____, generally falls ______ the scope of employment.

Answer 6

A/: Detour; within.

Question 7

A major deviation from an ER’s directions, also known as a ____, falls ___ the scope of employment.

Answer 7

A/: Frolic; outside.

Question 8

Who can be bound to a contract when the principal’s identity is disclosed to a third party and the agent had authority to enter the contract?

Answer 8

A/: The principal and, if the parties intended the agent to be a party to the contract, the agent.

• A disclosed principal is one whose existence and identity are known to the third party.
• A disclosed principal is always liable on a contract entered into by an authorized agent.
• The agent generally is not bound unless the parties intended that the agent would be a party.

Question 9

A principal gives his agent authority to enter a contract with a third party. The agent discloses to the third party that a principal exists, but does not disclose the principal’s identity. Who can be bound to the contract?

Answer 9

A/: Both the principal and the agent.

Question 10

Who can be bound on a contract when the principal is undisclosed to the third party and the agent had authority to enter the contract?

Read Agency II.D.3.b. Unidentified and Undisclosed Principal Situations- Principal or Agent May Enforce Contract.

Answer 10

A/: Both the principal and the agent.

• In an undisclosed principal situation, the party does not know of the principal’s existence or his identity.
• both the agent and the principal are liable on a contract entered into by an unauthorized agent on behalf of an undisclosed principal.

Question 11

If a principal negligently selects an incompetent independent contractor, the principal will be liable to the injured third party for:

Answer 11

A/: Her own negligence in selection.

• If a principal negligently selects and incompetent independent contractor, she will be liable to the injured third party for her own negligence in selection.
• A principal will be liable for the independent contractor’s negligence if the principal hired the independent contractor w/ knowledge of the contractor’s incompetence.

Question 12

Which of the following is a situation where an employer will be held liable for his employee’s torts?

Answer 12

A/: An EE driving the ER’s vehicle w/in the scope of the employment negligently causes an automobile accident.

• There mere fact that an EE is driving an ER’s vehicle at the time the EE commits a tort does not impose liability on the ER for the tort.
• However, if the tort occurred while the EE was w/in the scope of employment, the ER will be held liable.
• Where the EE, w/out authority invites a 3d party to ride in the ER’s vehicle and that party is injured as a result of the EE’s negligence, the ER is NOT liable for the 3rd parties injuries.
• Moreover, the ER generally is not liable for torts caused by the EE in the use of an instrumentality substantially different from that authorized, or for an intentional tort committed by an EE UNLESS it occurred as a natural incident to the carrying out of the ER’s business.

Question 13

How are profits and losses distributed to LLC members?

Answer 13

A/: Equally, unless the operating agreement otherwise provides.

• Absent a provision in the articles or an operating agreement, in Georgia, distributions and profits and losses of an LLC are allocated equally.

Read GA Partnerships & LLC X.E. Distributions and Sharing of Profits and Losses.

Question 14

When is a limited partner personally liable for obligations of the limited partnership?

Answer 14

A/: If the third parties are misled into believing, based on the limited partnerships participation in the business, that she is a general partner.

• Limited partners are not liable for partnership obligations beyond their contributions.
• Exceptions are where the limited partner: (i) is also a general partner; or (ii) knowingly permits his name to be used improperly in the name of the partnership.
• Unlike the RULPA, GA law does NOT impose liability on a limited partner solely for participating in control of the business.
• However, a limited partner ya be liable on estoppel grounds to third parties who are misled into believing, based on the limited partner’s participation in the business, that she is a general partner. As a result, there is little practical difference between GA law and the RULPA this regard.
• Read GA Partnerships & LLCs IX.G.2. Limited Liability of Partner.

Question 15

A LLP IS SIMILAR TO A GENERAL PARTNERSHIP IN THAT:

Answer 15

An LLP is subject to the Uniform Partnership Act. (UPA).

• An LLP is essentially a general partnership and subject to the UPA.
• The major advantage of operating as an LLP is that the partners are not personally liable for the obligations of the partnership, whether arising in contract, tort, or otherwise (each partner is only liable for his own wrongful acts).
• To become an LLP, a partner ship must file an election to operate as an LLP with the superior court clerk of any county where the partnership has an office.
• The LLP name must include the words “Limited liability partnership” or the abbreviation L.L.P. or LLP as the last words or letters of its name.

Question 16

Which of the following statements regarding a partner’s liability for partnership obligations in a general partnership is true?

Answer 16

A/: All partners are jointly and severally liable for all partnership obligations.

• In Georgia, all partners are jointly and severally liable for the full amount of all partnership obligations, whether arising in contract or tort.

Question 17

What feature conclusively establishes the existence of a partnership?

Answer 17

A/: The filing of a statement of partnership.

• Such a filing conclusively establishes the existence of a partnership, making it unnecessary to consider other factors.

Question 18

Property is presumed to be partnership property if it is:

Answer 18

A/: Described as such in the partnership agreement or any recorded statement of partnership, acquired in the partnership’s name or purchased w/ the partnerships funds.

• There is no restriction as to what type of property may be included in partnership property.
• In determining whether a particular item of property if partnership property, the partners’ intent to devote the property to the partnership purposes is the controlling factor.
• That said, GA law contains specific rebuttable presumptions regarding partnership property or the separate property of a partner.
• Property is presumed to belong to the partnership if it is: (i) described as such in the partnership agreement or any recorded statement of partnership; (ii) acquired in the partnerships name; or (iii) purchased with partnership funds.
• On the other hand, property is presumed to be the separate property of a partner if it is acquired in that partner’s name, even if it is used for partnership purposes, and no partnership funds were used to purchase the property.

Question 19

Under the UPA, which of the following factors is prima facie evidence that a partnership has been formed?

Answer 19

A/: Sharing of profits.

• Under the UPA, when a person receives a share of the profits of a business, that is prima facie evidence that he is a partner.
• The designation by the parties of the entity as a partnership, the sharing of gross returns, and joint or common tenancies of property tenancies of property are indicative of the intent to form a partnership, but they are not prima facie evidence of partnership.

Question 20

Absent an agreement to the contrary, how are profits, surplus and losses shared under the UPA?

Answer 20

A/: Each partner shares equally in the profits, surplus and losses.

• Absent an agreement to the contrary, each partner shares equally in the profits and surplus remaining after all liabilities, including those partners, are satisfied.
• Each partner must contribute to the losses sustained by the partnership according to her share in the profits.
• Assuming there is no agreement otherwise, this means that losses also are shared equally.

Question 21

Generally, which of the following statements regarding renumeration of a partner is correct?

Answer 21

A/: A partner is not entitled to renumeration except for services rendered in winding up the partnerships’s business.

• Absent an agreement to the contrary, a partner is not entitled to renumeration except for reasonable compensation for services rendered in winding up the partnership’s business.
• However, where partners do not have an equal interest, are not equally liable, and are not equally responsible for the conduct of the partnership business, it is possible to imply an agreement to compensate a partner for extraordinary services.

Question 22

The Revised Uniform Limited Partnership Act (“RULPA”) grants certain rights to general and limited partners. Which of the following rights is exclusive to general partners under the RULPA?

Answer 22

A/: The right to manage the limited partnerships activities.

• The RULPA’S grant of management rights is exclusive to general partners.
• Both general and limited partners are granted the right to dissolve the partnership, to share profits and losses, and to assign their interest in the partnership.

Question 23

Under the Revised Uniform Limited Liability Company Act (RULLCA), which of the following statements is correct regarding the management of a limited liability company?

Answer 23

A/: It is presume that members will manage an LLC.

• Under RULLCA, a management of an LLC is presumed to be by all members.
• Other management arrangements can be made. (e.g., management by only some managers), but they must be specified in an operating agreement.
• Each member (or manager, if the LLC is manager- managed) has equal rights in the management of the LLC unless otherwise agreed.

Question 24

With respect to the LLC’s a court will pierce the veil of limited liability in each of the following circumstances EXCEPT when an LLC:

Answer 24

A/: Fails to observe formalities.

• A court may pierce an LLC’s file of limited liability under circumstances similar to those under which the court’s pierce the view of a corporation: (i) where the LLC is the later ego of the member(s) or manager(s); (ii) for inadequate capitalization at the inception of the LLC; or (iii) if the LLC was formed to perpetrate a fraud.
• Because LLC’s can be run with fewer formalities than a corporation, the failure to observe formalities is not a ground for piercing an LLC.

Question 25

Which of the following is required to form a partnership?
A: A written partnership agreement. 
B: Intent to form a partnership. 
C: At least 2 persons. 
D: Contributions to partnership capital.

Answer 25

A/: = C. At least 2 persons.

• Under the UPA, a partnership is an association of two or more competent persons to carry on as co-owners a business for profit.
  (Note that a person may not become a partner unless he has capacity; i.e. he is capable of entering into a binding agreement.) Although the partners need not intend to form a partnership, they must intend to carry on as co-owners a business for profit.
• A writing is NOT REQUIRED.
• A partnership can be formed by conduct. (i.e. associating to form a business for profit.) Partner contributions to partnership capital are NOT REQUIRED to form a partnership.

Question 26

The absence of an agreement to share losses is:

Answer 26

C/: Evidence that the parties did not intend to form a partnership.
- While there is no requirement under UPA that sharing losses is necessary to create a partnership, the absence of an agreement to share losses is evidence that the parties did not intend to form a partnership.

Question 27

Under the UPA, what is a partner’s rights in partnership property?

Answer 27

A/: A partner has an equal right with co-partners to possess partnership property for partnership purposes, but has no right to possess it for any other purpose without the consent of his co-partners.
- A partner’s right in specific partnership property is not assignable to non-partners except in connection with the assignment of the rights of all the partners in the property.

Question 28

If a partner personally profits from a transaction connected with the partnership, To whom do the profits belong?

Answer 28

A/: The profits belong to the partnership.

• Each partner owes a fiduciary duty to the partnership. This means that each partner is bound to exercise her partnership powers for the benefit of the partnership and not for herself alone.
• Profits made in the course of the partnership belong to the partnership, and a partner who personally profits from any transaction connected w/ the partnership, at the expense of the partnership and without the consent of the other partners, must hold those profits as trustee for the partnership.
• There is no rule providing that the partner can keep the profits so long as she discloses them to the partnership, or that they will be off-set against the partner’s share of profits for that year.

Question 29

A partnership will be liable for a wrongful act or omission by a partner in each of the following circumstances EXCEPT:

Answer 29

A/: When the partner defrauds a third party outside the scope of the partnership business.

• Where one partner, acting within the scope of partnership business, defrauds a third party, the partnership will be held liable.
• Generally, if the fraudulent act involves a transaction outside the scope of partnership business, the partnership will NOT be held liable.
• The partnership is liable if one partner misapplies money or property within the scope of his apparent authority, or if money or property received in the ordinary course of business is misapplied by a partner while in the custody of the partnership.

Question 30

A partner is NOT liable for:

Answer 30

A/: Crimes committed by a co-partner within the scope of the partnership business of which the partner had knowledge.

• Unless the partner participated in the commission of the crime as a principal or accessory.
• A partner is liable for any torts committed by a co-partner or by an employee w/in the ordinary scope of partnership business or which authority of the partnership, including any fraud- even if the partner has no connection with, knowledge of, or participation in the fraud: Additionally, a partner is liable on contracts made by a co-partner within the scope of partnership business, as well as any other contracts expressly authorized by the partners.

Question 31

Generally, which of the following acts is appropriate for winding up a partnership?

(A) Performing contracts made after dissolution.

(B) Extending time on a debt.

(C) Increasing an obligation of the partnership.

(D) Collecting debts due to the partnership.

Answer 31

A/: D: Collecting debts due to the partnership.

• After dissolution, before termination, the liquidated partners can bind the partnership in transactions winding up old business, but not in transactions constituting new business.
• Performing contracts made prior to dissolution and collecting debts due to the partnership is considered old business and thus appropriate for winding up.
• Extending time on a debt & increasing an obligation of the partnership are considered new business and thus inappropriate for winding up.
• Of course, a partnership may increase an obligation by entering into necessary contracts (e.g., with an accountant) for winding up the business.

Question 32

Each of the following is required to form a limited partnership EXCEPT:
(A) a certificate of limited partnership filed with the secretary of state.
(B) An office where records are maintained.
(C) A written limited partnership agreement.
(D) An agent in the state to receive service of process.

Answer 32

A/: C= A written limited partnership agreement.

• A written partnership agreement is NOT required.
• To form a limited partnership, a certificate of limited partnership signed by all the general partners must be filed with the secretary of state.
• The limited partnership must maintain in its state of organization with certain records of limited partnership.
• Furthermore, each limited partnership must continuously maintain an agent in the state to receive service of process.

Question 33

Under the Revised Uniform Limited Partnership Act, the name of a limited partnership ____ contain ____.

Answer 33

A/: May contain the name of any limited partner, if the partnership business had been carried on under that name before the admission of the limited partner.

• A limited partnership name may contain the name of a limited partner only if it is ALSO the name of a general partner, or the partnership business had been carried on under that name before the admission of that limited partner.
• The name must contain the words “limited partnership.”

Question 34

Generally, a person who erroneously believes himself to be a limited partner but who wants to be a limited partner can avoid being held liable as a general partner if, on ascertaining the mistake, she:

Answer 34

A/: Files a certificate of limited partnership or amendment with the secretary of state.

• Under the RULPA, a person who makes a contribution to a business enterprise and erroneously, but in good faith believes that she thereby became a limited partner, rather than a general partner, can avoid being held liable as a general partner if, on ascertaining the mistake, she:
  (i) files an appropriate certificate of limited partnership or certificate of amendment with the secretary of state; or (ii) withdraws from future equity participation in the partnership by submitting a certificate declaring withdrawal to the general partners will prevent the person from being held liable as a general partner.
• Furthermore, sending a written explanation of the mistake, signed by the person and also by the general partners of the partnership, to the third party with whom she dealt, will not prevent the person from being held liable as a general partner.

Question 35

What is the general rule re: a limited partner’s liability on partnership obligations?

Answer 35

A/: As a general rule, a limited partner is not liable beyond his contribution for partnership obligations.

Question 36

Under what circumstances will a limited partner be personally liable for a partnership’s obligations?

Answer 36

A/:

• If he/she participated in control of the business and
• the creditor dealing with the limited partnership reasonably believed, based on the limited partner’s conduct, that the limited partner was a general partner.
• For ex. if the creditor knows that Gerrie Brown is a “silent partner” and knows it’s a limited partnership, then that should indicate to the Creditor that Gerrie Brown is a silent partner.
• Creditor can always ask to see a copy of the partnership agreement before entering into a security agreement.
• If creditor knows Gerrie Brown has signed other partnership obligations as a guarantor, Creditor could have her sign the security agreement without the “limited partnership” indication if they intend for her to be personally liable.
• Just because the Creditor asks to see Gerrie Brown’s financial statement does not necessarily indicate to that the Creditor believed Gerrie to be a general partner.
• Creditor can have all parties furnish such information prior to loaning any funds.