Agency, Partnerships, Corporations

Question 1

Creation of Agency Relationship

Answer 1

Agency law addresses the legal consequence of one person (agent) acting on behalf of and subject to the control of another person (the principal).

The principal is typically an employer, such as a corporation or a partnership. Independent contractors can be agents if they are subject to control over their physical conduct by the principal.

Exam tip: ID the principal and agent on exam answer

Question 2

Contractual Liability of the Principal

Answer 2

A principal is subject to liability on a contract that the agent enters into on the principal’s behalf if the agent has the power to bind the principal to the contract. An agent has the power to bind the principal to the contract when the agent has actual authority or apparent authority.

Exam tip: discuss all theories of authority on exam answer but spend most time on theories that are relevant based on facts.

Exam tip: agency questions usually focus on whether the principal is liable to third parties for the actions by the agent.

Question 3

Express Actual Authority

Answer 3

For an agent to enter into a contract on behalf of the principal can be created via oral or written words; clear, direct, and definite language; or specific detailed terms and instructions.

Question 4

Implied Actual Authority

Answer 4

Allows an agent to take whatever actions are properly necessary to achieve the principal’s objectives, based on the agent’s reasonable understanding of the manifestations and objectives of the principal.

Question 5

Implied Authority by Position

Answer 5

If the agent is placed in a position that customarily has certain authority, such as treasurer, the agent will have implied authority to carry out the duties of a treasurer.

Exam tip: presidents, vice presidents, salespersons, technology persons, etc. all carry implied authority to carry out certain duties.

Question 6

Apparent Authority

Answer 6

Apparent authority results when a principal causes a third party to reasonably believe that the agent has the authority to act. If the third party reasonably believes the agent has the authority to act, the principal will be bound to the contract.

Third Party’s Reasonable Belief: to determine whether a third party’s belief is reasonable, a court will consider the trade customs and industry standards. The agent’s position will also be considered - if the agent is appointed to a specific position, the principal will be found to have made a manifestation that the agent has the customary level of authority possessed by a person in the agent’s position.

Exam tip: Agents in positions like president, vice president, salesperson, technology person all likely cause a third party to reasonably have apparent authority.

Question 7

Ratification

Answer 7

A principal can ratify (affirm/approve) an act performed by an agent, even if the agent did not have the authority to act, and therefore be bound to a contract with a third party. Ratification requires:
- The principal ratifies the entire contract or transaction by express assent or conduct that indicates affirmation;
- The ratification must be timely (before the third party withdraws from the contract); and
- The principal must have knowledge of the material facts involved in the original act.

Question 8

Principal’s Tort Liability

Answer 8

A principal can be vicariously liable and directly liable to a third party who is harmed by a tort committed by an agent.

Question 9

Respondeat Superior

Answer 9

A principal may be vicariously liable for a tort committed by an agent acting within the scope of his employment.

(a) Agent: an agent can be an employee, director, officer, or partner.
(b) Scope of Employment: an agent is acting within the scope of employment if she is performing work assigned by the employer. An agent who makes mistakes or acts carelessly while performing her assigned duties is still acting within her scope of employment.
(c) Intentional Torts: intentional torts may be within the scope of the duty if they are during work hours, the agent was motivated to act for the principal’s benefit, and the act was within her assigned duties.
(d) Work-Related Travel: traveling between work and home is usually not within the scope of employment. Travel for work purposes (business trips, visiting clients) is within the scope of employment.

Question 10

Principal’s Direct Liability to Third Parties

Answer 10

A principal may also be directly liable to a third party harmed by an agent’s conduct if the principal authorizes or ratifies the agent’s conduct; is negligent in hiring or supervising the agent; or delegates a non-delegable duty to the agent.

Question 11

Partnership Formation

Answer 11

A partnership is an association of two or more persons to carry on a for-profit business as co-owners.
(1) Sharing of Profits: the key test to determine a partnership exists is whether there is a sharing of profits from the business, if so, a partnership will be presumed.
(2) Intent: it is not necessary that people have the specific intent to form a partnership.
(3) Agreement: the only agreement required is the agreement to conduct a for-profit business as co-owners. No writing is required.

Question 12

Partner as an Agent for the Partnership

Answer 12

A partner is an agent of the partnership (the principal) for business purposes. As an agent, the partner can commit the partnership to binding contracts with third parties with either actual or apparent authority.

Question 13

Partnership Fiduciary Duties

Answer 13

A partner owes the partnership and other partners the fiduciary duties of loyalty and care

Question 14

Partnership Duty of Loyalty

Answer 14

A partner is required to refrain from competing with the partnership business, advancing an interest adverse to the partnership, and usurping a partnership opportunity or using partnership property or business to derive a profit, without notifying the partnership.

Usurping a Business Opportunity: if a business opportunity is presented to a partner that is the type of business the partnership engages in, the partner must present the opportunity to the partnership; he cannot take the opportunity for himself without first informing the other partners and receiving their permission to do so.

Question 15

Partnership Duty of Care

Answer 15

A partner is required to refrain from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of the law.

Question 16

Partnership Profits & Losses

Answer 16

The partnership agreement controls a partner’s rights to share in the partnership;s profits and losses. If there is no agreement, each partner is entitled to an equal share of the profits or losses.

Question 17

Partnership Management Rights

Answer 17

Each partner has equal rights in the management and conduct of the partnership. A majority of the partners can make a decision as to an ordinary matter of business. All partners must consent to a matter outside of the course of ordinary business.

Exam tip for agent authority: A partner may not cut off another partner’s power to conduct business on behalf of the partnership as long as that partner had the power to contractually bind etc.

Question 18

Partner As an Agent for Partnership

Answer 18

A partner is an agent of the partnership (the principal) for business purposes and can contractually bind the partnership when the partner acts with actual (express or implied) authority or apparent authority. As an agent, the parties can commit the partnership to binding contracts with third parties. There are three types of authority: actual express authority, actual implied authority, and apparent authority.

Question 19

Express Actual Partner-Agents

Answer 19

Express actual authority can arise from the partnership agreement itself, an authorization of the partners, or a statement of authority filed with the state.

Question 20

Implied Actual Partner-Agents

Answer 20

Implied authority is based on a partner’s reasonable belief that an action is necessary to carry out his express authority.

Question 21

Apparent Authority Partner-Agents

Answer 21

Apparent authority exists if the partnership holds a partner or employee out as possessing certain authority, thereby inducing others to reasonably believe that such authority exists. The third party must reasonably rely on the holding out. If a partner performs the unauthorized act in the ordinary course of partnership business and the third party reasonably believes the partner has authority to act, there will be apparent authority.
- If the third party has knowledge that the partner lacked authority, it cannot assert apparent authority and bind the partnership to a contract.
- If a partnership sends written notice to the third party indicating the partner’s lack of authority and the third party receives the notice, there will be no apparent authority.

Question 22

Partnership Liable for Partner’s Tortious Acts

Answer 22

A partnership is liable for a partner’s tortious acts, including fraud, committed in the ordinary course of partnership business or with partnership authority.

Question 23

Partnership Liability to Third Parties

Answer 23

As a separate entity, a partnership is subject to a lawsuit for its obligations. A partner is jointly and severally liable for all partnership obligations.

Question 24

Partnership Effect of Judgment

Answer 24

A partnership creditor must exhaust the partnership’s assets before taking the partner’s individual assets.

Question 25

Dissolution of Partnership

Answer 25

A partnership at will is an open-ended partnership that does not have a fixed termination date or event. It is dissolved when a partner chooses to dissociate from the partnership by giving notice.

Question 26

Partnership Winding Up

Answer 26

A partnership that is dissolved only continues to exist to “wind up” its business. In winding up a partnership’s business, partnership assets are first applied to discharge partnership obligations to creditors (including partners who are creditors of the partnership) before being distributed to the partners. Each partner’s account must then be adjusted to reflect the profits and losses that result from the liquidation of the partnership assets. After these adjustments, any partners with a negative account balance must contribute to the partnership the amount necessary to bring the account balance to zero. Partners are not entitled to compensation for services so a lack of capital contribution means a partner is not a creditor. If partners are creditors, the amount they are owed is added to the total external creditor debt, and that total amount is split equally by the partners with personal liability.

(a) Assets: creditors have priority over partners to partnerships’ assets.
(b) Obligations: partnership assets are first applied to pay off obligations to creditors (creditors may include partners who made loans to the partnership) before being distributed to the partners.

Question 27

LLP - Limited Liability Partnerships

Answer 27

An LLP requires a statement of qualification to be filed with the Secretary of State. A limited partner in an LLP is not personally liable for the debts or obligations of an LLP. A partnership becomes an LLP at the time of the filing of the statement, or on the date specified in the statement.

Question 28

General Partnerships

Answer 28

General Partnerships “GP” are formed by two or more persons carrying on a business for profit. There are no filing requirements for forming a GP. General partners have a duty to manage the business and can be held personally liable for partnership debts and/or obligations. The key test to ascertain whether a business arrangement is a partnership is whether there is a sharing of the profits from the business; if so, such an arrangement generally is presumed to be a partnership, and the persons who share in profits are partners.

Exam Tip: if a partnership does not express intent to limit liability, this suggests they did not intend to file anything but a general partnership. Even if they intended to form a different type of business entity, the fact that they failed to file documentation with the Secretary of State prevents another type of entity from being formed.

Question 29

De Jure Corporation

Answer 29

A de jure corporation is one that is formed in accordance with the law. Corporate formalities require that the articles of incorporation are filed with the Secretary of State, and the Secretary of State must approve of the registration. The advantage of operating as a corporation is that shareholders are shielded from personal liability for the corporation’s obligations.

Question 30

Partners v. Employees

Answer 30

In order to be a partner in a GP, one must agree with at least one other to carry on as co-owners in a business for profit. A person who receives a share of the profits of a business is presumed to be a partner unless the profits were received in payment of wages. An employee in general is someone who is hired by a company, paid a salary or wages to perform services, and works at the behest and direction of an owner of a business.

Question 31

Owners of Types of Businesses

Answer 31

Members are owners of an LLC.

Shareholders are owners of a corporation.

Partners are the owners of a partnership.

Question 32

Limited Partnership (LP)

Answer 32

A limited partnership is a partnership formed by two or more persons that has at least one general partner and at least one limited partner. A limited partner’s liability for partnership debts is limited to the amount of her capital contribution to the partnership. To form a limited partnership, a certificate of limited partnership must be filed with the state.

Question 33

Partnership Profits and Losses

Answer 33

If there is no agreement or the agreement is silent as to the division of the profits and losses, each partner is entitled to an equal share of the partnership profits and losses. When the agreement only addresses the division of partnership profits, the partnership losses are shared in the same manner.

Question 34

Partnership Apparent Authority

Answer 34

A partner’s act that was not authorized by the partnership may nevertheless bind the partnership under the principle of apparent authority. Apparent authority exists if the partnership holds a partner out as possessing certain authority, thereby inducing others to reasonably believe that authority exists. The third party must reasonably rely on the holding out. Under R.U.P.A., apparent authority is the act of any partner for apparently carrying on in the ordinary course of the partnership business or business of the kind unless the partner had no authority to act for the partnership in the particular matter and the person with whom the partner was dealing knew or had received notification that the partner lacked authority.