Biz Orgs Flashcards
What are the three requirements for an agency relationship?
1) Mutual manifestation of assent;
2) Agent acting on behalf of the Principal; and
3) Understanding that the agent is subject to control of the Principal.
Does agency require consideration or a formal agreement?
No.
Does intent matter in forming agency?
No, it can be proved by circumstantial evidence. Look at what level of control one had over the other.
What is the key premise or rule of agency?
That the agent has the power to bind the principal.
In determining agency, how is manifestation analyzed?
Using an objective standard of the reasonable person.
NOTE: Non verbal assent is OK (e.g., someone nods head).
What are the three types of principles and under which is an agent liable?
o Disclosed Principals: exists when a 3rd party knows that A is acting for P
o Partially disclosed/ unidentified = exists when a 3rd party knows A is an agent for someone but does not know who P is
o Undisclosed = T thinks A is dealing for him or herself
Agent is liable in both partially disclosed and undisclosed. An agent that makes a contract on behalf of a partially disclosed or undisclosed principal is a party to the contact.
What are the two types of agency authority?
Actual (express or implied) and Apparent
What is implied actual authority?
What agent reasonably believes from the circumstances including authority to do acts that are implied through the words, defined by custom, defined by past conduct, or are reasonably necessary [incidental] to accomplish it.
What is apparent authority?
Where the Principal (not the agent) has caused the third party to reasonably believe the Agent has actual authority
NOTE: Marital status does not prove an agency relationship.
When is the principle liable for the acts of the agent?
Under actual authority, and under apparent authority (e.g., disclosed or partially disclosed Principal)
In the case of an agent’s fraud (e.g., wearing a fake badge for Home Depot) is Home Depot bound?
No, this would be the agent’s fraud.
What is ratification?
When someone affirms a prior act done by a purported agent where the act is given affirmance by the now principle as if the agent had actual authority.
NOTE: Ratification is a means by which the P can say “my agent did NOT have the right to enter into this K, but I am glad she did so. Accordingly, I’ll affirm the transaction and agree to be bound by the K”
What are the two elements of ratification?
1) The person accepts the results with the intent to ratify; AND
2) The person has an understanding of the material facts.
NOTE: The person here is the principle.
NOTE: Mere acceptance of benefits, without more, does not prove ratification of an agreement.
NOTE: You can ratify by silence if facts show you had intent to ratify and knew all the facts (called ratification by acquiescence)
Under ratification, what is the effective date of the agency relationship?
Date of contract.
Can you ratify part of a transaction?
No. It is all or nothing.
NOTE: Under old rule, an undisclosed P could not ratify a transaction. Under the new rule, an undisclosed P can be bound by a ratification.
What is the material circumstances principle in ratification?
That the third party cannot be bound by ratification if the circumstances have materially changed in a way that hurts the third party
What is agency by estoppel?
An equitable principle that the principal is estopped (legally prevented) from denying that the third party was their agent if they were complicit in giving the third party the impression that they were a valid and officially authorized agent of the principal.
NOTE: This includes a company not exercising reasonable care in preventing the occurrence of the incident.
What are the three elements to agency by estoppel?
- Defendant principal intentionally or negligently creates an appearance of authority in the purported Agent
(2) The third party reasonably, and in good faith, acts in reliance on that appearance of authority; AND
(3) The third party detrimentally changes their position in reliance on the appearance of authority.
What duties does an agent owe to his principal?
Duty of care and
Duty of loyalty and
Duty of disclosure (to disclose all matters pertinent to the principals business)
E.g, Agent has duty not to make secret profits in connection with their work for P. If A does so, A must give profits to P.
E.g., cannot take customer lists (keep confidential info lasts forever)
NOTE: Special skills acquired on the job, agent can take with them
NOTE: Exception to all duties is Principal’s consent and Agent discloses all material facts
NOTE: On damages, P does not need to have suffered any loss. Can recoup lost profits (discouragement)
NOTE: Cashing in on fame is not a breach of duty
What is the main difference between having the right and the power in agency law?
Having the right to do something means you necessarily have the power.
Having the power to do something does not mean you have the right; you could be acting outside of scope and breaching fiduciary duties but you had the power to carry it out
The general rule is that an agent or principal can terminate an agency relationship at any time. What is the exception?
Detrimental Reliance
When the principal or agent has changed their position upon reliance of the relationship CANNOT terminate (even in a gratuitous relationship).
What happens with actual and apparent authority when an agency relationship is terminated?
- Actual authority ends
- Apparent authority may end (depends on what third party would reasonably believe)
What happens when an agent or principal dies, goes bankrupt or is declared mentally incapacitated?
Relationship immediately terminated.
Does fiduciary duty survive termination of an agency relationship?
Yes.
Which law defines partnership?
The Uniform Partnership Act.
How does the Uniform Partnership Act define partnership?
The Uniform Partnership Act defines partnership as “An association of two or more persons to carry on as co-owners a business for profit.”
What are the two things present in every partnership case?
Shared control, and shared profits and losses. When both are present, a partnership is likely; however, other factors should also be assessed.
What are the 9 factors for determining a partnership and what is the opening sentence to use? What is the mnemonic?
Someone I Loved Can’t Return
A determination of whether a partnership exists requires an examination and balancing test of the totality of the circumstances in a given case. These include nine factors:
The mnemonic is S cubed, I, L squared, C squared, R
- Share in profits (law assumes split equally unless specified otherwise in agreement)
- Share in losses (law assumes split equally unless specified otherwise in agreement. Thus, if one party indemnifies a other, this weighs toward no partnership
- Share in ownership and control of the partnership property and the business (law assumes shared equally unless otherwise specified. Who owned the capital that went in? who controls the business?)
- Intent (determined from statements and conduct)
- Language of the agreement (is agreement called “Partnership Agreement” or just “Agreement”?
- Length of agreement (partnership agreements typically run for indefinite terms. Thus, the more finite the term, the less likely there is a partnership.
- Conduct toward third parties (did parties file partnership income tax returns? Did only one party file partnership income tax returns?)
- Community of Power in Administration
- Rights of the parties upon dissolution (did one party not have the rights to share in capital upon dissolution)?
What does sharing in the profits do under the law? And what are the 7 instances under which the prima facia presumption does not apply?
Under the Uniform Partnership Act, sharing of profits creates a prima facie presumption of partnership UNLESS the profits were received for:
- a joint tenancy/property
- a debt
- compensation
- rent
- annuity or other retirement benefit
- interest on a loan
- sale of goodwill on a business…
in which case no prima facie presumption is established and one must look at other factors.
NOTE: This means that even if you get compensation money, or rent money, you can STILL be a partner, it just kills the presumption of partnership.
Why do creditors not want to be partners with the company they made a loan to?
Because if they are a partner they are liable for all of the partnership’s debts.
NOTE: Veto power only gives creditors option to protect against bad investments but no authority to make good ones. Creditors have no authority to initiate transactions on behalf of the partnership nor do their actions bind the partnership.
What is the case on creditors not considered partners?
Martin v. Peyton (partnership was not created)
What is partnership by estoppel?
An equitable doctrine in which a partnership is created by law when a person holds him or herself out as a partner and a third party detrimentally relies on the representation. The Defendant is estopped or precluded from denying the partnership.
c. Elements of Partnership by Estoppel
i. A representation of partnership with one or more persons who are not partners in fact; AND
ii. Plaintiff’s reliance on the representation of partnership.
What is the fiduciary duty owed to joint venturers?
Joint adventures, like copartners, owe to one another the duty of the finest loyalty. In other words, share with your fellow joint venturer the opportunities you come across so long as the opportunity arises from the joint venture.
What are the four elements for a business to constitute a joint venture?
An Agreement Considers Partners
- Express or implied agreement to form a JV;
- Express or implied agreement for the sharing of profits and (usually but not necessary), losses.
- Contribution by each party (though not necessarily in equal parts) of financial resources, property, time, skills, etc., in a common undertaking;
- A proprietary interest and right of mutual control over the property
What is the case on duty of joint venturers to each other?
Meinhard v. Salmon where Salmon should have shared the opportunity with Meinhard as if a partner.
How is a joint venture defined?
A limited purpose partnership that is shorter in duration than a partnership and has a more narrow purpose than a partnership
What is the quote to include if a joint venture question is given and who said it and in which case?
In Meinhard v. Salmon, Justice Cardozo concluded that, “Joint adventures, like copartners, owe to one another, while the enterprise continues, the duty of the finest loyalty . . . Not honesty alone, but the punctilio of an honor the most sensitive, is the standard of behavior.”
Under the Uniform Partnership Act, what provisions cannot be changed?
[[INSERT FROM 105 c and 105 d]]
- Rules that affect third party rights cannot be changed
(e.g., a rule on payment of debts cannot be changed because this would impact a third party)
What are the three equal rights in partnership unless otherwise specified in the agreement?
Equal share in profits
Equal share in losses
Equal share in control rights
What loyalties do partners in a partnership owe each other?
- Not competing with the firm
- Duty of disclosure
Case is Meehan v. Shaughnessy - where lawyers took customer lists and employees with them to the new firm
NOTE: Associates of a law firm are agents
What are the three ways to identify property as partnership property?
1) Purchased with partnership assets
2) Transferred to a person with indication of their capacity as a partner
3) The existence of a partnership (but without the name of the partnership)
NOTE: Property acquired in the name of a partner, without any indication of the partnership or that the person is a partner, and without use of partnership assets, is presumed to be individual/separate property.
What are the two consequences of a partner filing for bankruptcy?
1) Creation of a bankruptcy estate; and
2) Dissolution of the partnership
Assume 3 partners, A, B, and C. A puts in 90% of capital, and B and C put in 5% each. They all work equal amounts. They make $100K in profit. How do they split the profits?
All profits split equally (unless agreement states otherwise) irrespective of how much work or capital someone put in.
Under the UPA, upon dissolution of a partnership, partnership property is used to pay off liabilities in what order?
- Outside/third party creditors
- Partners for contributions that are not capital or profits related
- Partners for capital contributions
- Partners for profit-related debts
How are decisions on ordinary matters (usual course of business) decided?
By a majority vote of partner (e.g., hiring or firing an employee related to the business)
How are decisions extraordinary matters (outside usual course of business) decided?
By a unanimous vote of partners.
What is the rule regarding the partners binding each other to contracts?
In a general partnership with two partners, each party has the power to bind the partnership in matters pertaining to the ordinary course of the partnership’s business.
However, if a contract is entered into by a partner who lacks authority and the third party knows the partner lacks authority, then the contract does NOT bind the partnership. [like as if vendor had notice of dissolution]
NOTE: One partner cannot restrict the powers of another partner for a matter in the course of ordinary business (e.g., write letter to vendor saying don’t sell bread to my fellow partner and they run a grocery store).
Define breach of fiduciary duty and what are the fiduciary duties of a partnership?
A breach of fiduciary duty occurs when one partner advantages himself at the expense of the firm.
Fiduciary duties include the duty to:
Act honestly toward other partners and for the benefit of the other partners.
Not compete nor make any unauthorized profit
Disclose material information
When does a third party lose its ability to bind you to a contract?
For two years after dissolution unless partnership files a notice of dissolution with the Secretary of State which will then put the third party on constructive notice after the passing of 90 days
What is the old and new UPA rule on what happens to a partnership when a partner dissociates?
Under the old UPA, if a partner dissociated from the partnership, the partnership dissolved.
Under the new UPA, if a partner dissociates, the partnership is NOT automatically dissolved.
What should a partner do when he dissociates?
Optionally file a statement of dissociation with the Secretary of State. This document limits the power to bind the dissociated partner and the personal liability following potential dissolution. The filing serves as constructive notice. After 90 days it becomes constructive notice of the facts it contains
-For the first 90 days there is no protection so reach out and notify vendors.
What are the 7 ways in which a partner dissociates from a partnership?
- Notice of partner’s express will to quit
- Event in partnership agreement specified as to trigger dissociation occurs.
- Expulsion of partner.
- Unanimous vote + unlawful to carry out business with partner, transfer of partner’s interest, entity was partner and dissolved, or person was an unincorporated entity that dissolved
- Partner expelled by judicial notice (e.g., wrongful conduct, willful breach of agreement)
- Partner bankrupt
- Partner dies
When is dissociation wrongful?
- Breach of partnership agreement
- In a partnership for specific undertaking or term, if partner dissociates prior to completion of term or undertaking
What are the two consequences of wrongful dissociation?
- Liable to the other partners for damages
- Liable for existing debts of the partnership even though they wrongfully “bailed out”
What are the 9 ways a partnership is dissolved?
- Death of partner + w/i90 days consent/vote of at least half of remaining partners to dissolve business
- Fixed term partnership or goal specific partnership where complete
- Fixed term partnership where partners decide to wind it up
- Fixed term partnership with a wrongful dissociation and half of remaining partners or more vote to dissolve
- Received notice under partnership at will for partner rightful dissociation
- Inability to carry out obligations created by the partnership agreement
- Court order (e.g., unlawful business, not reasonable to carry on partnership, partnership does not have at least two partners)
- Only able to carry business at a loss
- Insanity of a partner (?)
What happens when the partnership dissolves? Is the partnership terminated?
The winding up of the business during which partners pay off creditors and wind and partners share in profits and losses. The partnership is not terminated until after the winding up of the partnership is complete.
NOTE: Judicial dissolution terminates the partnership immediately.
What is the order of priority in paying liabilities upon dissolution of a general partnership?
- Pay creditors (inside and outside creditors)
- Return capital
- Share profits
What are the three occasions in which judicial dissolution may occur?
On application by a partner by a judicial decree that:
- The economic purpose of the partnership is likely to be reasonably frustrated
- Another partner has engaged in conduct relating to the partnership business that makes it not reasonably practicable to carry on the business with that partner
- It is not otherwise reasonably practicable to carry on the partnership business in conformity with the partnership agreement.
What is the rule on losses when one partner contributes only capital and the other partner contributes only labor?
The general rule on partnerships is that losses are to be shared equally unless otherwise specified in the partnership agreement. However, in the situation described above, where one partner or joint adventurer contributes the money capital and the other contributes the skill and labor, neither party is liable to the other for contribution for any loss sustained.
What are three advantages to a general partnership (GP)?
- No registration requirements
- Tax advantage in that partnership is not taxed just your income as a partner is taxed
- Flexibility in that you can define agreement as you would like so long as it is not an immutable rule (e.g., adversely impacting third party rights)
What is the biggest disadvantage to a general partnership (GP)?
The partners are all individually and jointly liable for the debts of the partnership performed in furtherance of the business.
What is the solution to the unlimited liability associated with a general partnership?
A LP - limited partnership.
Did partnerships or LPs exist in the Common Law?
General partnerships did exist in the Common Law. LPs did not.
What are the two different kinds of partners in a limited partnership?
A general partner and a limited partner.
How is a general partner characterized in a limited partnership?
General partners in a limited partnership
1) Run and manage the business
2) Have unlimited personal liability for the organization
How is a limited partner characterized in a limited partnership?
Typically do NOT partake in managing the company.
Are not personally liable for acts of partnership.
Risk is only that of losing their investment in the LP.
What was the policy rationale in creating Limited Partnerships?
Encourage people to invest by removing their personal liability to a partnerships liabilities.
What is a limited liability partnership or a LLP?
Like a LP but the general partner AND the limited partner BOTH do NOT face personal liability for the debts of the LLP.
NOTE: It is like a magical solution.
What professions typically form LLPs?
Anyone can form an LLP, however some states only people in certain professions can file for an LLP
CA rule: ONLY lawyers, accountants and architects can become LLPs
What is the hurdle to forming a limited liability partnership?
May need to establish financial security by:
o Insurance
o a bond or
o meeting a net worth requirement (CA has a net worth requirement)
When is registration required?
For forming a limited partnership or a limited liability partnership.
What is the registration drawback to the LLP?
Must renew LLP registration every year in states OTHER THAN LLP
If forget, lose LLP shield and have formed a general partnership on default
What is the one difference in the Limited liability limited partnership (LLLP)?
LLLP is the ultimate extension of all the liability limiting exceptions.
No liability for general and limited partners (same as LLP) but NOT restricted to only some professions
NOTE: Some states do not recognize LLLPs.
What does LLC stand for?
limited liability company
What is a LLC?
An LLC is an unincorporated business association who provides its owners/members with limited liability and allows them to participate in managing the enterprise without risking any loss of that limited liability.
What is the difference between a LLC and a partnership?
Unlike partnerships LLCs have limited liability for all their members.
Also, several corporate laws apply to LLCs.
What is an advantage to the LLC?
There is no double taxation. LLCs can choose between being taxed as a partnership or as a company.
How is a corporation defined?
A business that is a legal entity and shares in the profits of the business but whose owners are not personally liable for any debts or losses of the business.
What are four benefits to forming a corporation?
- Limited liability (e.g., in tort cases, P can only sue corporate entity unless they can pierce the corporate veil)
- Tax benefit: Corporations do not have to distribute all of their income; income can be reinvested in the business; however business taxes have to be paid on earnings and income is taxed against at personal income tax level
- Benefits: Employees receive benefit plans (partnerships cannot do this)
- Safe (Board meetings, a lot of governance, organization)
What are the three steps to forming a corporation?
- Draft articles of incorporation that include requirement components
- Deliver articles of incorporation to the Secretary of State and receive copy
- Secretary of State accepts articles and this is point at time at which corporation is born.
What must the articles of incorporation contain?
- The corporation’s name
(and some word indicating business is incorporated (ie. “inc.). - The max # of shares the corporation is authorized to issue
- Names of corporation’s registered agent
- Address of registered office (must be located within the state of incorporation)
- Name and address of each incorporator
