Biz Orgs Bar Flashcards
What are three requirements to form an agency relationship?
(1) An agreement between parties;
(2) To benefit the principal; AND
(3) The principal has the right to control the agent.
o The principal is responsible for the acts of his agent.
o Note: No writing required unless Statute of Fraud requires writing. No consideration.
What capacity do the principal and agent require?
Principal must be an adult and have mental capacity
Agent must have mental capacity but can be any age
Formation by estoppel - define
An agency relationship may be created where a P holds out someone as an agent and a third party reasonably relies
(e.g., P lets an imposter represent him)
5 duties owed by an agent
(1) Duty of loyalty
(2) Duty of care
(3) Duty to follow reasonable directions
(4) Duty to communicate relevant information
(5) Any contractual duties
6 remedies when agent breaches
(1) Discharge agent
(2) Withhold compensation
(3) Compensatory remedies
(4) Disgorge profits
(5) Constructive trusts
(6) Rescission
3 duties owed by principal
(1) Duty to reasonably compensate and reimburse for expenses
(2) Duty to cooperate
(3) Express contractual duties
3 remedies when principal breaches
(1) Compensatory damages
(2) Terminate agency
(3) Seek lien for money due
When will the agent’s actions bind the principal?
The agent’s actions will bind the principal if the agent was acting under actual (express or implied) or apparent authority
3 types of agency authority?
(1) Actual express
(2) Actual implied
(3) Apparent
define actual express authority
what is written in the four corners of the agreement or expressly stated
Note: In corporation, exists for director if in board resolution or similar
define actual implied authority
Where agent reasonably believes principal gave him the authority in order to accomplish the agency’s goals (due to customs, prior dealings, necessary to accomplish goals)
When does termination of actual authority occur?
occurrence of event, unilaterally by A or P, operation of law, changed circumstances where clear agent’s services no longer needed
Define apparent authority
Apparent authority exists where the principal has provided the agent with the appearance of authority upon which a third party reasonably relies
define lingering apparent authority
apparent authority may linger even if where actual authority has ended. the agent can continue to have apparent authority with third parties with which the agent has previously contracted unless the third party had actual or constructive notice of the termination
define ratification in agency and 3 requirements
Where an agent acts without authority, the principal may approve the act. The agent is no longer liable if this occurs. 3 requirements:
(1) P has capacity;
(2) P has knowledge of all material facts; AND
(3) P accepts transaction.
what happens when principal dies?
modern rule: authority not terminated
what happens when agent acts without actual or apparent authority
principal is not liable and agent is liable on contract
on the other hand, if agent had authority, principal is liable to the third party on the contract
when is the agent liable to the third party on the contract?
- when acted with no authority
- when did partially disclosed principal or did not disclose him at all (Third party elects whether agent or principal is liable.)
who enforces the contract - P or A?
disclosed principal enforces the contract, not the A
when principal not disclosed, P or A can enforce
when is P liable for agent’s torts?
Principal liable for agents torts if:
(1) Employer and employee relationship; AND
(2) Tort committed within the scope of the relationship with the exception of frolics
Rule: While the P is liable for a detour (minor deviation off course), the P is not liable for frolics (a major deviation from the scope of employment).
how to determine whether employer and employee relationship exists?
most important consideration is the amount of control principal has over how A gets the job done
other factors
- expertise required
- who provides tools and facilities
- period of employment
- type of compensation
rule for when P and liability for the torts of an IC?
P is not liable for the torts of an independent contractor unless
(1) intentional tort authorized by employer
(2) in furtherance of business
(3) abnormally dangerous activities
(4) non delegable duties
- Other notes
o Negligent selection of the IC agent
o Principal holds out IC agent as an employee (relationship by estoppel)
define partnership and all the main rules.
A partnership is formed where two or more persons carry-on as co-owners a business for profit.
General partners are liable for the partnership debts.
No formalities are required. Writing required if partnership within Statute of Limitations.
Note: A “person” may be a corporation, trust, another partnership, etc.
3 ways to determine whether partnership exists and most important factor
(1) whether share in profits - raises a rebuttable presumption of partnership
* Exception – profits received as payment of debt, rent, wages, services
(2) whether share in control
(3) whether share in losses
define partnership by estoppel
one who holds himself out as partner may later be estopped from denying partnership if one reasonably relies to their detriment
3 ways to know something is partnership property
(1) property titled in partnership name
(2) property title in partner name but identifies partnership or partner capacity
(3) property purchased with partnership funds
rule on partnership property
Partnership property belongs to the partnership itself and not to the partners. A partner can only use the partnership property for the benefit of the partnership and may not transfer the interest
rights of general partner and what voting required
All partners have an equal right to manage and control the business (one partner, one vote), unless agreement provides otherwise. A partner cannot unilaterally transfer his management rights. All ordinary decisions require a majority vote while extraordinary decisions require a unanimous vote.
Extraordinary decision - bringing on a new partner
rule on distribution of profits and losses in a general partnership
All profits are split equally unless the agreement says otherwise, and losses are split the same way profits are treated
- Example: Split profits 60/30/10, then split losses by 60/30/10. Losses follow profits, not the other way around.
define indemnification in a partnership
a general partner is indemnified by fellow partners for expenses incurred in excess of the partner’s share
Note: No right to compensation other than for winding up business.
what is the rule on inspection in a partnership?
A partner may inspect and copy the partnership books
o Lawsuit
Rule: A partner may sue another partner (e.g., for breach)
5 duties of a general partner - first two are fiduciary
(1) Duty of loyalty
(2) Duty of care
(3) Duty to disclose
(4) Duty to account
(5) Duty of obedience (because a partner is an agent of the business)
o Rule: Partners owe a fiduciary duty to the partnership and to each other.
Duty of Care and Duty of Loyalty cannot be eliminated in partnership agreement
Duty of care
Partner must not engage in grossly negligent, reckless, or intentional misconduct
4 things to remember with duty of loyalty - what must partner do/not do
(1) Act in good faith and fairly toward the partners
(2) Account for all profits and benefits derived by partnership
(3) Not deal adversely with the partnership
(4) Not compete with partnership
rule on general partners as agents
Each general partner is an agent of the partnership. The general partner can bind the partnership under actual or apparent authority
(unless a third party knew the partner lacked authority).
rule for general partnership liability for contracts
The partnership is liable for contracts entered into by a general partner acting under authority of the partnership and in the scope of the partnership
rule for partnership liability for torts
The partnership is not liable for the torts of general partners unless those were performed in furtherance of the partnership/scope of the partnership
rule on joint and several liability in a partnership
A partner is jointly and severally liable for the debts of the partnership. If the partner pays more than their fair share, the partner can seek contribution from the other partners. However, the plaintiff must first exhaust the partnership resources before seeking to recover from the partner’s personal assets.
Rule for new partner obligations?
New partner is not liable for partnership obligations prior to him joining firm but can lose any investment he put in (e.g., to satisfy partnership debts)
rule for existing partner obligations?
liable for any obligations partnership incurred while he was a partner unless there is a release
criminal liability - is partnership liable?
No.
Rule: Partners are criminally liable only for their own crimes.
listen
o Rule: A GP has the power to dissociate or dissolve at any time by express will, agreed event, expulsion, bankruptcy, death/incapacity, or judicial order.
Duties of loyalty and care (confidentiality) continue
Describe dissociation
When a partner dissociates, he leaves the partnership. The partnership either dissolves or continues.
A dissociated partner can bind the partnership for up to two years if other party did not have notice of the dissociation.
Define dissolution
Dissolution requires that the partnership be wound up (sell and settle GP affairs) before termination.
Partners may waive dissolution by a unanimous vote of partners who have not wrongfully dissolved.
When does voluntary dissolution occur?
(1) Partner in an at will partnership voluntarily dissociates (must dissolve)
(2) In term partnership, after death, bankruptcy or wrongful dissociation, majority of remaining partners wish to dissolve
(3) Partnership objective achieved
(4) Agreement specified an end date
(5) All partners agree
(6) Passage of 90 consecutive days where partnership lacks 2 partners
2 times involuntary dissolution occurs?
(1) Partnership engaged in unlawful activity
(2) Court decree following request of partner
When does apparent authority end in a partnership?
(1) Directly inform creditors, or
(2) 90 days after the filing of a notice of dissolution with the state
define winding up
Winding up is the period between dissolution and termination where the partners sell the assets, settle the debts, and distribute remaining assets to the partners. Partners receive compensation for winding up services.
What is the order of distribution of assets?
(1) Outside creditors
(2) Partner creditors
(3) Capital contributions from partners
(4) Profits, if any, distributed equally unless agreement says otherwise
NOTE: If partnership cannot cover debts, partners must contribute in equal share to cover the debt.
Define a limited partnership
In a limited partnership, general partners are liable for partnership debts while limited partners are not liable for partnership debts though do not manage the business (they can only lose the investment they put in). The limited partner does not owe fiduciary duties. Limited partners have a full right to inspect the books and receive an accounting
If a purported LP fails to file with the state, they are a GP.
How are profits based in a LP?
Profits are based on the degree of capital each partner put in.
E.g., Partner puts in 20% of capital, partner receives 20% of profits (different from partnership)
3 requirements for an LP to form
(1) File certificate of limited partnership with the state;
(2) Identify name of partnership, must state “limited partnership”; AND
(3) Name and address of registered agent and of a general partner
What is a LLP?
In a limited liability partnership, all of the partners have limited liability.
Formation is the same as LP. File with state.
Dissociation and dissolution: Same as limited partnership
o LLLP – Limited Liability Limited Partnership
Rule: Both general partners and limited partners have limited liability.
Main rules for LLC
A LLC - limited liability company is an entity owned by members and run off an operating agreement. The LLC enjoys the taxation of a partnership (pass-through taxation) and the limited liability of a corporation, where the members are not personally liable for the LLC’s debts (other than for their own wrongful debts). Profits and losses are same as that for a LP, split based on contributions (not equally). Managers in a LLC owe fiduciary duties of loyalty and care. BJR applies.
Note: This is not a corporation or partnership. No shareholders. Only members.
3 requirements to form a LLC
(1) File certificate with secretary of state;
(2) Name must include LLC; AND
(3) Name and address of agent
Dissociation – same as general partnership
Dissolution – same as general partnership
Sample conclusion: To form a LLC, a certificate of formation must be filed with the state. Here, there was no filing with the state, so the firm is not an LLC. Partnership is the only entity that does not create a state filing.
What liability is a member subject to in a LLC?
(1) Piercing the veil
(2) Direct or derivative actions
What is a de jure corporation?
A regular corporation
Define a corporation at a high level
A corporation is a legal owner that shields owners and managers from the obligations of the corporation.
4 requirements to be included in filing with secretary of state?
(1) Corporation’s name;
(2) Authorized number of shares and associated rights;
(3) Names and addresses of incorporators, initial directors, and registered agents; AND
(4) Any lawful purpose
Define ultra vires activity and the rules
An ultra vires is one outside of the corporation’s stated purpose in the articles of incorporation. At common law, ultra vires acts were not permitted. Modernly, ultra vires acts are generally permitted but shareholders can seek an injunction to stop the company from performing the act and a manager may be liable for approving such an act.
Other than a regular de jure corporation, what are the 2 other ways to form a corporation?
(1) De facto corporation
(2) Corporation by estoppel
2 requirements for de facto corporation?
(1) Actual use of corporate power; AND
(2) Good faith but unsuccessful attempt to incorporate
Under a de facto corporation, there is no liability for failing to correctly incorporate
Effect: Treated as an actual corporation where shareholders generally not liable. Otherwise, default is a general partnership.
Note: Cannot claim de facto if you knew you had no corporation.
Define corporation by estoppel
A person who deals with the business believing it is a corporation is estopped from later denying it was a corporation. This only applies in contract cases.
The de facto and corporation by estoppel doctrines have been established in many jurisdictions but if they are available, this is how they work
Define a professional corporation
Licensed professional incorporate into a professional corporation. An individual is responsible for their own malpractice but not that of others. This is the only type of organization where the shareholders are liable for corporation obligations (other then under piercing)
3 requirements for close corporation
(1) 35 or fewer shareholders;
(2) Not publicly traded; AND
(3) Filing with the state.
A close corporation may be managed by shareholders and can forgo many corporate formalities.
Define S corporation
(1) Less than 100 shareholders;
(2) U.S. citizens and residents;
(3) Only one class of stock; AND
(4) Cannot be publicly traded.
Similar to close corp
Rules for foreign corporation and define it
A foreign corporation is one incorporated in another state. To do business (outside of owning property) in another state, it must register and pay a fee. If it does not, it can be:
(1) civilly fined
(2) cannot sue in the state
(3) can be sued (and can defend)
o Example: A Nevada corporation is foreign in California.
define all rules for promoters
Promoters are those that enter into contracts before a corporation is formed. Promoters are personally liable for contracts entered into before and after the corporation is formed unless there is a novation or the corporation adopts the contract (e.g., accepts the benefits). A corporation is NOT liable for pre-incorporation contracts. The promoter has a fiduciary relationship with the corporation (e.g., cannot make secret profits off dealings).
o Notes
Promoter may have a right to reimbursement for the value of the benefit received by the corporation.
Examples: Rent or equipment contract entered into before incorporation
