Business Forms/Agency Rules Flashcards
Sole Proprietorship
Business owned by a single person who has not filed the paperwork to operate the business in some other legal form.
Single-owner business is a sole proprietorship by default.
Defining feature: no legal distinction btwn owner & business.
- Owner has complete management authority, no separate body of sole proprietorship law.
- Personally liable for obligations of the business
- Official legal name of a sole proprietorship is the sole proprietor’s legal name (can use “doing business as” assumed name)
Partnership (General)
For-profit business with 2+ owners (default). Governed by partnership statute of the state in which it’s recognized.
Most partnerships have written agreement signed by each partner addressing management structure, allocation of profits/losses, taxation, dissolution, etc.
Common management approaches include managing partner/committee/equal say/voting power in accord with capital contribution.
Each partner is personally liable for partnership obligations (personal assets are at risk). Pass-through taxation per individual partner rather than partnership paying federal income tax. Most taxed under Sub-Chapter K
Limited Liability Partnership (LLP)
For-profit business with 2+ owners that has filed a “statement of qualification” w/state’s Secretary of State office.
Key Attributes:
- not personally liable for obligations of the partnership
- LLP governed by general partnership statute of the state in which it’s organized
- most have written partnership agreements & similar management structure & tax arrangement as general partnerships
- Full liability shield (not liable for any obligations of the partnership sole bc partner, still responsible for own negligence or misconduct) in all but Louisiana & South Carolina.
Limited Partnership
Partnership with 1+ general partners & 1+ limited partners that has filed a “certificate of limited partnership” w/state’s secretary of state office.
- General partners no liability shield but get management rights
- Limited partners get liability shield but no management rights. Exception is the “control rule.” Basically just provide money.
Governed by limited partnership statute of state in which organized. Most have written limited partnership agreement.
Treated similarly to general partnership for federal income tax purposes.
Not used that much anymore. Used historical when it was hard to get corporate charter, and LLPs were not around.
Corporation
Business that has filed “article of incorporation.”
- limited liability for all its owners
- management authority vested in a board of directors elected by the shareholders
Governed by law of state in which it’s incorporated. 32 states base their corporate law statutes on some form of the Model Business Corporation Act. Remaining states developed own states.
- Delaware most important non-MBCA state bc state of incorporation for > 50% of US publicly traded companies.
Required to have charter & bylaws, which make up corp’s governing documents. Others include shareholders’ agreements & corporate governance principles.
- charter specifies name, types of stock, rights/prefs of preferred stock, office & agent for service of process in state of incorporation
- bylaws specify rules regarding governance: notice/quorum reqs, proxy voting, voting standards, etc.
- shareholders’ agreements cover stock transfer restrictions, employment of shareholders, board representation, buy-sell rights w/respect to corporation’s shares, etc.
Board of directors typically appoints officers to run the business.
Corp can choose to be taxed as a C-corporation (separate taxpaying entity) or an S-corporation (pass-through). Can choose.
Limited Liability Company (LLC)
Business that has filed “articles of organization” w/state’s Secretary of State office. Provides full liability shield & pass-through taxation. Bylaws = LLC Operating Agreement.
LLC govern by law of state in which it’s organized. Not a lot of uniformity among LLC statutes.
Most have a written agreement tailoring rules to specific needs/prefs
Either member-managed or manager-managed. Most are member-managed by default.
IRC treats a 2-member LLC same as general partnership. Single-member LLC taxed like sole proprietorship.
Agency Law
Dictates when a business will be bound by a k w/ a 3rd party that someone entered into on the business’s behalf. Consists largely of state common law. (We will be reading restatements).
Agency Relationship
Created when an agent-to-be & a principal-to-be consent to their association with each other.
(1) Principal “manifests assent” to the agent
(2) who “acts on the principal’s behalf subject to the principal’s control”
(3) “the agent manifests assent or otherwise consents to so act.”
Note: All employees are agents of their employers bc employment is a consensual relationship where the employee (agent) is subject to the control of the employer (principal).
Frawley v. Nickolich
Frawley, a licensed bail bondsman employed by appellant J&J Bonding was found to have an agency relationship with her friend Hinerman, who passed out business cards when they visited a jail together, helped by driving around & answering Frawley’s cell phone, and listened to Frawley as if she were her boss.
Essential elements of agency under 2nd Restatement were authorization and right to control.
Note: Under Restatement (Third) of Agency, how parties characterize a relationship is relevant but not controlling.
H.H. Taylor, C.A. v. Ramsay-Gerding Construction Co.
Shows direct/unambiguous communication is not req’d for finding apparent authority.
Ps became concerned about possibility that their new stucco system might rust. Agent made # of representations to Ps including that they had a 5 year warranty.
Issues:
1) Whether sufficient evidence to support finding that McDonald acted w/apparent authority when he warranted the stucco system to Ps.
2) Whether evidence that actions by ChemRex reasonably led Ps to believe that McDonald was authorized to provide warranty.
3) Whether Ps reasonably replied on McDonald’s apparent authority to provide warranty. [RELIANCE req not mandated by Restatement (Third)]
Answer to all: yes bc McDonald was given title territory manager, had access to official ChemRex letterhead, and had authority to visit job sites & solve problems.
Actual Authority
At the time of taking action that has legal consequences for the principal, the agent reasonably believes, in accordance w/the principal’s manifestations to the agent, that the principal wishes the agent so to act.
Actual Authority
At the time of taking action that has legal consequences for the principal, the agent reasonably believes, in accordance w/the principal’s manifestations to the agent, that the principal wishes the agent so to act.
Can be express or implied.
Focus is on communication btwn principal & agent.
Apparent Authority
A third party reasonably believes the actor has authority to act on behalf of the principal and that belief is traceable to the principal’s manifestations.
Can become lingering authority if person is no longer an agent but possesses apparent authority. Proof that apparent authority of an agent can be broader than his or her actual authority.
Focus is on communication of the principal & reasonable interpretation of this communication by third party.
Estoppel
A business may be bound to a k entered into on its behalf by an agent or other person lacking both actual & apparent authority under the doctrine of estoppel.
1) the person intentionally or carelessly caused such belief, or
2) having notice of such belief and that it might induce others to change their positions, the person did not take reasonable steps to notify them of the facts
Does not require a manifestation traceable to the principal regarding he purported agent’s authority but does require detrimental reliance by the 3d party.
Inherent Agency Power
A business may be bound to a k entered into on its behalf even in the absence of actual/apparent authority or estoppel under the doctrine of inherent agency power.
Describes power of an agent derived solely from the agency relation & exits for the protection of persons harmed by or dealing with a servant or other agent.
