Final Exam

Question 1

Define “fiduciary.”

Answer 1

• Relationship of the highest duty and loyalty
• This describes an agent’s duty to a principal
• Includes the following:
• • Conflicts of interest
• • Self-dealing
• • Duty not to compete
• • Misappropriation
• • Confidential information
• • Duty to account for financial benefits

Question 2

Define “indemnification.”

Answer 2

• Insurance, or standing behind

* Also: compensation for a loss

Question 3

What are the principal’s duties to an agent?

Answer 3

• Compensation
• Reimbursement
• Indemnification (insurance, or standing behind)

Question 4

What are the agent’s duties to an principal?

Answer 4

• Fiduciary: relationship of the highest duty and loyalty
• Same as the duties a spouse owes to their partner
• The agent doesn’t have any more authority than the principal does
• Agents can designate sub-agents

Question 5

Define “power of attorney.”

Answer 5

• Written, formal appointment of an agent
• An instrument authorizing a person to act as the agent or attorney of the person granting it.
• Most common formal agency relationship (beyond employment)

Question 6

Define “principal.”

Answer 6

• If the principal is a minor or an incompetent not under a guardianship, his appointment of another to act as an agent is voidable, as are any resulting contracts with third parties
• The term “principal” describes one who has permitted or directed another (i.e., an agent or a servant) to act for his benefit and subject to his direction and control.
• • This allows them to do business with third parties.
• Principal includes in its meaning the term “master” or employer, a species of principal who, in addition to other control, has a right to control the physical conduct of the species of agents known as servants or employees, as to whom special rules are applicable with reference to harm caused by their physical acts.

Question 7

Define “agent.”

Answer 7

• Any person able to act may act as an agent as the act of the agent is considered the act of the principal

Question 8

What are the two problem areas in agency relationships with third parties?

Answer 8

1) Problems that arise with tort
* * Civil wrongs may have been committed
* * In this case, the lawyer or principal is always responsible for the acts of the agent, so long as (limine phrase) the agent is acting in scope of his/her duties
* * This is called doctrine of respondeat superior

2) Contract situations
* * Recall “undisclosed principal,” “partially-disclosed principal,” and “disclosed principal”

Question 9

Define “respondeat superior.”

Answer 9

• Let the superior respond.” It does not matter how carefully the employer selected the employee if, in fact, the latter tortiously injures a third party while engaged in the scope of employment

Question 10

Explain the differences between “undisclosed principal,” “partially-disclosed principal,” and “disclosed principal.”

Answer 10

• Undisclosed principal:
• • Stick figure without limbs
• • When the third party does not know of an agency relationship, and therefore does not know the identity of the principal
• • In this case, the agent is fully liable under the law to both the third party and the principal
• Partially-disclosed principal:
• • Stick figure with two limbs
• • The third party is aware of the agency relationship, but not of the identity of the principal
• • The agent is liable, but is protected by indemnification by the principal
• Fully-disclosed principal:
• • Stick figure with all four limbs
• • The third party is aware of both the agency relationship and the identity of the principal
• • The principal is liable

Question 11

List the three types of entities.

Answer 11

1) Sole proprietorships
2) Partnerships and LLCs
3) Corporations

Question 12

List the advantages and disadvantages of sole proprietorships.

Answer 12

• Advantage
• • Easy to do
• • Go from concept to implementation almost immediately
• • You’re the boss
• • Income (revenue-less expenses derived from profit) taxed only once
• Disadvantages
• • Full liability
• • No protection in contract or in tort against claims against you

Question 13

List the advantages and disadvantages of partnerships.

Answer 13

• Advantages:
• • Really easy to form
• • Great if you know your partner, and trust them
• Disadvantages:
• • Partners share EQUALLY in the profits and losses
• • Each partner has the right to participate in the management
• • There is no right to compensation (this is DIFFERENT from agency law)
• • Each partner has a right to an accounting (informal lawsuit that compels one party to give the records to the other) and examination of books and records

Question 14

List the advantages and disadvantages of corporations.

Answer 14

• Advantages:
• • Allows you to decentralize your management
• • Limited liability
• • Allow for easy generation of revenue
• Disadvantages:
• • Difficult to form

Question 15

Define “joint venture.”

Answer 15

• If your partner gets in trouble, you do too because you are jointly liable

Question 16

Define “capital contribution.”

Answer 16

• This is what you put down when you got started

Question 17

What is a “secret partner?”

Answer 17

• These are undisclosed partners

Question 18

What is a “silent partner?”

Answer 18

• Partners who choose not to participate in management

* This is something that is agreed upon

Question 19

How long does a partnership exist?

Answer 19

• Until it is ended

Question 20

What are the three stages of ending a contract/partnership?

Answer 20

1) Dissolution: the occurrence of an act or event (could be the death of the partner)
2) Winding up the affairs of the partnership, usually involves liquidation and distribution
3) Termination of the partnernship

Question 21

In winding up the affairs, what is the order of priority of distribution?

Answer 21

1) Outside creditors
2) Inside creditors (partners if they loaned money to the partnership)
3) Return on capital contribution
4) Division of the profits

Question 22

List the key characteristics of limited partnerships.

Answer 22

• There must be a limited partner and a general
• Limited liability
• Limited as to the amount of your contribution
• • By virtue of this, they are also limited as to the management of the affairs (this means that they’re more of an investor than a partner)
• Very expensive to obtain
• Do a good job in protecting family wealth
• Keeps it free from creditors
• Registered agent is very important in the formation process
• You can only create a limited partnership by filing a formal document by the TX Secretary of State

Question 23

List the advantages of Limited Liability Companies (LLCs).

Answer 23

• Advantages:
• • Has a set of internal regulations, called operating agreements
• • Easy to form
• • Protects the member from personal liability
• • Again, an advantage is limited liability
• • Registered agent is very important in the formation process

*No clear disadvantages

Question 24

List the five classifications of corporations.

Answer 24

1) Public or Private
* * Public: government corporations, public service, e.g. post office
* * Private: companies like Facebook, Target, etc.

2) Profit or Non-profit
* * Profit
* * Non-profit: must fill out an app with the IRS to be classified as a non-profit, organized for benevolent purposes, e.g. Boy Scouts, American Heart Association, etc.

3) Publicly-traded or Privately-owned
* * Publicly-traded
* * Privately-owned

4) Domestic, foreign, or alien
* * Domestic: formed and operates in Texas
* * Foreign: formed in Texas, operates both in Texas and Oklahoma
* * Alien: corporation from a different company that operates in
* * (All corporations that operate in Texas must be registered through the Secretary of State)

5) Subchapter S or Subchapter C
* * Sub-S: fewer than 100 shareholders, you can elect to have Sub-S tax treatment (optional)
* * Sub-C: over 100 shareholders, you are automatically a Sub-C corporation

Question 25

Define bylaws.

Answer 25

• Internal regulating rules of a corporation

* Regulations, ordinances, rules, or laws adopted by an association or corporation for its government

Question 26

List the key stages in the formation of a corporation.

Answer 26

• Board of directors appoints officers
• Officers appoint employees
• Directors, officers, and employees are all agents of law, and are therefore protected by agency law

Question 27

List and explain the three ways to finance corporations.

Answer 27

1) Equity financing: issuance and stock of shares, big source of corporate finance
2) Debt financing: the issuance of bonds to raise money for corporate growth and activities
3) Raising capital: through sales and service

Question 28

What is the role of shareholders?

Answer 28

• Restricted to election of directors

Question 29

Describe the relationship amongst agents, shareholders, and officers.

Answer 29

• The directors act as agents to the shareholders, as do employers and officers

Question 30

List the six parts of the definition of “partnership.”

Answer 30

• An association
• Of two or more
• Persons (can be corporations)
• To carry on a business
• As co-owners
• For profit/loss

Question 31

What is the easiest and the hardest partnership to form?

Answer 31

• The sole proprietorship is the easiest

* A corporation (and any other registered partner) is the hardest

Question 32

All partnerships, except for ___, only get taxed once. Which partnership is this?

Answer 32

• A sub-C corporation