Forms of Organizations & Agency

Question 1

Types of Business Organizations

Answer 1

1. Sole Proprietorships
2. General Partnerships
3. Limited Liability Partnerships
4. Limited Partnerships
5. Corporations
6. Limited Liability Companies
7. and Other Lesser Used Types

Question 2

Considerations for Type of Organization

Answer 2

1. Ease of Formation & Administrative Startup Costs
2. Continuity of Existence
3. Transferability
4. Management
5. Raising Capital
6. Taxation
7. Risk & Liability Exposure

Question 3

Veil Piercing

Answer 3

An equitable, judicially created exception to limited liability

If the veil is pierced, the entity and owners are treated as one for purposes of liability

Question 4

Traditional Veil Piercing

Answer 4

Entity’s creditor seeking to collect from Owners

Question 5

Reverse Veil Piercing

Answer 5

Owner’s creditor seeking to collect from Entity

Question 6

Enterprise Liability

Answer 6

Multiple corporations treated as one entity for liability purposes

(think subsidies/parent corps)

Question 7

Veil Piercing:

Factors to Consider

Answer 7

Actual Control & Fairness

1. Inadequate Capitalization
2. Lack of Formal Separation
3. Comingling of Personal and Business Assets
4. Using Entity Funds for Personal Matters
5. Lack of Business Records
6. Nonfunctioning Officers
7. Using the Business for Personal Matters
8. Using the Business to Commit a Wrong (Abusing the Liability Shield)

Question 8

Agency Relationship:

Formation

Answer 8

(1) Principal manifests assent to Agent that Agent will act:
(a) On Principal’s behalf
(b) Subject to Principal’s control
(2) Agent manifests assent or otherwise consents

Question 9

Disclosed Principal:

Contracting Parties/Liability

Answer 9

The Principal and Third Parties are parties to the contract

The Principal is liable for the contract obligations

Question 10

Partially Disclosed/

Unidentified Principal:

Contracting Parties/Liability

Answer 10

The Principal, Third Parties, and the Agent are parties to the contract

The Principal is liable for contract obligations

The Agent is liable for contract obligations, unless otherwise agreed by the Third Party

Question 11

Undisclosed Principal:

Contracting Parties/Liability

Answer 11

The Agent and Third Parties are parties to the Contract.

The Principal is a party to the contract, unless they are excluded.

The Principal (if not excluded) and the Agent are liable for contract obligations.

Question 12

Types of Agent Authority

Answer 12

1. Actual
2. Apparent
3. Inherent

Question 13

Actual Authority

Answer 13

May be express or implied

1. At the time of taking action
2. The Agent reasonably believes
3. Based on the Principal’s manifestations
4. Made to the Agent
5. That the Principal wishes the Agent to so act

Question 14

Apparent Authority

Answer 14

1. A Third Party reasonably believes
2. That the Agent has the authority to so act, and
3. That belief is based on the Principal’s manifestations

Question 15

Inherent Authority

Answer 15

1. An Agency Relationship exists
2. Regardless of actual authority of the Agent
3. Third Parties were harmed
4. Fairness requires holding the Principal liable

Question 16

Estoppel

Answer 16

A Principal may be liable under this theory when:

(1) Even though the Principal:
(a) Made no manifestation that an Actor had Agent Authority
(b) Is not otherwise liable for the act made on the Principal’s account
(2) The Third Party:
(a) Is justifiably induced to make a detrimental change in position
(b) Because the transaction is believed to be on the Principal’s account
(3) AND – The Principal
(a) Intentionally or carelessly caused or had notice of such belief AND
(b) Knew that belief might change the Third Party’s position
(c) Did not take reasonable steps to notify the Third Party otherwise

Question 17

Ratification

Answer 17

1. Regardless of whether the Actor was an Agent or had Authority
2. The Principal manifests assent to be bound by the act OR
3. The Principal manifests conduct that justifies a reasonably assumption that the Principal consents to the act

Question 18

Respondeat Superior

(Vicarious Liability)

Answer 18

Employers are liable for torts when:

1. The Actor is an Employee (not an Independent Contractor) and
2. The Activity was within the scope of employment (Frolic v. Detour)

Question 19

Fiduciary Duties of Agents

Answer 19

1. Care, Competence, and Diligence
2. Notify and Disclose
3. Loyalty
4. Accounting

Question 20

Fiduciary Duties of Agents:

Loyalty

Answer 20

No use of Agency Relationship to make secret profits

No disclosure of Principal’s confidential information to Third Parties

No use of Principal’s confidential information for purposes not related to the Principal’s business

No dealing with the Principal’s adversaries

No competing with the Principal

No representing anyone with interests conflicting with those of the Principal, unless the Principal agrees

Question 21

Fiduciary Duties of Agents:

Remedies for Breach

Answer 21

If an agent breaches their fiduciary duty, the Principal may have several potential remedies, such as:

1. Injunction
2. Equitable remedy
3. Basis for voiding or rescinding a contract with a third party
4. Subject the agent to liability for actual losses caused to the principal
5. Punitive damages
6. Disgorgement

Question 22

Principal’s Duties to Agents

Answer 22

1. Compensation
2. Reimbursement and Indemnification
3. Cooperation

Question 23

Principal’s Duties to Agents:

Cooperation

Answer 23

The Principal must not hinder the Agent in the performance of their duties

The Principal must deal with the Agent fairly** and in **good faith

Question 24

Termination of Agency Relationship

Answer 24

Agency Relationships may be terminated when:

1. The stated time period expires
2. The purpose of the agency has been fulfilled
3. By mutual agreement
4. By death or bankruptcy of either party
5. By either party upon reasonable notice to the other

The termination of actual authority does not necessarily terminate all apparent authority.