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|Business Organizations Winter 2004|
Chapter 1 - Introduction
Parties involved in a business enterprise
Investor – The party that typically provides financial resources.
Owner – The party (or parties) who own the business.
Manager – The party who actually operates the business.
Worker – The people who carry out all the tasks necessary for the business to operate.
Third Party – All parties that are not directly involved in the operation of the business.
Types of Business Entities
Sole Proprietorship – a business owned and operated by an individual who has full authority and responsibility for all business decisions.
General Partnership – an association of at least two individuals, other partnerships, corporations, or other associations for the purpose of carrying on as co-owners a business for profit.
Limited Partnership – a special type of partnership created by statute that has one or more general partners and one or more limited partners.
Corporation – a statutory entity whose legal existence and identity are independent of the business owners identity.
Non-profit Associations – an entity that exists for purposes other than earning profit (may be incorporated or unincorporated).
New Business Entities
Limited Liability Companies (LLC) – Combines the tax treatment of a partnership with the limited liability of a corporation. Generally, an LLC has at least two members (individuals, partnerships, trusts, estates, other LLC’s or other associations) who have contributed capital and have filed articles of organization with the state.
Registered Limited Liability Partnerships (RLLP) – is a conventional general partnership that has met certain guidelines and registered with the state. The RLLP enjoys partnership taxation and limits the liability of the partners to their capital investment in the partnership.
Registered Limited Liability Limited Partnerships (RLLLP) – is a conventional limited partnership that has met certain guidelines and registered with the state. The RLLLP enjoys partnership taxation and limits the liability of the general partners to their capital investment in the partnership.
Missouri v. Kansas City Firefighter’s Local No. 42, 672 S.W.2d 99 (Missouri Ct. App. 1984)
A voluntary association is governed by principles of agency. Therefore, members of a voluntary association are liable for acts of its agents when done within scope of authority. Liability of the members for acts of its agents when done within scope of authority does not devolve upon a member from fact of association only; however, but from a personal act, or from act of an agent whose agency must be proven. Thus, a member of a voluntary association sustains no personal liability for acts of association's officers or other members unless the member participates in, authorizes, or ratifies the acts.
Security-First National Bank v. Cooper, 145 P.2d 722 (Cal. Dist. Ct. App. 1944)
The liability of members of an unincorporated association on contracts made by it varies according to the answer to the question whether the association is one organized for profit. If the association is, in fact, not for profit then membership imposes no personal liability for the debts of the association unless the individual member has actually or constructively assented to or ratified the contract on which the liability is predicated.
Lyons v. American Legion Post No. 650 Realty Co., 175 N.E.2d 733 (Ohio 1961)
In the absence of an enabling statute, a voluntary association cannot be sued by its association name. It has no legal existence, and the persons composing it must be joined individually. The existence of an enabling statue does not, however, relieve the individual members of liability because the enabling statute will not abrogate the common-law liability of the members unless the statue specifically does so.
Common-law Entities (entities that exist without an enabling statute)
Sole Proprietorships – There are essentially no requirements to form a sole proprietorship of the operation of a business (with the exception of fictitious name statutes).
General Partnerships – General partnerships are governed by the Uniform Partnership Act and/or the Revised Uniform Partnership Act.
Uniform Partnership Act
UPA § 6 defines a partnership as the association of two or more persons to carry, on as co-owners, a business of profit.
UPA § 7 states that the receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business. No such inference, however, shall be drawn if such profits were received in payment: (1) as a debt by installments or otherwise, (2) as wages of an employee or rent to a landlord, (3) as an annuity to a widow or representative of a deceased partner, (4) as interest on a loan, (5) as the consideration for the sale of the good-will of a business or other property by installments or otherwise.
In re Dolton Lodge Trust No. 35188, 22 Bankr. 918 (N.D. Ill. 1982)
The most essential feature of a partnership is it is formed to carry on business purposes. Other factors that are material include: (1) Manner in which parties have dealt with each other; (2) Mode in which each partner has, with knowledge of the others, dealt with persons in partnership capacity; (3) Whether the parties have filed a certificate setting forth the entity’s assumed name; (4) Whether the parties have carried telephone listings, signs on premises, truck, etc. in the firm name; and (5) Whether the parties have shared profit.
Stuart v. Overland Medical Center, 510 S.W.2d 494 (Mo. Ct. App. 1974)
A partnership is a contract of two or more competent persons to take their money, effects, labor and skill, or some or all of them, in lawful commerce or business and to divide the profits and bear the loss in certain proportions. The primary consideration in determining the existence of a partnership is whether the parties intended to carry on as co-owners a business for profit.
Revised Uniform Partnership Act
RUPA § 101(4) – “Partnership” means an association of two or more persons to carry on as co-owners a business for profit formed under Section 202, predecessor law, or comparable law of another jurisdiction.
RUPA § 101(8) – “Person” means an individual, corporation, business trust, estate, trust, partnership, association, joint venture, government subdivision, agency, or instrumentality, or any other legal or commercial entity.
RUPA §§ 202(a)&(b) – Unless formed under a statute other than this Act, a predecessor statute, or a comparable statute of another jurisdiction, the association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intend to form a partnership.
John v. Lamb, 36 Bankr. 184 (E.D. Tenn. 1983)
A person may be a partner though he believes that he isn’t. It is the legal effect of the parties’ agreement, not they’re subjective intent, that determines whether they are partners.
Fenwick v. Unemployment Compensation Commission of New Jersey, 133 N.J.L. 295 (N.J. 1945)
The intention of the parties to form a partnership is only one factor to consider when determining if a partnership exists. Other factors include (1) the right to share in profits; (2) the obligation to share in losses; (3) ownership and control of the partnership property and business; (4) community of power in administration; (5) the conduct of the parties toward third parties; and (6) the rights of the parties on dissolution.
Zajac v. Harris, 410 S.W.2d 593 (Ark. 1967)
The business association that is known in the law as a partnership is not one that can be defined with precision. To the contrary, a partnership is a contractual relationship that may vary, in form and substance, in an almost infinite variety of ways.
H.T. Hackney Co. v. Robert E. Lee Hotel, 300 S.W. 1 (Tenn. 1927)
The issue of profit sharing is not an infallible test by which to determine the existence of a partnership. Especially when an alternate relationship exists, such as employer and employee or landlord and tenant.
Martin v. Peyton, 158 N.E. 77 (N.Y. 1927)
Partnerships result from contract, express or implied. If denied, it may be proved by the production of some written instrument, by testimony as to some conversation, or by circumstantial evidence. If nothing else appears, the receipt by the defendant of a share of the profits of the business is enough. The only exception is when the sharing of profit is merely the method adopted to pay a debt or a wage.
Joint Ventures – A joint venture is a common law business entity that closely resembles a general partnership and is treated very similarly to a general partnership.
Crest Construction Company v. Insurance Company of North America, 417 F. Supp. 564 (W.D. Okla. 1976)
A partnership is an association of two or more persons to carry on as co-owners a business for profit. A joint adventure is a special combination of two or more persons, whether corporate, individual, or otherwise which seeks a joint profit in a specific venture. Partnerships and joint adventures are separate legal relationships although they are generally governed by the same rules of law.
Limited Partnerships – Limited partnerships were unknown at common law; they are exclusively a creature of statute, their main purpose being to permit a form of business enterprise, other than a corporation, in which persons could invest money without becoming liable as general partners for all debts of the partnership. The General purpose was to enable persons to invest their money in partnerships and share in the profits without being liable for more than the amount of the money contributed.
Uniform Limited Partnership Act
ULPA § 101(7) – “Limited partnership” means a partnership formed by two or more persons under the laws of the state and having one or more general partners and one or more limited partners.
ULPA § 102 – The name of the limited partnership shall contain the words “limited partnership. The name may not contain the name of a limited partner unless it is also the name of a general partner or the business of the limited partnership had been carried on under that name before the admission of that limited partner.
ULPA § 208 – The fact that a certificate of limited partnership is on file is notice that the partnership is a limited partnership and that the persons designated as general partners are general partners.
Dwinell’s Central Neon v. Cosmopolitan Chinook Hotel, 587 P.2d 191 (Wash. Ct. App. 1978)
A third party’s knowledge regarding the status of a limited partnership is irrelevant when at the time of contracting, the partners have made no attempt to comply with the statutory information and filing requirements of the Limited Partnership Act. Since limited partnerships were unknown at common law, a party seeking the protection of limited liability must have substantially complied with the statutory requirements.
An employee or independent contractor can only bind an employer to a contract with a third party if two requirements are satisfied: (1) the employee or independent contractor is in an “agency” relationship with the employer in which the employee or independent contractor is an “agent” of the employer; and (2) the agent had “authority” to enter the contract on behalf of the employer. The Authority may be (1) actual authority, (2) apparent authority, or (3) inherent authority arising from the agency relationship. The principle may also be bound to the third party on account of a transaction with an agent, because of the principles of estoppel or unjust enrichment.
General and Special Agents
General agent – an agent authorized to conduct a series of transactions involving a continuity of service (one who is an integral part of a business organization and does not require fresh authorization for each transaction is a general agent).
Special agent – an agent authorized to conduct a single transaction or a series of transactions not involving continuity of service.
The Agency Requirement
Agency is a fiduciary relationship. This relationship is created when one person (principle) manifests an intention that another (agent) shall act in his behalf and the other person (agent) consents to represent him (principle). There is no requirement for consideration because the relationship created is not necessarily contractual in nature. Thus, the relationship may be created expressly, either orally or in writing, or implied by some other conduct by the principle that may be interpreted as an objective intention to appoint an agent.
The Restatement (Second) of Agency – An agency relation exists only if there has been a manifestation by the principal to the agent that the agent may act on his account, and consent by the agent so to act.
The Authority Requirement
Actual authority is created by written or spoken words (i.e. express authority) or other conduct of the principal (i.e. implied authority) which, reasonably interpreted by the agent, causes the agent to believe that the principal desires him to act on the principal’s behalf.
Express Authority – Actual authority includes “express authority” which is authority granted by words which expressly and directly authorize the agent to engage in certain conduct on behalf of the principal.
Implied Authority – Actual authority also includes “implied authority” which is authority implied from the surrounding facts and circumstances.
Incidental authority – Finally, actual authority also includes “incidental authority” which is the authority that an agent reasonably presumes she possesses by virtue of the position she occupies or the responsibilities she is charged with (includes authority to do ministerial acts and other acts necessary for the agent to carry out her duties as an agent).
Implied authority is tat authority that comes in conformity either with law or the general business customs of a particular trade. Where conformity with law is concerned, the captain of a vessel has implied authority under admiralty law to bind the owner thereof tot he purchase of “necessaries” for the use of his ship; not for the use of other ships in the fleet.
Penthouse International, Ltd. v. Priscilla Barnes, 792 F.2d 943 (9th Cir. 1986)
Implied actual authority requires that the reasonable belief of the agent that he was authorized to modify the contract based on the principal’s conduct known to him.
Security Pacific Finance Corp. v. Nelson, 761 F.2d 1320 (9th Cir. 1985)
Actual authority may be conferred upon the agent by the principal intentionally (i.e. express authority), or intentionally, or by want of ordinary care, allows the agent to believe himself to possess (i.e. implied authority). Actual authority may be established informally by the conduct of the parties.
Federal Land Bank of Omaha v. Sullivans, 430 N.W.2d 700 (S.D. 1988)
An attorney who is clothed with no authority other than that arising from his employment has no implied power to compromise, or settle, his client’s claim. A principal, however, will be liable for contracts made in its behalf, by an agent, if the agent was authorized to enter into the agreement. This authorization may be either actual or apparent. Actual authority is created by manifestations from the principal to the agent to believe the agent has the authority to act on the principal’s behalf. This actual authority can also be created by the acquiescence of the principal in the actions of the agent. Apparent authority, conversely, is created by manifestations from the principal to a third person to believe the agent has authority to act on the principal’s behalf.
Apparent authority – is created by written or spoken words or any other conduct of the principal which, reasonably interpreted by a third party, causes the third party to believe that the principal consents to have the act done on his behalf by the person purporting to act for him.
Zummach v. Polasek, 227 N.W.33 (Wis. 1929)
Power to bind the principal may result from consent of the principal manifested to third persons by formal or informal writings or by spoken words, or it may result from manifestations of consent on the part of the principal implied from authority to do other acts. This is called Apparent Authority.
Estoppel and Apparent Authority – Apparent authority arises when an employer’s actions lead a third party to reasonably believe an agent has authority. In contract, estoppel requires the same elements as apparent authority plus the third party must also change his position to his detriment in reliance upon the employer’s actions for estoppel to apply.
Walker v. Pacific Mobile Homes, Inc, 413 P.2d 3 (Wash. 1966)
Authority to perform services for a principal carries with it the implied authority to perform the usual and necessary acts essential to carry out the authorized services. One dealing in good faith with an agent who appears to be acting within the scope of his authority is not bound by undisclosed limitations on the agent’s power.
Inherent Authority – is authority that is created solely from the existence of an agency relationship. The source of the authority is the status or position of the agent in the business enterprise on whose behalf she is acting. Inherent authority exists independent of either actual or apparent authority because it would be unfair for an enterprise to have the benefit of the work of its agents without making it responsible to some extent for their excesses and failures to act carefully.
UPA § 9 – Every partner is an agent of the partnership for the purpose of its business and may bind the partnership unless he has, in fact, no authority to act and the person with whom he is dealing knows that he does not have the authority to act.
RUPA § 301 – Each partner is an agent of the partnership for the purpose of its business and may bind the partnership unless he has, in fact, no authority to act and the person with whom he is dealing knows that he does not have the authority to act.
Ellis v. Mihelis, 384 P.2d 7 (Cal. 1963)
Insofar as the partner limits his conduct to matters apparently within the partnership business, he can bind the other partners without obtaining their written consent. There must, however, be express authority for acts of a partner, which do not appear to be within the usual course of the business.
Executive Financial Services, Inc. v. Loyd, 715 P.2d 376 (Kan. 1986)
A partner has both actual and apparent authority to act within the usual course of partnership business, even though the authority is used illegally.
Acts of Unauthorized Agents
An agent, pursuant to her authority, who obligates her principal to a contract, is not bound to the contract even thought the principal is. However, if the agent acts outside the scope of her authority (i.e. actual or apparent) the principal is not bound by the contract but the agent is. The principal may, however become bound by the unauthorized acts of the agent (1) if she knows about the unauthorized actions of the agent but does not object; (2) if she ratifies the acts of the agent; or (3) if she receives the benefit of the unauthorized actions.
Termination of Authority
Mutual Consent – the authority of an agent terminates in accordance with the terms of an agreement between the principal and the agent.
Revocation or Renunciation – Authority terminates if the principal or agent manifests to the other dissent to its continuance.
Death of Principal – the death of the principal terminates the authority of the agent without notice
Death of Agent – Duh!
Loss of Capacity of Principal or Agent – the loss of capacity by either party terminates the authority during the period of incapacity.
Gallup v. Barton, 47 N.E. 2d 921 (Mass. 1943)
The death of the principal terminates the authority of the agent with, or without, notice of the principal’s demise.
Webster Real Estate v. Rickard, 98 Cal. Rptr. 559 (Cal. Ct. App. 1971)
A real estate listing creates an agency between the broker and the owner. Because of its personal and fiduciary character, the agency is terminated by the death of or renunciation by the agent ... or the death of or revocation by the principal.
An Exception to the rule
Irrevocable Agency – an irrevocable agency (also called an agency coupled with an interest, a power coupled with an interest or a power given as security) is generally irrevocable under any circumstances.
A power given as security is a power to affect the legal relations of another, created in the form of an agency authority, but held for the benefit of the power holder or a third person and given to secure the performance of a duty or the protection of a title, either legal or equitable, such power being given when the duty or title is created for consideration.
Lane Mortgage Co. v. Crenshaw, 269 P. 672 (Cal. Dist. Ct. App. 1928)
A power is said to be coupled with an interest when the power forms part of a contract, and is a security for money or for the performance of any act which is deemed valuable, and is generally made irrevocable in terms, or if not so, is deemed irrevocable in law. To be deemed irrevocable in law, the power must coexist with an interest in the thing or estate to be disposed of or managed under the power.
Phoenix Title & Trust Co. v. Grimes, 416 P.2d 979 (Ariz. 1966)
The interest that can protect a power after the death of a person who creates it, must be an interest in the thing itself – the power must be engrafted on an estate in the thing. The phrase “coupled with an interest” means an interest in the property on which the power is to operate.
Durable Power of Attorney – When a principal designates another his attorney in fact by a power of attorney in writing and the writing contains the words “This power of attorney shall not be affected by disability of the principal or lapse of time”. or words of similar import, the authority of the attorney in fact is exercisable by him as provided in the written instrument notwithstanding the later disability, incapacity, or adjudged incompetence of the principal and , unless it states a time of termination, notwithstanding a lapse of time.
Disclosed principal – If, at the time of a transaction conducted by an agent, the other party thereto has notice that the agent is acting for a principal and of the principal’s identity, the principal is a disclosed principal and unless otherwise agreed, a person making or purporting to make a contract with another as agent for disclosed principal does not become a party
Partially disclosed principal – If the other party has notice that the agent is or may be acting for the principal but has no notice of the principal’s identity, the principal for whom the agent is acting is a partially disclosed principal and unless otherwise agreed, a person purporting to make a contract with another for a partially disclosed principal is a party to the contract.
Undisclosed principal – If the other party has no notice that the agent is acting for a principal, the one for whom he acts is an undisclosed principal and an agent purporting to act upon his own account, but in fact making a contract on account of an undisclosed principal, is a party to the contract.
Benjamin Plumbing, Inc. v. Barnes, 456 N.W.2d 628 (Wis. Ct. App. 1990)
Where a corporate officer contracts with another without disclosing or in any manner indicating that he or she is acting on behalf of a corporation, and where the other person is otherwise unaware of the corporate agency, the officer cannot avoid personal liability in the transaction. Unless otherwise agreed, a person purporting to make a contract with another for a partially disclosed principal is a party to the contract and thus liable for its breach. The principal is partially disclosed if the other party has notice that the agent is or may be acting for a principal but has no notice of the principal’s identity.
Ingram v. Lupo, 726 S.W.2d 791 (Mo. Ct. App. 1987)
An agent incurs personal liability regardless of disclosure of the principal, where the agent contracts in his own name, rather than on behalf of his principal.
Inherent authority of General Agents acting on behalf of undisclosed and partially disclosed principals.
If a general agent acting on behalf of an undisclosed principal knowingly exceeds her authority the principal may still be bound by the actions of the agent in certain cases because it is fair that one who benefits from the enterprise of another should pay for the harm or errors caused by the other.
The fiduciary must be loyal to and must unselfishly serve the interests of the person or enterprise the fiduciary is acting for or on behalf of. Fiduciary law imposes a high standard of morality upon a fiduciary and describes the fiduciary’s duty in terms of the loyalty, fidelity, faith or honor. The fiduciary is obliged to place the interests of the person or enterprise on whose behalf he is acting above his own interests.
Who is a Fiduciary?
A fiduciary relationship is one founded upon trust or confidence reposed by one person in the integrity and fidelity of another. A fiduciary is held to something stricter than the morals of the market. The fiduciary relationship is the punctilio of an honor the most sensitive.
Statutory Fiduciary Obligations
UPA § 21 – Every partner must account to the partnership for any benefit, and hold as trustee for it any profits derived by him without the consent of the other partners from any transaction connected with the formation, conduct, or liquidation of the partnership or from any use by him of its property.
RUPA § 404 – The only fiduciary duties a partner owes to the partnership and the other partners are the duty of loyalty and the duty of care.
Duty of loyalty – A partner’s duty of loyalty to the partnership and the other partners is (1) to account to the partnership and hold as trustee for it any property, profit, or benefit derived by the partner in the conduct and winding up of the partnership business or derived from a use by the partner of partnership property, including the appropriation of a partnership opportunity; (2) to refrain from dealing with the partnership in the conduct or winding up f the partnership business as or on behalf of a party having an interest adverse to the partnership; and (3) to refrain from competing with the partnership in the conduct of the partnership business before the dissolution of the partnership.
Duty of care – A partner’s duty of care to the partnership, and the partners, in the conduct and winding up of the partnership business is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.
ULPA § 403 – A general partner of a limited partnership has the same rights, powers, and liabilities as does a general partner in a partnership without limited partners.
Limited Liability Companies
ULLCA § 409 – A member of a limited liability company has the same fiduciary duties as a partner in a partnership.
Restatement (Second) of Agency § 387 – An agent is subject to his principal to act solely for the benefit of the principal in all matters connected with his agency.
Misappropriation of a Business Opportunity – The fiduciary must apprise the business enterprise of the opportunity and allow the business enterprise to exploit the opportunity if the opportunity is in the same line of business as the enterprise is engaged in or it is a logical extension of the enterprise’s business; and the enterprise is willing and financially able to capitalize on the opportunity.
Meinhard v. Salmon, 164 N.E. 545 (N.Y. 1928)
A managing co-adventurer appropriating a partnership benefit without warning to his partner might fairly expect reproach.
Lipinski v. Lipinski, 35 N.W.2d 708 (Minn. 1949)
In determining their respective obligations, a court should always keep in mind the purposes for which the participants were associated and the manner in which the association was organized. It is clear that the relationship between the parties was fiduciary in character and that each owed to the other the highest degree of loyalty and good faith, but that such relationship and its obligations were limited to the enterprise in which they were mutually engaged.
Employee Inventions and Fiduciary Obligations – Generally, an employee owns the rights to her inventions. However, an employee is generally in a fiduciary relationship with her employer. Therefore it would seem appropriate that an employer should have rights to inventions made by employees during their employment.
The first exception is when an employee is hired specifically to invent for the employer – in such a case, the inventor is entitled to a patent on her invention but the employee must then convey the patent to the employer.
The second exception is when an employee who is not employed to invent, but nevertheless invents something during the hours of employment or with the use of the employer’s equipment, services or other employees – In this case, the employee retains title to the invention and is entitled to obtain and retain any patent issued for the invention. However the employer is granted an irrevocable non-exclusive license to use the invention in her business.
ULPA § 107 – transactions between general and limited partners and the limited partnership are specifically authorized.
ULLCA § 409 – A member does not violate his duty to the enterprise merely because the member’s conduct furthers the member’s own interest.
Corporations – A contract will not be void or voidable merely because an interested director is present at or participates in the meeting of the board which authorizes the contract if (1) the material fact of his relationship is known to the board and the board in good faith authorizes the contract by the votes of a majority of the disinterested directors, (2) the facts of the relationship are knows to the shareholders who are entitled to vote thereon; or (3) the contract is fair to the corporation.
Starr v. International Realty, LTD., 533 P.2d 165 (Or. 1975)
When a real estate broker undertakes to join as a member of a partnership or joint venture in the purchase of real property on which he holds a listing, his is also subject to the fiduciary duties of unified loyalty and complete disclosure owed by one partner to anther. A fiduciary has a duty not only not to misrepresent but also to disclose fully all the material facts within his knowledge. One of the fundamental duties of any partner who deals on his own account in matters within the scope of his fiduciary relationship is the affirmative duty to make a full disclosure to his partners not only of the fact that he is dealing on his own account but all of the fats which are material to the transaction.
Cude v. Couch, 588 S.W.2d 554 (Tenn 1979)
Couch’s duty to his partner did not require that he least the premises against his own best interests.
Dual Agency – An agent is not permitted to serve tow masters having a contrary interest, unless it be that such contracts of dual agency are known to each of the principals. In fact, even if there was no actual fraud, no damages, and no bad faith, a contract made by a dual agent is void absent knowledge on the part of the principal, of all material fact.
Competing with your employer – Generally, an employee cannot directly compete with her present employer while still employed. An agent is subject to a duty not to compete with the principal concerning (1) the subject matter of his agency, (2) confidential information acquired on account of his agency.
Jet Courier Service, Inc. v. Mulei, 771 P.2d 486 (Colo. 1989)
Absent a contrary agreement, an employee may compete with his employer after the termination of his employment. However, an employee is not entitled to solicit customers or co-workers for a rival business before the end of his employment.
Meehan v. Shaughnessy, 535 N.E.2d 1255 (Mass. 1989)
Partners owe each other a fiduciary duty of the utmost good faith and loyalty. As a fiduciary, a partner must consider his or her partners’ welfare and refrain from acting for purely private gain. However, a partner may plan to compete with the entity to which they owe allegiance, provided that in the course of such arrangements they do not otherwise act in violation of their fiduciary duties.
Distribution of profits from a business enterprise
If a business is operated as a sole proprietorship, any profits are the personal property of the owner. If several persons, or entities, own a business profits are generally split in accordance with the agreement of the parties.
Corporations – A corporation is managed under the direction and control of the board of directors. Decisions with regard to the distribution of profits are with in the management authority of the board and subject to their discretion. A corporate distribution may be in the form of a declaration or payment of a dividend; a purchase, redemption, or other acquisition of shares; a distribution of indebtedness; or otherwise.
Limited Partnerships – The profits and losses of a limited partnership shall be allocated among the partners, and among classes of partners, in the manner provided in writing in the partnership agreement. If the agreement does not provide for the sharing of profits and losses, they shall be allocated according to the partner’s basis in the partnership.
Limited Liability Companies – The profits of a limited liability company shall be allocated equally among the members of the entity.
General Partnership –
UPA – Each partner shall share, subject to any agreement, equally in the profits and losses.
RUPA – Each partner shall share equally in the profits and the losses of the partnership. Property acquired by the partnership is the property of the partnership, not the partner.
Smith & Stehlik v. Daub, 365 N.W.2d 816 (Neb. 1985)
UPA § 18 does not require an express agreement, but may be interpreted by the court in accordance with the parties previous “course of dealing” while engaged in the performance of the contract.
When a business enterprise incurs liabilities from its activities the business entity is generally responsible for these liabilities. However, personal liability of business owners for business liabilities depends to a great extent on the type of legal entity utilized to operate the business.
Sole proprietorship – There is no distinction between the assets of the business and the assets of the owner. Consequently, the assets of both the business and the personal assets of the business owner are available to satisfy any obligations arising from the business.
General Partnership – each partner has unlimited personal liability for all debts and obligations of the business.
UPA § 15
RUPA § 306
RUPA § 307 – A judgment against a partnership is not a judgment against a partner and the partner’s personal assets cannot satisfy the judgment unless there is also a judgment against the partner personally.
Limited Partnership – each general partner has unlimited personal liability for all debts and obligations of the partnership but the limited partners have no personal liability for debts or obligations of the partnership.
ULPA § 303 – A limited partner is not liable for the obligations of a limited partnership unless he participates in the control of the business and is reasonably believed to be a general partner by the third party with which business was transacted. A limited partner does not participate in the control of the business solely by doing the following:
ULPA § 1515
Limited Liability Limited Partnership – The General partners of a LLLP enjoy the same protection as the General partners of an RLLP and the limited partners still are not personally liable for the debts and obligations of the entity.
Limited Liability Company – A member or manager is not personally liable for the debts or obligations of the company.
Corporation – A corporation is a separate and distinct entity from the business owner, and therefore only the corporation’s assets are typically available to satisfy debts and obligations of the business. In a professional corporation, however, individual business owners are typically liable for any legal obligations or liabilities arising from the service provided but they are not liable for the malpractice of others.
Management and Control of Business Enterprises
Sole proprietorship – The owner has total control over the business.
General Partnership – All the partners have a financial stake in the business and absent an agreement to the contrary all partners have an equal voice in the management of the business.
UPA § 18 – All partners have equal rights in the management and conduct of the business. Any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of the partners; but no act of contravention of any agreement between the partners may be done without the consent of all the partners.
RUPA § 401 – Each partner has equal rights in the management and conduct of the partnership. A difference arising as to a matter in the ordinary course of business of a partnership may be decided by a majority of the partners. An act outside the ordinary course of business of a partnership and an amendment to the partnership agreement may be undertaken only with the consent of all the partners.
Bernstein, Bernstein, Wile & Gordon v. Ross, 177 N.W. 193 (Mich. Ct. App. 1970)
All partners have equal rights in the management and control of the partnership business, except those rights and duties of the partners in relation to the partnership as shall be determined by agreement.
Limited Partnership – General partners, subject to the partnership agreement, have similar rights, over the management and control of a limited partnership, as those of a General partner in a general partnership.
A limited partner shall not become liable as a general partner, unless, in addition to the exercise of his rights and powers as a limited partner, he takes part in the control of the business.
Limited Liability company – Management and control may be vested in either the members themselves (like a partnership) or in a business manager.
Corporations – Comprised of a rigid management structure dictated by statute.
Transfer of Ownership Interest in a Business Enterprise
The ability to transfer an ownership interest in a business enterprise depends upon many factors. Such factors include the size of the enterprise, the type of ownership interest, the availability of public markets to sell a particular ownership interest and the type of business entity involved.
Corporations – The ownership interest in the corporation, represented by shares, are freely transferable, without the consent or approval of the corporation but shareholder agreement or restrictions in the articles of incorporation may restrict the transferability.
Ownership interests in general partnerships, LLP’s, LLLP’s, and LLC’s are not freely transferable.
UPA § 27 – A conveyance by a partner of his interest in the partnership merely entitles the assignee to receive in accordance with his contract the profits to which the assigning partner would otherwise be entitled. The party to whom the interest was assigned does not automatically become a partner.
RUPA § 503 – The only transferable interest of a partner is the partner’s share of the profits and losses of the partnership and the partner’s right to receive distributions. The party to whom the interest was assigned does not automatically become a partner.
Limited Partnerships – Generally, a partnership interest may be assigned in whole or in part. The assignment entitles the assignee to receive, to the extent assigned, only the distribution to which the assignor would be entitled. If the partner assigns all of his interests, the partner ceases to be a partner in the partnership. The assignee may become a limited partner if the partnership agreement provides or if all the other partners agree.
Limited Liability Company - A member may assign, in whole or in part, his interest in the company. The assignment entitles the assignee to receive, to the extent assigned, only the distribution to which the assignor would be entitled. If the member assigns all of his interests, the member ceases to be a part of the company. The assignee may become a member if the membership agreement provides or if all the other members agree.
Chapter 8 – Covenants not to Compete
Employee Covenants not to Compete
Employee covenants not to compete, also called negative covenants or post employment restraints, are contractual agreements that restrict an individual from competing with a former employer after termination of her employment. It is generally stated that a covenant not to compete can’t stand on their own but must be ancillary to a valid contract or employment relationship.
A covenant not to compete must satisfy the following initial criteria before it can be enforced:
If the above criteria are satisfied the next issue is whether the covenant is reasonable. Reasonableness is determined by a balancing of three interests: (1) the employer’s interest, (2) the employee’s interest, and (3) the public’s interest.
Three questions to determine reasonableness:
If the covenant, in whole or in part, is determined to be unreasonable a variety of consequences may result. The following three common law approaches have been used in different jurisdictions when any part of a covenant is found to be unreasonable:
Arthur Murray Dance Studios of Cleveland, Inc. v. Witter, 105 N.E.2d 685 (Ohio Common Pleas Ct. 1952)
Because the restrain sought to be imposed is one that restricts the exercise of a gainful occupation, it is a restraint in trade. The employer shoulders the burden of proving the restraint reasonable and the contract valid. An employer seeking an injunction is a case like this is suddenly confronted with the following questions:
To determine if a non-competition agreement is valid, we apply the following criteria:
Covenants not to compete coupled with the sale of a business enterprise
When a business enterprise is sold, it is typical for the seller, as part of the transaction, to agree not to compete with the business after the sale. Covenants associated with the sale of a business are subject to the same rules as employee covenants not to compete. Consequently, a court will usually enforce a business seller’s covenant not to compete when a business is sold as a going concern along with its good will.
Traditionally, an employee who works without an employment contract is called an “at-will” employee and could be fired, with or without cause, without any recourse against the employer.
Good Cause – A reasonable job-related ground for dismissal based on a failure to satisfactorily perform job duties, disruption of the employer’s operation, or other legitimate business reason.
The at-will Employment Doctrine: Public Policy Exception
Public Policy – In general, it can be said that public policy concerns what is right and just and what affects the citizens of the state collectively such as matters affecting a citizen’s social rights, duties and responsibilities.
Peterman v. International Brotherhood of Teamsters, 344 P.2d 25 (Cal. Dist. Ct. App. 1959)
An employee stated a cause of action for wrongful discharge when he claimed he was fired for supplying information to police investigating a co-worker’s alleged criminal violations.
Ward v. Frito-Lay, Inc., 290 N.W.2d 536 (Wis. Ct. App. 1980)
Frito-lay made a business judgment, and the court should not second-guess that judgment absent a clearly defined and well-established public policy.
Allen v. Safeway Stores, Inc., 699 P.2d 277 (Wyo. 1985)
To contend that an employee can talk in a derogatory fashion to customers or business contacts of his employer and be protected from disciplinary action by the employer by virtue of the right to speak freely is obviously in error.
The At-Will Employment Doctrine: Implied Contract Exception
A number of courts have decided that oral and written assurances, an employer’s practices, and company policy manuals can all establish contractual rights that modify the at-will status of an employee.
Pugh v. See’s Candies, Inc., 171 Cal. Rptr. 917 (Cal. Dist. Ct. 1981)
The presumption that an employment contract is intended to be terminable at will is subject, like any other presumption, to contrary evidence. Two relevant limiting principles have developed: one of them based upon public policy and the other upon traditional contract doctrine. The first limitation precludes dismissal when an employer’s discharge of an employee violates fundamental principles of public policy. The second limitation is violated when the discharge is contrary to the terms of the agreement, express or implied. This agreement, express or implied, may be that the relationship will continue for some fixed period of time or that the employment will continue indefinitely, pending the occurrence of some event such as the employer’s dissatisfaction with the employee’s services or the existence of some “cause” for termination.
While an employer need not establish personnel policies or practices, where an employer chooses to establish such policies and practices and makes them known to its employees, the employment relationship is presumably enhanced. The employer secures an orderly, cooperative and loyal work force, and the employee the peach of mind associated with job security and the conviction that he will be treated fairly.
The At-Will Employment Doctrine: Implied Covenant of Good Faith and Fair Dealing Exception
A few jurisdictions have adopted the implied covenant of good faith and fair dealing exception to the “at-will” employment doctrine. This exception is based on the court implying a good faith requirement in the employment relationship. Under this requirement, and employer must act in “good faith” when terminating an “at-will” employee.
Cleary v. American Airlines, Inc., 168 Cal. Rptr. 722 (Cal. Dist. Ct. 1980)
Longevity of the employee’s service, together with the expressed policy of the employer, operate as a form of estoppel, precluding an discharge of such an employee by the employer without good cause,
Gates v. Life of Montana Insurance Company, 638 P.2d 1063 (Mont. 1982)
While an employer need not establish personnel policies or practices, where an employer chooses to establish such policies and practices and makes them known to its employees, the employment relationship is presumably enhanced. The employer secures an orderly, cooperative and loyal work force, and the employee the peach of mind associated with job security and the conviction that he will be treated fairly
“Dissolution” stage – A voluntary decision, an occurrence of certain specific events, or a judicial decree results in the business enterprise ending its ongoing operations. When this occurs, the business is dissolved.
“Winding Up” stage – The business continues to exist but it has entered the winding up stage of liquidation. Usually this involves converting the assets to cash with which to pay off creditors and any remainder being distributed among the business owners.
“Termination” stage – The final stage occurs at the conclusion of the winding up of the business’ affairs. At this point the business actually ceases to exist.
Liquidation of A Business Enterprise
Sole Proprietorship – A sole proprietorship can be dissolved, like it is created, without any formalities. The owner of the sole proprietorship is free to dissolve the business enterprise at will for any reason or for no reason. The owner merely has to pay off any existing creditors and cease operation of the business.
Corporation – Corporations are legal entities that exist separately from their directors, officers, employees and shareholders. Consequently, they can not act on their own so appropriate formalities must be complied with for the corporation to end its ongoing operations.
The Dissolution Stage – A corporation’s board of directors may propose dissolution for submission to the shareholders. The shareholders entitled to vote must approve the proposal by majority vote. The corporation may then dissolve by delivering to the secretary of state articles of dissolution.
The Winding Up Stage
The Termination Stage – Most corporate statutes require a corporation to satisfy or make provisions to satisfy known liabilities and claims of the corporation before the corporation can be terminated.
The Dissolution Stage – The dissolution of a partnership is the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on as distinguished from the winding up of the business.
UPA § 31 – Dissolution is caused:
Thomas v. American National Bank, 704 S.W.2d 321 (Tex. 1986)
Pursuant to UPA § 29, when one partner withdraws from the business, the partnership is dissolved as to that party, thought the remaining partners may elect to continue operating as a partnership. Dissolution of a partnership is caused by the express will of any partner to withdraw. Therefore, dissolution is accomplished by giving notice to the other partners. UPA § 12 provides that notice to any partner of any matter relation to partnership affairs operates as notice to or knowledge of the partnership.
Girard Bank v. Haley, 332 A.2d 443 (Pa. 1975)
Dissolution of a partnership may be caused by the express will of any partner. The expression of that “will” does not need support by any justification. If the dissolution results in breach of contract, the aggrieved partners may recover damages for the breach and, if they meet certain conditions, may continue the firm business for the duration of the agreed term or until the particular undertaking is completed.
The Winding-Up Stage – Upon dissolution of a general partnership, the partnership continues until the winding up of the partnership business is completed. Once completed, a partnership can either be terminated or its business can be continued as a new partnership.
RUPA § 803 – After dissolution, a partner who has not wrongfully dissociated may participate in winding up the business.
Hunter v. Straube, 543 P.2d 278 (Or. 1976)
A distinction must be recognized between the power to dissolve a partnership and the right to dissolve a partnership. Any partner may have the power to dissolve a partnership at any time and this is true even though such dissolution is in contravention of the partnership agreement. If a partner exercise his power to dissolve a partnership, but does not have the right to do so, he must suffer the penalties.
Pav-Saver Corp. v. Vasso Corp., 493 N.E.2d 423 (Ill. App. Ct. 1986)
The UPA provisions are best viewed as “default” standards because they apply in the absence of contrary agreements. When the partnership contract contains provisions imposing obligations on the partnership relation, the court should strive to construe these provisions so as to give effect to the honest intentions of the partners as shown by the language of the contract and their conduct under it.
Therefore, a provision that would not allow a partner, who has not caused a wrongful dissolution of the partnership, to continue the business shall be unenforceable.
RUPA 704(c) – A person, not a partner, is deemed to have notice of the dissociation 90 days after the statement of dissociation is filled.
Jewel v. Boxer, 203 Cal. Rptr. 13 (Cal. Dist. Ct. 1984)
Under the UPA, the former partners will be allocated such income of the old firm in accordance with their respective percentage interest in the former partnership. The former partners will also be entitled to reimbursement for reasonable overhead expenses attributable to the production of the post-dissolution partnership income.
Redman v. Walters, 152 Cal. Rptr. 42 (Cal. Ct. App. 1979)
On dissolution the partnership is not terminated, but continues until the winding up of partnership affairs is completed. Among these affairs is the performance of its agreements. In general, dissolution operates only with respect to future transactions; as to everything past, the partnership continues until all preexisting matters are terminated.
The Termination Stage
Termination of a partnership after completion of the winding-up stage requires the remaining assets of the partnership to be distributed to various parties. Creditors are generally paid first and if any assets remain they are distributed to the partners according to the partnership agreement.
UPA § 18 – Each partner shall be repaid his contributions and share equally in the profits and surplus remaining after all liabilities.
UPA § 40 – The liabilities of the partnership shall rank in order of payment, as follows:
RUPA § 401 – Each partner is deemed to have an account that is credited with an amount equal to his net contributions and his share of partnership profits less his share of the partnership’s losses.
RUPA § 807 The assets of the partnership must be applied to discharge its obligations to creditors, including partners who are creditors. Any surplus must be applied to pay partners their share of partnership profits less partnership losses.
Mahan V. Mahan, 489 P.2d 1197 (Arizona 1971)
The distribution of partnership assets in the course of winding up consists, first of all, in the payment of creditors other than partners. Then come the claims of partners other than those for repayment of capital contributions or profits, such as claims for advancements made by partners. After this, partners are entitled to return of their respective capital contributions. Finally, any remaining balance of partnership property is distributable as profits.
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