Chapter 15
What is a sole proprietorship? No separate legal entity from its single owner
Where can a sole proprietorship obtain funding?
What are some advantages? Easy to start, no additional taxation
Disadvantages?Unlimited liability for the owner
What is a partnership? 2+ persons that share the profit
General v. Limited: have joint liability (anyone can be liable but one could pay all); not liable in excess of their investment
How are taxes filed? On their individual taxes
Limited Liability Limited Partnerships: all partners are limited; banks do not like to lend to these types
What is a corporation? Separate legal entity that provides limited liability to its owners/stockhodlers
Where can a corporation obtain funding? Investors/its man owners
What type of corporation has double taxation? C Corp
How is a corporation formed? Must file with a state agency
What is an S Corp? flow through tax treatment, like a partnership; shareholders can still be paid a salary
Why wouldn’t every corporation be an S Corp? no more than 100 shareholders; partnerships and other corps cannot be shareholders
Perpetual Real Estate Services, Inc. v. Michaelson Properties, Inc.
Facts: wanted to hold the shareholders of Michaelson Properties (pierce the corporate veil); Several of the condominium owners sued for breach of warranty and they settled for $950,000. PRES paid all of it because MPI was in debt; had to prove that Michaelson had “undue domination or control” and was a device or sham used to disguise some type of fraud
Ruling: supreme court: not strong enough evidence
Significance:
Limited Liability Companies: like a partnership but owners are referred to as members; still flow through taxation; some members can have limited liability if not involved in day to day business; has limited liability like a corporation
Conceptual:
Which would you choose on the basis of ease of formation?
Which would you choose on the basis of taxation of profits?
Which would you choose on the basis of liability?
Not for Profit: spends revenue on certain programs (LLC, Corp, Partnership)
Professional Service Corporation: doctors, lawyers, and accountants
Why can these not be C Corps? Cannot be shielded from liability
Franchise: can use the qualities of a certain entity but for a price (% of revenues)
Be familiar with what a non-profit is, a franchise is and a professional service corporation.
Factors used in distinguishing between independent contractors vs. employees
What is vicarious liability and respondeat superior? Responsible for the actions of the employee if they are acting within the scope of employment
Now what must you ask? Independent contractor? Scope of employment?
(has to be a substantial deviation)
When would a business be liable for the actions of an independent contractor?
- If the act is inherently dangerous
- The duty being performed was non-delegable (had to be done yourself)
- Negligent in hiring, supervising, and instructing
Agency
Know basic terminology
Agent and principal: principal is the one on whose behalf the agent acts
General agent: has authority to provide all the services a principal would need
Special Agent: Performs a specific action
Subagent: agent of an agent who performs acts as a part of an agency agreement
Gratuitous agency: agent is not compensated
Distinguish between express agency, implied agency, agency by ratification, agency by estoppel
Distinguish between types of agency authority including express authority, implied authority, authority by ratification, emergency agency powers.
Distinguish between actual authority and apparent authority
Know the equal dignity rule: if the agent will be entering into contracts, the agent’s authority must be in writing (express authority)
Contractual liability for contracts entered into by agents
Know the legal significance of disclosed principals, partially disclosed principals, and undisclosed principals:
Undisclosed Principal: third party is unaware of the principal; thinks they are only contracting with the agent; agent is liable for breach of contract
Partially Disclosed Principal: third party knows there is a principal but does not know who; state law differs on agent’s liability
Disclosed Principals: discloses existence and identity; no liability for agent
Principal’s liability for torts of agents
If they order the agent to commit; knew or should have known
Principal’s liability for crimes of agents
Ordered to commit, knew they were likely to commit, or certain crimes automatically make principal liable
Duties of agents
Loyalty: cannot represent two principals in competition with each other
Notification: notify of matters important to the principal
Duty of care: reasonably care (no negligence)
Duty to abide by orders: MUST follow directions
Duties of principals
Cooperation: cannot interfere in agent’s completion of required duties
Reimbursement and indemnification: expenses incurred on behalf of the principal; seek reimbursement arising from a legal liability (undisclosed)
Termination of an agency
- By agreement
- Resignation of agent
- By Principal’s actions
- Purpose achieved
- Occurrence of a specific event
- Death or incapacity
- Impossibility or frustration of purpose
- Bankruptcy
Diamond v. Oreamuno, et al.
Facts: sued two members of the board of directors claiming use of insider information to gain profits; as the board, they should protect the interest of their shareholders, which they were not doing
Ruling: breached their duty of care
Significance: fiduciary duty (one party act in the best interest of another party