General discussion:

Reasons for starting a business: profit ….

Four business structures: sole proprietorship, corporation, limited liability company, partership.

Partnership – can have different amounts of ownership.

Corporation – each share has the same amount of ownership.

Different reasons for different structures: agency, liability, taxation, profit, loss,bankruptcy(some can
some can not),accountability,diversifiedownership,decisionmaking,debt,equity,financial
statements,stock,mergers and acquisitions, secuirutys and state regulation .

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Corporations - most corporations are: corporation, Limited partnership, limited liability company. To
limit liability.

Chapter 1 Summary

- A business structure can be a separate legal entity.

- How to address questions of governance in a business that has multiple owners
o Some business structures separate management from ownership.
- There is a connection between money and issues of governance.

Principal – the person who is …

Agent – a person authorized to act on behalf of another.

How managers know what they need or how investors know if they should invest:

Income statement – for a particular period of time, quarterly or annually,

Balance sheet -

Cash flow statement -

GAAP – General accepted accounting principles : financial statements are prepared according to
standards (double entry accounting)

- Designed to provide assurances for investors

- Enron and other tricks – destabilizes the marketplace -
Depreciation – when there is a purchase of property which is expected to last more than one year it
should be depreciated.

Straight line depreciation – when the item is depreciated in equal increments

Accelerated depreciation –

8/19/10

Depreciation:

- Recognizing that not every expense should be fully charged to the company in a single quarter
or year.
- The value of the item has a life beyond one year : it is an inverstment as opposed to an expense
- Strait-line v. accelerated

Types of taxes

- Payroll tax
- Property tax
- Intangible tax
- Income tax

Corporate income tax

- Federal : 15% to 39% depending on income

- NC 6.9 % flat rate

Cash flow statement

- Cash is separate from profits

- The case flow statement shows how much case is available
- For example, a company might be profitable, but it doesn’t have enough cash to pay all it’s bills
but it might have enough case flow to service a loan, which it can use to pay its bills.

Cash Flow Calculation: Profit after taxes +Depreciation – investment = cash flow

Cash Flow – the measurement of how much more or less cash a company has from one period to the
next.

Why does cash flow matter ?

- Companies go broke when they run out of cash

- Including profitable companies
- Undercapitalization is the leading reason that companies fold
 o And even if it doesn’t lead to insolvency it leads to weak growth.
o

Balance Sheet –

- The balance sheet always balances; which means that assents equal liabilities plus equity
- Assets are everything a company owns (including cash) – this is a positive side of the balance
sheet.
- Liabilities are everything a company owns - the negative side of the balance sheet
- Equity is the difference between assets and equity (can be positive or negative).
Equity: book value, shareholder, equity, net worth.

Retained earnings – earnings which are from prior periods.

How d you value a business?

(what you are looking at is future cash flow and earnings)

- Look at its history

- Look at the general market and this sector
- Look for future potential

Good will - an intangible asset (the whole is greater then the sum of its parts)

8/23/10

Goodwill – an intangible asset : the whole is greater than the sum of its parts.

Other reasons to value a business

-estate planning

-domestic issues

-loss profit calculation in litigation

-employee stock ownership in employment matters

-reorganization

-recapitalization

-merger

-dissolution
Fraud – an intentional misrepresentation of a material fact. (a fact which would cause someone to do
something different had they known the fact). It usually requires detrimental reliance – where the party
relies on the fact and is decremented due to it.

Potential legal structures:

-sole propriethership

-the business and the person are the same

-Partnership

- general partner

-limited partner

-limited liability partnership

-corporation

-c-corp

-s corp

-nonprofit

- IRC 501 (C)3 - 501(c)4

- Limited Liability Company

- recent development

-combines attributes

-PLLC (combines the attributes of a partnership and a corporation).

Purposes for types of organizations : tax treatment , and limited liability

- A corporation is a legal entity.

Fiduciary – (noun) – a person having a duty created by his undertaking, to act primarily for another’s
benefit in matters connected with such undertaking. (adjective) of the nature of a trust: having the
characteristics of a trust.

Agency – agency is the fiduciary relationship which results from the manifestation of consent by one
person (principle ) to antoher (agent) that the agent shall act on the princeiplal behalf and subject to
the principles control and consent by the agent to act.
 - The relationship is fidutionary relationship
- The relationship is based on consent.
- The principal will be responsible for the acts of the agent where theagnet is actin withing the
scope of the agents authority.

An agency relationship is created by actual or apparent authority bestowed on the agent py the
principle.

Actual authority :

- Expressed – principle specifically states that the agent is authoried to act as such in a particular
manner. (Would you go into my rental unit and paint the house yellow next week).
- Implied – when a reasonable person would assume that the agent’s activities would flow from
a grant of express authority. (would you paint my house – it would be implied that you had the
authority to buy paint etc).

Apparent Authority - when the principlals words or conduct would cause a reasonable person to
believe that the principal authorized the act. Apparent authority is possible even thought the principle
reither intended an agency relathipnship nor granted the agent actual authority (either express or
implied). However there must have been some action by the principle for the third party to reasonably
believe.

Factors

Third party is the key – Theee factors in the manifestation of authority for the apparent authority to be
created (aka implied) :

- Attributable to the principle

- Communicated to the third party
- Leads the third party to believe that A is now an agent.

There must be some act on the part of the principal in order to be an agency. The third party
must have interpreted that there was agency from reasonable facts.
Inherent Power :
- The notion that certain positions cary with them certain authority.
o I.E. the president of a corp has inherent power to sign a contract on belef of the
corporation.
- The distinction in terms is not a distinction in effect
o RS2 : inherent power
o RS@ recognizes a broad scope of apparent authority.
In the event that the third party is notified that there is no authority then there is no apparent authority.

In the event that an agent exceeds the scope of their authority they are still not liable to the third party
because they only bound the principle.

Since agee is acting within the express authority of an agency relationship, she is not a party to the
contracts. A person making a contract with another as agent for a disclosed principle …

Vicarious liability - The principle is vicariously liable …

Ratification – a principle become liable for the unauthorized acts of an agent by ratifying those acts after
the fact. Principle may affirm the acts expressly or in a manner that shows affirmation or acquisence.

Tort Liablity – Repondent superior for employer – employee

- Employer may be liable for employee’s torts

o Scope
o Frolic v. detour
- Degree of employer’s control of employee
o Distinguish independent contractor.
 Not employer tort liability for IC
 But IC may be employer’s agent in R.
- Inherent authority – a catch all – the power of an agent that is derived not from express
authority , apparent authority, or stopped, but solely from the agency relationship, inherent
authority ecists for the protection of people who are harmed by dealing with an agent.

- Franchises:
o Franchisor : the originator of the business model
o Franchisee: pays for the right to use the business model
o Franchisee may also pay royalties to franchisor, purchase supplies and equipment from
franchisor, etc.
 The business operations of a franchise are not company owned.
 What does a franchiser want from a franchisee
 Quality control , recognizable features

Actual Agency – in practical effect the franchise agreement goes beyond the stages of setting standards,
and allocates to the franchisor the right to exercise control over the daily operations of the franchise,
an agency relationship exists .

- Apparent agency creates an agency relationship that does not otherwise ecist
- Apparent authority expands the authority of an agent
 - Apparent authority may be releant oce agency is esta bleshed.
Agency by estoppels
- When a purported agent has no express or apparent authority
- But the principle is at fault somehow in the situation
- And the principle benefits by the acts of the purported agency.
- The principal is stopped – not permitted – from denying the act (agency).
o Elements
 P’s act created an appearance of authority in the agenc
 TP reasonably and in good faith relies
 That reliance results in a detrimental change in position by TP.
* distinquesh apparent acancy : the requirement for good faith …

What could a franchiser do?

- Carry liability insurance

- Require franchisee to carry liability insurance
- Required franchisee to indemnify and have it linked to liability insurance .

Financing:

- Debt –loan
- Equity –ownership interest.
o Consider the degree of risk that each offers : to the inversotrs lender business.
o Consider the cost to the business : debt has a fixed or predictable cost . Equity has
uncertain financial cost and involves some loss of control.
o Borrowing money : hier interest –hier cost.
o Higher risk will result in a higher interest rate.

Decreasing lender risk

- Collateral
o Secures the loan , the lower the risk
- Short term financing
o More predictablility for the lender
o Also : factoring : not the same as a loan.
- Yield some measure of control to lender
o Loan covenants (calling the note on some certain terms, E.G. debt to equity ratio ; net
profit margin)
o Seat on board.
- Factor – someone who buys receivables at a discount.

In re Estate of Fenimore
Partnership :

- What is a partnership ?

Rule and elements:

o NCGS 59 36: a partnership is an association of two or more personas to carry on as co-

co-owners a business for profit.

 Association – not necessary to have a contract or even an agreement.

 Two or more persons: There are no single member partnerships. “Person” is a
legal term that includes individuals, partnerships, corporations, LLCs.
 Carry on a business: not a pleasure group, and not a nonprofit association .
 Co-owners – Unless someone has an ownership interest, he or she is not a
partner.
 Profit – not that it necessarily makes a profit, but that the purpose is to make a
profit.
- The law of partnership is based on the law of agency and the law of contracts.
o Fundamentals
 The purpose for which the partnership was formed but be a legal.
 NCGS 59-37 – rules for determining the existence of partnership
 The statutory rules may be modified by the partnership agreement.
o Hypo:
 NCGS: the receipt by a person of a share of the profits of a business is prima
faci evidence that he is a partner in the business, but no such infercne shall be
drawn if such profits were received in the payment.
 As a bebt by installments or otherwise ,
 Employment income
- A joing venture is generally treated as a peartnership.
- The difference is that a joint venture is usually undertaken for a single purpose for example to
buy a parcel of real estate – a narrower purpose and scope.
- Entity theory – if it is an entity, it can be sued in it’s own name. Rupa and NC view partnerships
as entities
- Aggregate theory - if it is an aggregate, then each partner must be joined. Some aspects of
partnerships look more like aggregate I.E. why do the partners get taxed individually?
o NC considers a partnership as an entity.

The partnership agreement

- A contract between/ among the partners

- May alter most of the statutory rules.
 - But only as to dealings amoung partners – not the rights of the third parties. I.E. a unilateral
agreement to not be liable to third parties (cannot do).
- So the statute is the default / gap filling.
o I.E. title to land may be taken in the partnership name
o A partnership may sue or be sued in the partnership name alone or by naming the
individual partnership .
 In entity theory states, like NC ;
 aggregate theory - requires suits aganst te partnership to be in name of the
individual partner.
o RUPA 59-48
 Everyone shares equally in profits and losses
 The partnership has liability for its obligations and shall reimburse any parter
who is held personally liable for partnership obligations.
 Where one partners is compelled to pay or satisfy the whole or more than her
 There is equal voting

Impasse – deadlock in negotiations

8/30/10 at

NCGS 59-39 NC Law - Every partners is an agent of the peartnership as to partnership business
and can bind the partnership and each partner.

 Requires a unanimous vote for : assigning partnership property …..

 …
 …

Uniform Partnership Act (UPA ) – 103 effect of partnership agreement : nonwaivable provision: -

- cannot eliminate duty of loyalty to partners

- Cannot reduce the duty of care
- Cannot eliminate good faith and due care

202 entities -

- Two or more persons ….

204 – When property is partnership property.

- A. If it is acquired in the name of the partnership.

- B. Acquired in the name of the partnership by transfer
- C. Property is purchased with partnership assets even if not in partnership name.
- D- Remains separate property if not acquired in the partnership name. I.E. acquired in only one
of the partner names.
Agency of a franchise - Each partner is an agent for the partnership when carrying on ordinary activities
of the partnership.

- Reasonableness it the key to apparent authority. Is it reasonable to assume that the person had
the authority to bind the principle?

Partner liability – all partners are liable jointly and severally unless otherwise agreed by the third
party. The partners can be held jointly and severally liable.

404 – only duties are loyalty and the duty of care.

o a partners may maintain an action against the partnership or a partner.

o A partnership is not a co-owner of partnership property. It has no interest in it that can
be transferred. I.E. there is no transferable interest. There is only the transferable
interest to profits and losses and there right to receive distributions.

D601 – disassociation. (you should address at least every rule that the uniform partnership address
addresses if not it will default to the UPA).

- Death
- Judicial dissolution

602 – Wrongful disassociation –

- Liable to partnership for damages

701 – Purchase of a disassociated interest.

- Winding up – associated price – buying out a partner.

801 – Winding up

- Events for winding up

o Dsf

802 – Partnership discontinues after disillusion only when it is necessary for winding up.

Owenrship –

- The partnership owns the property

- The partners own the partnership.

204 – a property must be deeded in the name of the partnership name to be partnership property.

Order of deciding issues with partnership –

1. Partnership agreement
2. Statute
 3. Common law

401 – partnerships rights and duties

Ordinary course of business – majority

Outside the ordinary course of business – unanimous vote

Page 90 meinhard v. Salmon

Joint venture or partnership ? (Andrews and Cardo

Take home – there is a duty of loyalty to other partners to act in good faith (Andrews felt it was a
partnership while cardozo felt it was a joint venture).

Cardozo felt that the opportunity became known to him through his association in the partnership. They
had a duty to each other therefore when he leased the building then the misappropriated the
opportunity.

“He misappropriated the partnership opportunity.”

- Considerations: what is the conduct, what is the business,

North Carolina has not adopted the RUPA , but it has made modifications to the original act.

- Part 3 of the act

o Generally the rule of agency is used regarding the authority of a partner to bind the
partnership when dealing with …
o The knowledge by an individual can be imputed to the partnership (if a person knows
something the partnership knows it).
o The partnership is liable for anywrongul act by a partners who is acting in the schope of
his authority carring on the business 59-43
o The partnership 59 – 44(1)
o 59-44(2)
o NCGS 59-34 rules of construction. The law of estoppels and the law of agency apply.
o NCGS 59 – 35 in any case not provided for in the act the rules of law and equity shall
govern.
o NCGS 59-52 right to an account
o NCGS 59-50 partners have a duty to render information
o NCGS 59-51 partner accountable as a fiduciary (partner is fiduciary)
o NCGS 59-52 right to account to partners.
RUPA – the revised uniform partnership act sets forth changes that various states made, or clarifications
that courts set forth between 1941 and 94.

Section 404 - provides that the partners owe the duty of loyalty and the duty of care.

- The duty of loyalty and the duty of care cannot be eliminated however you may set the
standard.

Trust – an asset held in the benefit for another person.

Trustee is a legal term for a holder of property on behalf of a beneficiary.

Partnership property usurped by aa partner is held in trust for the partnership iunder consturctdive trust
theory.

- This permits the other partners to retrieve the usurped …

Duty of care : a partner must b e certain not to act with gross negligence.

General duty – good faith and fair dealings in the discharge of partnership duties.

- Good faith and fair dealing cannot be eliminated but you can set the standards.

Suing a partnership in NC :

o NC 1.69.1 partnership can sue or be sued in their own name without naming any of the
individual members.
o Any judgment shall bind it real and personal property.
o A partner is an agent to the partnership.
o Acts by the partner bind the partnership unless there is no authority and the third party
knows that.
o But a partners cannot relieve himself of personal liability by notice to a third party (I.E. I
would not like to be held liable any longer for the debt of the partnership)
o If you sue a partnership in NC you do not have to serve every partner with a summons.
Any judgement is binding on the partnership and the partners who was served. It is not
binding individually on anyone who is not served.

Partner Liability –

- Partners are jointly and serverally liable

- NC 59-43 partnership bound by acts of other partners.
- Civil liability 8.31.10 you may get a judgement and then get the party joined.
-59-44

59-45 – nature of partner’s liability

- Partners are jointly and serverallyt liable for the acts and obligations of the partnership,

Criminal liability – partners are not liable for criminal acts of another partner.

Limited liability ;partnerships – rupa 306 c

NC: limited liability partnerships, article 3B

These are not the same as limited partnerships

59-45 (a1) – a partner in a registered limited liability partnership is not indidually liable for debts and
obligations of the partnership that are incurred solely by reason of being a partner and does not become
liable by participating in the management or control of the business of the partnership.

- Does not alter rules of professional responsibility

- The professional is also liable for the acts of his or her agents
- A partner in a llp is not individually liable for the professional negligence of his or her partners.

Partner by estoppels –

- NCgs 59 – 46 a person who represents himself to another as a partner in an existing partnership

is liable to any person to whom the representation has been made.

Growing a partnership:

Figure out whether he will be testing on UPA – RUPA or NC.

Know both the RUPA and NCGS (

Recall the relationships between RUPA and NCGS (

Sections of the RUPA

How does a partnership grow:

Adding partners

- Distinguish this from selling partnership

- Put the terms of admission into partnership agreement
- Otherwise look to the general rules of management.
 306(B) - no liability for obligations incurred before the person became a partner.

NCGS 59-47 - new partner liable for obligations of partnership arising before admission.

- As though a partner when obligations incurred but satisfied only from partnership property.

Making money:

Salary , profits , sale of interest to third party.

NCGS 59-48 - in the event you have a loss and retained earnings then you can make a distribution only if
creditors are paid off.

NCGS 59 – 57 assignment does not dissolve the partnership. No assignee right to management,
information, books. Entitles assignee to receive profits to which assigning partner would be entitled.

Buy – sell agreement – consider the contents of this agreement and what obligations it requires.

Partner withdrawal - dissolution (the partnership can carry on or the partnership can terminate) ,
winding up , termination

- Withdrawl
o – a partner may leave the partnership.
 There my be consequences if the withdrawl is wrongful.
 Disninghis at will from term
 Wrongful if partner voluntarily withdraws before expiration of the term.
o What if a partner withdraws
- Creel v. Lilly in the event of involuntary withdrawal winding up occurs.

NCGS 59-61(4) diss

59-71©

59-72

- Partners can bind to third parties after disassociation but it will be wrongful.
- Partnership agreements do not alter obligations to third parties.
- Partners may be held liable after disassociation if precautions are not taken.

Ending a partnership:

North Carolina : 1dissolution 2 winding up 3 temrination

RUPA: 1 dissociation 2 dissolution 3 winding up 4 termination

NC rules – 59 59 defined (not likely important)

60 partnership not terminated by dissolution

61 causes of dissolution

63 general effect of dissolution on authority of partner

64 right of partner to contribution from copartners after dissolution.

Dissolution - is a change of membership among the partners.

- No violation under circumstances (59-61)

o Term ends
o Express will then no definite term
o Expulsion
- Dissolution is wrongful if it is “in contravention of the partnership agreement.”
- Wrongful dissolution makes winthdrawing partner liable for damages for breach of K (59-68) B
o Excluded from winding up 67
o Remaining parters can continue ( 68)
o Not entitled to good will
- Court ordered dissolution
o 59-62
- Winding up – generally terminates partner’s authority .
o Creditors liability first then partnership liability.
o Shared losses
o Pay the amount in each partner’s account
o Partner must pay in if he has a negative balance.

Review question 2 on page 127.

Liquidation:

- Distributing the assets

- Generally in cash
- Could be proceeds from the ongoing business

Distributions –

- Oudside creditors first

- creditor partners second
- Partner capital third
- Profits owed to partners

Dissociation – either
 - Buy out the dissociated partner and cary on the business
- Dissolve

RUPA 601 – express notice , agreed upon event , expulsion, partner conditions (pankruptcy, partnership
property ..

Page 131

Bohatch v. Butler

Termination by expulsion -

NCGS 59-61 Dissolution is caused and not wrongful by expulsion of any partner if it is done in
accordance with the terms of the partnership agreement.

“ A partnership is an association of two or more persons to carry on as co-owners a business for profit.”

Declaratory Judgment:

- A definitive statement of the rights of the parties.

- Not an order to do something
- No damages awarded
- Conclusive in subsequent actions regarding the subject matter.

Partnership :

Sources of corp law – state statutes (based on MBCA)., Corp bylaws , Case law, * no federal corp law
but there are agencies which require public documentation.

NC – business act chapter 55 of Business corps act.

Starting a Corp – must have a incorporator: 1 must sign articles of inc, 2 deliver to sec of state , and
3 have organizational meeting.

- Is a separate entity
- There are formalities (articles of incorporation).
- Comes into existence upon filling.
- Has perpetual life
 - Articles must have the name , and indicate that it is a corp.
- Name must be distinguishable from other names.
- Name of registered office and agent (so they can be sued)

Bylaws : not public docs, may contain provisions.

Usually will contain - provisions of yearly meetings etc. BOD , officers, finances, and shares.
pre-corporation liability – no secret profit, full disclosure requirement.

Distinguish novation and ratification – novation is where the person is totally removed from liability,

De facto v. de juve

De jure – a matter of law . IE the corp was formed pursuant to state law

De facto – as a matter of fact. IE there is no corp by law but due to equity…

Corporation by esstopple – where there is no Corp but as a matter of fairness (all formalities were
followed) there should be

55-6-01 –

Shares of a Corp –

- Articles of Corporation prescribe how many shares may be issued

- Not all authorized shares must be issued

Stock – at least on form of stock must have these characteristics

- Unlimited voting rights

- Right to receive the net assists of the corporatation upon dissolution

Preferred stock – a hybrid of common stock and a loan

Par value – the face value or stated value of a share of stock (the min amount you will be able to sell
stock at, also you must not distribute dividends of the stated capital).

- Optional in NC

Structure of a Corp :

Corporate formalities:

- Maintaining records is part of formality

- The corporate minutes book (records of issuance of shares , names, addresses, shareholders)
 - NC –every corp has authority to have bylaws.

- Initial bylaws should be part of the organization of the corp

- Usually adopted by the board of directors, but they can be adopted by the shareholders instead.
- NC - law provides that certain bylaws provistions must be adopted if at all by the shareholders.

Bylaws can say anything –

Bylaws must contain –

- where the annual shareholders meeting.

- Number of directors
- Designation, authority, duties etc

Shareholder rights –

- Control by voting (but not complete control)

- Profits (dividends)
- The shareholders must all receive equal rights to vote and receive dividends ( by law).
o Shareholder rights can be limited I.E. perfered stock but cannot be elimited

Shareholder control –

- Direct – voting on things

- Indirect – election of directors
(Control of a Corp is different from managing it).

A shareholder cannot bind the Corp without corp authority.

Each outstanding share of a corp is entitled to one vote on each matter that is submitted to a vote at a
shareholder meeting.

- Unless the articles of incorp provide for

- Directors voted by majority
- In NC you can vote by shares in person or in proxy ( voting )

Board of directors – authority begins where shareholder control ends.

- Directors need discretion to run company and take risks (business judgment rule).
- But they need to held accountable for wrongdoing.

Role : establish policies and monitor officers.

Fiduciary duties: good faith, due care, and loyalty (owed to shareholders, corp)
NC 55-8-30 : duty of care of an ordinary prudent person
 Responsibilities:
 Adopt emend bylaws
 Define shares
 Authorize issuance
 Call shareholder meetings
 Appoint officers
 Act on fundamental change.
- Number requirement – one or more person (usually in bylaws).
-Directors act as a board not as individuals
- in carrying out their duties, directors act as a board by unanimous consent.
- individual directors have no authority to bind co

Adding directors - shareholders appoint directors , directors may fill vacancies, unless bylaws
provide otherwise.
Removal – can be removed by shareholders
-unless bylaws say for cause
-but there are limitations on this right of shareholders
The directors have no power to remover a director without cause

Officers – employees of the corp , agents etc ,

 Bylaws ..
 Can be president and vice president (but cannot sign as both)
 Usually there are 2 officers

Read to at least page 157 (new book)

Who is liable to the corporation’s creditors?

Dewitt Trucking Brokers Inc v. Flemming Fruit

Factors : for piercing veil

 Lack of records
 Not following corporate formalities
 Siphoning funds
 Mere instrumentality (control,
 Inadequacy of capital (based on the type of business and reasonable need there
is a distinction between starting a business with no capital and running a
business down)
And
 (must also be coupled with fairness / equity)
 - Fraud, itself does not support piercing vail)

Instrumentality -
Alter Ego - other self - the person and the corporation are indistinguishable.
Identity – lack of separate identity

Individuals or corporations can own shares in a company and get the limited liability. However, it will be
liable if the veil can be pierced.

Silicone Gel Breast Implants

Take home - when there is complete dominance then the court will likely find that the shareholder is
liable.

Page 187 note on direct liability - Distinguish between derivative liability and direct liability
Derivitive liability – the corp was in such control that they did the act

Enterprise liability – where all the companies which are related are deemed to be one. This is different
from piercing the corp veil. Piercing the corp veil is where you will only be able to get to the one
corporation.

Inside directors v. outside directors – the purpose for outside directors is independent eyes etc.