Business Law Exam #4


the consensual relationship that the principal and agent may form by contract or agreement

Independent Contractor

a person who contracts with another to do a particular job and who is not subject to the control of the other.
- Someone who contracts to do something for another but is not controlled in the physical conduct used in performing the job. They may or may no

Independent Contractor or Employee Determination Factors

1. Is the principal in business or not?
2. Is payment by the job or by time worked?
3. Is the work part of the regular business of the principle?

Independent Contractor or Employee Determination Courts will consider:

1. The extent of control which, by the agreement, the one who hired the work may exercise over the details of work
2. Whether the employed is engaged in a distinct occupation
3. The kind of occupation, with reference to whether the work is usually done un

Creation of Agency

Consensual relationship between one person (principal) and another (agent).
- Consists of three basic elements:
1. Assent
2. Control by the Principal
3. Agent's acting on behalf of the principal

Gratuitous Agency

Agency created without compensation to agent
- A gratuitous agent is subject to the same duty of loyalty as other agents

(Durable) Power of Attorney

Written, formal appointment of an agent.
- An instrument that evidences an agent's appointment and states the nature or extent of the agent's authority

Duty of Obedience

Agent must act in principal's affairs only as authorized by the principal and must obey all reasonable instructions and directions

Duty of Good Conduct

An agent has a duty to act reasonably and to avoid conduct that is likely to damage the principal's interests or reputation

Duty of Confidentiality
(What type of information must an agent keep confidential)

Part of this requirement includes keeping unique business methods and customer lists confidential


A fiduciary is someone who acts for someone else's benefit while placing their own interests secondary to that person's interests. A fiduciary relationship is one of utmost trust and confidence, loyalty and good faith

Fiduciary Duty

agent owes a duty of utmost loyalty and good faith to the principal

Fiduciary Duty is breached when (including but not limited too):

1. The agent competes with the principal
2. The agent makes a secret profit
3. The agent uses confidential information obtained in the course of the agency for his own benefit

Fiduciary Duty (Duties of Agent to Principal)

When the agent breaches the duty, they are liable to the principal for the breach. They are also liable in tort for any losses caused by the breach and must make restitution for any profits or property received in breach of this duty.

What are the implications of an agent's fiduciary obligation? What is an agent prohibited from doing as a result of this obligation?

An agent must always act in a way that benefits the principal and not in a way in which the agent benefits to the detriment of the principal. An agent may not represent the principal in any transaction in which the agent has a personal interest without fu

Termination of Agency

1. Acts of the Parties
- Lapse of Time
- Mutual Agreements of the Parties
- Revocation of Authority
- Renunciation by the Agent
2. Other:
- Goal of the agency has been accomplished
- Subject Matter of the agency is destroyed
3. Operation of Law
- Death

Fiduciary Duty (Duty of Loyalty)

Duty of utmost loyalty, fairness, and good faith owed by partners to each other and to the partnership. This is the principal legal duty imposed upon partners

Right to Share in Distribution (Partnership Distribution)

Distribution is a transfer of money or other partnership property from the partnership to a partner in the partner's capacity as a partner
1. Right to Share in Profits- Each partner is entitled to an equal share of the profits unless otherwise agreed
2. R

Right to Information and Inspection

each partner has the right (1) without demand, to any information concerning partnership and reasonably required for the proper exercise of the partner's rights and duties and (2) on demand, to any other information concerning the partnership

Limited Liability Partnership

An unincorporated business association consisting of at least one general partnership and at least one limited partner

Rights of Partnership

The law provides partners with:
1. The right to use and possess partnership property for partnership purposes
2. a transferable interest in the partnership
3. the right to share in distribution
4. the right to participate in management
5. the right to cho

Actual Express Authority

set forth in partnership agreement, or other agreement or in decisions made by a majority of partners regarding ordinary partnership business

Actual Implied Authority

reasonably deduced from the nature of the partnership, the terms of the partnership agreement, or relations of the partners. This allows a partner to hire and fire employees whose services are necessary to carry on the business of the partnership

Apparent Authority

acts of a partner bind the partnership, so long as the third person has no actual knowledge or notice of the lack of actual authority


a partner is not criminally liable for crimes of her partners unless she authorized or participated in them

8 Attributes of a Corporation

1. It is a legal entity which can sue and be sued
2. It owes its existence to a state, which also regulates it
3. It provides limited liability to its shareholders
4. Its shares of stock are freely transferable
5. Its existence may be perpetual
6. Its man

What two attributes provide for certain constitutional rights to be held by the corporation?

1. Equal Protection (14th amendment)
2. Search and Seizure (4th amendment)

As a citizen...

a corporation is considered a citizen for some but not all purposes. Generally its citizenship is held in the place where it is incorporated or has its principal place of business

Public Corporation

one created to administer a unit of local civil government or one created by the United States to conduct public business
Example: Cities

Private Corporation

one founded by and composed of private persons for private purposes; has no governmental duties

Domestic Corporation

one created under the laws of a given state

Foreign Corporation

one created under the laws of any other State or jurisdiction; must obtain certificate of authority to do business. Doing or transacting business within a particular state makes a foreign corporation subject to local litigation, regulation and taxation

Closely Held Corporation

one that is owned by few shareholders and whose shares are not acticely traded

Subchapter S Corporation

Eligible corporation electing to be taxed as a partnership under the Internal Revenue Code. Subchapter S of the Internal Revenue Code permits a corporation meeting specified requirements to elect to be taxed essentially as though it were a partnership. Th

What is a corporation? How is it created? What is the liability of a corporation? What powers does a corporation have?

A corporation is formed only by substantial compliance with a state incorporation statute. Promoters arrange for capital and financing, assemble necessary assets, and attend to the actual legal formation of the corporation. Typically, incorporators then e

What Powers does a Corporation Have?

A corporation possesses only the powers that the state confers on it.
1. Perpetual Succession
2. To sue and be sued in its corporate name
3. To have a corporate seal
4. To make and amend bylaws
5. To acquire and dispose of property
6. to own, vote, and di


rules governing a corporation's internal management. They are adopted as one of the first items of business at the organizational meeting held promptly after incorporation. May contain any provision for managing the business not inconsistent with law or t

Piercing the Corporate Veil

General Rule - the courts may disregard the corporate entity when it is used to defeat public convenience, commit a wrongdoing, protect fraud, or circumvent the law


minimum number necessary to be present at meeting in order to transact business

Powers of Board Of Directors

- Selection and Removal of Officers
- Capital Structure
- Fundamental Changes

Fundamental Changes

directors, have the power to make, amend, or repeal the bylaws, unless this power is exclusively reserved to the shareholders


Declares annual dividends (if any), as well redemption of outstanding shares

Management Compensation

- Officer compensation determined by board
- Dodd-Frank Act requires nonbinding shareholder vote on compensation of officers

Election and Tenure of Directors

1. Election, Number, and Tenure of Directors
- initial board named in articles of incorporation, elected at first meeting
2. Vacancies and Removal of Directors
- Provided in bylaws or state statute
3. Compensation of Directors


run the day-to-day operations of the corporation

Fiduciary Duty of Officers and Directors of Corporations

requires the subordination of their self-interest to the interest of the corporation and owe constant loyalty to the corporation

Business Judgement Rule

precludes imposing liability upon directors or officers for honest mistakes of judgement. To benefit from this rule, a director or officer must make an informed decision, in good faith without any conflict of interest, and have a rational basis for believ

Compare the Roles of officer, directors, and shareholders

1. The officers of a corporation handle the day-to-day business affairs of the company. They are considered agents of the corporation, and are selected by the board of directors. Because of this, officers answer to the board of directors sets the broad gu

Respondeat Superior

a corporation is liable for the torts its agents commit in the course of their employment, under the doctrine of respondeat superior.


the directors who assent to an improper dividend are liable for the unlawful amount of the dividend


a shareholder must return illegal dividends if he knew of the illegality, if the dividend resulted from his fraud, or if the corporation is insolvent.

Due Diligence

Necessary level of care and attention that is taken to investigate an action before it is taken in order to satisfy a legal requirement

Sole Proprietorship

Liability - Unlimited for Owner
Tax Treatment - Personal
Reasons to Choose - ease of setup, owner and business are the same, no fees, can deduct business loss from personal taxes
Reasons to NOT choose - owner liable for any debts, judgements or other liab

General Partnership

Liability: unlimited for partners
Tax Treatment: personal
Reasons to choose: easy to create and maintain, no fees, report business loss on personal taxes
Reasons NOT to choose: jointly and personally liable, must pay taxes at personal income tax rate (hig

Limited Partnership

Liability: Unlimited for General Partners, but limited for limited partners
Tax Treatment: Personal
Reasons to Choose: Easy to attract investors because limited liability. General partners can focus more on running businesses, lim. Partner can leave witho

Limited Liability Partnership (LLP)

Liability: Unlimited liability for partners in some states for contract and intentional torts but limited for negligence. Laws vary, some have fully limited liability
Tax Treatment: Personal
Reasons to Choose: partners are not liable for malpractice of ot

Limited Liability Company (LLC)

Liability: Limited
Tax Treatment: Choice: personal or company level
Reasons to Choose: Owners enjoy limited liability for debts, profits, and losses can be allocated on different lines then ownership %, choose in taxation
Reasons to NOT choose: More expen


Liability: limited
Tax treatment: C: Corporate and Shareholder. S: Shareholder.
Reasons to Choose: Flexibility, owners enjoy limited liability, deductible business expenses, lower taxes
Reasons NOT to choose: more expensive to setup, paperwork, pay taxes