Iowa State University



Chapter 15What is a sole proprietorship? No separate legal entity from its single ownerWhere can a sole proprietorship obtain funding?What are some advantages? Easy to start, no additional taxationDisadvantages? Unlimited liability for the ownerWhat is a partnership? 2+ persons that share the profitGeneral v. Limited: have joint liability (anyone can be liable but one could pay all); not liable in excess of their investmentHow are taxes filed? On their individual taxesLimited Liability Limited Partnerships: all partners are limited; banks do not like to lend to these typesWhat is a corporation? Separate legal entity that provides limited liability to its owners/stockhodlersWhere can a corporation obtain funding? Investors/its man ownersWhat type of corporation has double taxation? C CorpHow is a corporation formed? Must file with a state agencyWhat is an S Corp? flow through tax treatment, like a partnership; shareholders can still be paid a salaryWhy wouldn’t every corporation be an S Corp? no more than 100 shareholders; partnerships and other corps cannot be shareholdersPerpetual 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 evidenceSignificance: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 corporationConceptual: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 accountantsWhy can these not be C Corps? Cannot be shielded from liabilityFranchise: 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 employmentNow 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 dangerousThe duty being performed was non-delegable (had to be done yourself)Negligent in hiring, supervising, and instructingAgencyKnow basic terminologyAgent and principal: principal is the one on whose behalf the agent actsGeneral agent: has authority to provide all the services a principal would needSpecial Agent: Performs a specific actionSubagent: agent of an agent who performs acts as a part of an agency agreementGratuitous agency: agent is not compensated Distinguish between express agency, implied agency, agency by ratification, agency by estoppelDistinguish between types of agency authority including express authority, implied authority, authority by ratification, emergency agency powers.Distinguish between actual authority and apparent authorityKnow 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 agentsKnow 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 contractPartially Disclosed Principal: third party knows there is a principal but does not know who; state law differs on agent’s liabilityDisclosed Principals: discloses existence and identity; no liability for agentPrincipal’s liability for torts of agentsIf they order the agent to commit; knew or should have knownPrincipal’s liability for crimes of agents Ordered to commit, knew they were likely to commit, or certain crimes automatically make principal liable Duties of agentsLoyalty: cannot represent two principals in competition with each otherNotification: notify of matters important to the principalDuty of care: reasonably care (no negligence)Duty to abide by orders: MUST follow directionsDuties of principalsCooperation: cannot interfere in agent’s completion of required dutiesReimbursement and indemnification: expenses incurred on behalf of the principal; seek reimbursement arising from a legal liability (undisclosed)Termination of an agencyBy agreementResignation of agentBy Principal’s actionsPurpose achievedOccurrence of a specific eventDeath or incapacityImpossibility or frustration of purposeBankruptcy 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 doingRuling: breached their duty of careSignificance: fiduciary duty (one party act in the best interest of another party ................
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