Commercial Law in Business Associations

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Table of Contents

Introduction
Agency
Partnerships
Limited Liability Companies (LLCs)
Conclusion

Introduction

Business law, in large part, takes the course of business associations. Business entities operate as sole proprietorship, partnerships, corporations and limited liability companies (Schneeman, pp. 1). Apart from these distinct forms, a business can operate as an agency if its owner engages other people to run the business on his behalf (pp. 25). Various business laws and Acts govern the running of business associations. This essay therefore seeks to discuss the law of agency, partnerships and limited liability companies (LLCs) based on the United States business environment.

Agency

An agency is a business relationship that results from an agreement between the business owner (a principal) and the manager (an agent). This fiduciary relationship grants an agent a legal authority to transact business on behalf of the principal (pp. 25). Agents can be individuals, partnerships, corporations or limited liability companies. For example, X who is going for a tour abroad, but does not want to lose his customers, hires Y to manage his business. X is, therefore, the principal and Y is the agent. Likewise, a bank hires tellers to provide manual banking services for its clients who might not prefer ATMs. The bank becomes the principal and the tellers are agents. Apart from agent and principal, agency also involves the third party. For instance, in the illustrations above, customers are the third party.

Agreements that create agency relationships can be either express or implied (Schneeman, pp.25). Express agreements are formal, either verbal or written contracts (pp. 25). For instance, a bank hiring tellers grant them express authority to transact business on its behalf through signing of a contract. Implied agreements on the other hand are informal mainly arising from performance of duty. For instance, a manager has an implied authority to undertake any form of repairs that his office might need.

During business interactions, an agent must disclose the identity of a principal only if the third party is aware that he is working for the principal and have knowledge of the principal’s identity (pp. 26). Otherwise, an agent can partially disclose principal’s identity if the third party knows about their business association, but has no knowledge about principal’s identity (pp. 26). However, when the third party has no knowledge about the business association, then the principal’s identity remains undisclosed.

The law of agency

The law of agency governs agents-principals relationship, agent-third party relationship, and principal-third party relationship. Under agency law, the agent has both actual authority and apparent authority. For instance, Y sells a car to Z on X’s behalf. Z later detects fault in the car. According to agency law, Y not only had the actual authority to transact the business, but also apparent authority to make sure the car is in good condition.

Agency law is enforced through restatement. Unlike Restatement (second) of Agency which viewed principal’s vicarious liability for an agent’s liability from a master- servant point of view, Restatement (third) of Agency takes a principal-employee point of view. Restatement second § 2 gives the master the obligation to control the physical conduct of the servant hence any liability incurred by the servant also becomes the master’s liability.

Restatement third takes a more formal approach to principal’s vicarious liability in tort. Restatement third (Id. § 7.07 (3) (a)) views an agent as an employee whose principal retains the right to control how he performs his duties. Going by this definition, Restatement Third governs principal’s vicarious tort liability in the following manner: an employer assumes liability for torts committed by an employee within his scope of duty; an employee’s act is within the scope of employment only when performing duties assigned to him or engaging in business interaction under employers control (Id. § 7.07 (1), (2)).

Partnerships

Unlike agency, partnership is an association of individuals or business entities to operate as “co-owners” of the business “for profit gains” (Schneeman, pp. 21). For example, company P merges with company Q to operate as one business entity, R. Therefore, P and Q become co-owners of company R. Partnership associations take the following forms: general or limited partnership in which case all partners have unlimited liability for both their actions and the debts of the business, and limited liability partnership in which case partners have partial liability for business debts, but full liability for their actions (pp. 23). Partnerships are, however, very rare in the United States.

The law governing partnerships

In the current business environment, the Revised Uniform Partnerships Act (RUPA) of 1997 governs partnerships. The Act provides guidelines for the formation of partnership, nature of partnership, partner-partnership relationship, partner-partner relationship, and dissociation of partners. For instance, § 15-301 of RUPA (1997) describe partners as agents of business hence providing for the use of agency law. RUPA (§ 15-305 and § 15-306) transfers full liability of personal conduct as well as business debts and other liabilities to partners.

Limited Liability Companies (LLCs)

A limited liability company is a business association whose characteristics reflect both aspects of partnerships and corporations (Schneeman, pp.117). Limited Liability Company is an incorporated legal entity distinct from its members (pp.118). Just like partnerships and corporations, LLCs have the characteristics of member profit taxation and limited liability respectively. Profits (dividend) are shared based on individual member interests. The members, who are its owners, have freedom of contract thus can withdraw their membership whenever they wish. Depending on the provisions of articles of organization, either members become the managers of LLC or they appoint board of managers to run the business on their behalf (pp. 118).

The law governing LLCs

Uniform Limited Liability Company Act (ULLCA) governs the operations of limited liability companies. The Revised Uniform Limited Liability Company Act (RULLCA) of 2006 provides legal guideline for the formation of LLC, management of LLC, member liability, and company life continuity. For instance, Mr. Smart, as the organizer, wishes to form a limited liability company, which has no member during its formation stage.

Section 201 of the Act allows Mr. Smart to obtain a certificate of organization, but the company only becomes operational upon receiving at least one member and Mr. Smart has to file for a second certificate indicating that the company has confirmed membership of at least one person. Similarly, a member can seek a court order under section 701 (5) (b) to dissolve LLC on grounds that the managers are acting in an oppressive manner that is likely to be harmful to the member. The internal affairs of the company including measures of liabilities for members are provided for in Section 106 of RULLCA.

Apart from RULLCA, Agency law can also handle cases arising from the operations of LLCs. For instance, appointing a member as the manager makes him an agent of the company and the powers that bind him to the company can only be interpreted through agency law.

Conclusion

Business law plays a critical role in providing a legal framework for the smooth running of business. Depending on the type of your business entity, it is mandatory that you understand the various laws governing your business to avoid inconveniences resulting from ignorance. Business laws also differ across states. Make sure you inquire about your state’s operating laws especially when operating partnership or LLC.

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