Business Associations: Agency, Partnership, Corporations, and LLCs
What the MEE tests
Business Associations questions ask you to separate the entity from its owners and to trace authority from principal to agent. Expect formation, governance, fiduciary duty, liability, and dissolution, often in a close corporation or LLC setting.
Core rules
- Agency: actual authority arises from the principal's manifestation to the agent; apparent authority from the principal's manifestation to a third party. Ratification requires knowledge and acceptance of benefits. A principal is liable for an agent's torts committed within the scope of employment; intentional torts generally fall outside unless foreseeable or motivated to serve the principal.
- Partnership: under RUPA, sharing profits presumptively creates a partnership. Partners are agents of the partnership and jointly and severally liable for partnership obligations. Default rules govern absent an agreement; dissociation and winding up follow the statute.
- LLC: members are not personally liable; a charging order is the exclusive remedy against a member's interest. Management is member-managed unless the operating agreement says otherwise.
- Corporation: directors owe care and loyalty; the business judgment rule presumes informed, disinterested decisions. Self-dealing shifts the burden. Shareholders may sue derivatively after demand or excuse; close corporations may impose heightened fiduciary duties.
Worked example
Ann owns 100% of A Corp. She pays personal bills from the corporate account, keeps no minutes, and the company is thinly capitalized. A tort creditor obtains a judgment against A Corp. and sues Ann. Piercing requires abuse of the corporate form plus injustice. Commingling, absence of formalities, and undercapitalization are factors, but no single factor controls. If Ann used the entity to avoid personal obligations or committed fraud, a court may pierce and hold her liable; otherwise, limited liability stands.
Traps
Apparent authority cannot be created by the agent's own words. A partnership can exist without a written agreement. An LLC member's personal guaranty, not membership alone, creates liability. Derivative suits require a demand or futility showing, and damages go to the corporation.