Business Associations: Agency, Partnerships, Corporations, and LLCs
What the exam tests
Business associations questions test agency formation and authority, partnership default rules, corporate formation and governance, fiduciary duties, veil piercing, derivative actions, and LLC management. Distinguish entity type before applying liability rules.
Core rules
- Agency: principal manifests assent, agent acts on principal's behalf, and principal controls. Authority may be actual (express or implied), apparent, or inherent. Apparent authority requires a manifestation by the principal to a third party.
- Respondeat superior: employer liable for employee torts within scope of employment. Independent contractors generally do not create vicarious liability.
- Partnership: under the UPA, partners are agents of the partnership for ordinary course business; each partner is jointly and severally liable for partnership obligations. Default rules apply unless the partnership agreement says otherwise.
- Corporation: formed by articles of incorporation; limited liability; board manages; officers act as agents. Shareholders generally are not liable absent veil piercing (alter ego, undercapitalization, fraud).
- Fiduciary duties: care and loyalty; corporate opportunities, self-dealing, and insider trading. Business judgment rule protects informed decisions.
- LLC: members have limited liability; management may be member-managed or manager-managed. Charging orders are the usual remedy against a member's interest.
Worked example
A supplier sells goods to a partner who signs in the partnership's name for ordinary business supplies. The partnership is bound because a partner has apparent authority to act in the ordinary course. The supplier need not prove actual authority. If the partner instead used partnership funds for a personal vacation, the partnership might not be bound, but the partner breached fiduciary duties.
Traps
Apparent authority requires a principal's manifestation, not just an agent's claim. Veil piercing is exceptional. A limited partner's liability depends on participation in control.