exam4 mgmt311

What is a sole proprietorship?

The simplest form of business where the owner = the business. No separate legal entity. Owner reports income on personal taxes and has unlimited liability.

What is a partnership?

An agreement by 2 or more people to carry on a business as co-owners for profit.

What is a corporation?

A separate legal entity from its owners (shareholders), formed under state law.

What is a limited partnership (LP)?

A partnership with:

• General partners → manage + unlimited liability

• Limited partners → invest only + limited liability

What is an LLC?

A hybrid entity that combines:

• Limited liability (like a corporation)

• Pass-through taxation (like a partnership)

What is an LLP?

A partnership where partners have limited liability for malpractice or actions of other partners (common for professionals).

Which entity has unlimited liability?

Sole proprietorship + general partnership

In a general partnership, what does “joint and several liability” mean?

Each partner can be held responsible for all debts, not just their share.

Who has unlimited liability in a limited partnership?

General partners

Who has limited liability in a limited partnership?

Limited partners (only lose what they invested)

What happens if a limited partner participates in management?

They can lose limited liability

What entities provide limited liability?

Corporation, LLC, LLP, limited partners in LP

How is a sole proprietorship taxed?

Personal income tax (owner only)

How is a partnership taxed?

Pass-through taxation → partners pay taxes on their share

What is “pro rata share”?

Each partner pays taxes based on their ownership percentage

Do partners pay taxes even if profits are not distributed?

yes

How is a corporation taxed?

Double taxation

1. Corporation pays tax

2. Shareholders pay tax on dividends

How is an LLC taxed?

Pass-through taxation (like a partnership)

What is the biggest advantage of LLC?

Limited liability + pass-through taxation (best of both)

Who controls a sole proprietorship?

The owner

How is management handled in a partnership?

Equal voice unless agreed otherwise

Who manages a limited partnership?

General partners only

Can LLC members manage the business?

YES (or appoint managers)

Who manages a corporation?

Board of directors + officers

What is the main advantage of a partnership over a corporation?

No double taxation

What is the main disadvantage of a partnership?

Unlimited liability

What is the main advantage of a corporation?

Limited liability

What is the main disadvantage of a corporation?

Double taxation

Why is LLC so popular?

Combines best features:

• Limited liability

• No double taxation

Jewelry business run by one person → what entity?

Sole proprietorship

Two friends starting a pizza shop together → what entity?

Partnership

Company wanting to sell stock publicly → what entity?

Corporation

Real estate deal with investors + one manager → what entity?

Limited partnership

Wealth management firm wanting liability protection + tax benefits → what entity?

LLC

Group of CPAs forming a firm → what entity?

LLP

Does a partnership require a written agreement?

no (but recommended)

Does capital contribution determine profit share automatically?

no (unless agreed)

What happens if no agreement in a partnership?

profits are split equally

Can a corporation exist forever?

yes (perpetual existence)

What are owners of a corporation called?

shareholders

what are owners of an LLC called?

members

T/F In a sole proprietorship, the owner and the business are entirely separate.

False - not really recognized as an entity. legally no differentiation.

T/F the income of a sole proprietorship is taxed to the owner as personal income.

True - A sole proprietorship’s income is not taxed separately — it passes through and is taxed as the owner’s personal income.

T/F Unless a partnership agreement specifies otherwise, profits are shared in the same ratio as capital contributions

False - Default rule: profits are shared equally, unless the partnership agreement says otherwise — not based on capital contributions.

ex: Partner A invests $80k, Partner B invests $20k.
Even though contributions are different, profits are split 50/50 by default unless agreed otherwise.

T/F An LLC doesnt offer the limited liability of a corporation

False - An LLC does offer limited liability, just like a corporation — owners (members) are not personally liable for business debts.

T/F In an LLC the members are similar to shareholders in a corporation.

True - LLC members are the owners, similar to shareholders in a corporation.

T/F In a limited partnership, the liability of the general partner is limited to their capital contributions.

False - In a limited partnership, general partners have unlimited liability (not limited to their contributions).

T/F In a limited liability partnership, no partner is exempt from personal liability for partnership obligations

False - In an LLP, partners are protected from personal liability for many partnership obligations (especially other partners’ actions).

• in most states its limited liability, assets are protected

T/F Generally shareholders are not personally liable for the debts of the corporation

True - Shareholders have limited liability, so they are not personally liable for corporate debts (they only risk their investment).

T/F Corporations are subject to double taxation

true -

• Corporation pays taxes on profits

• Shareholders pay taxes on dividends

T/F Corporations pay taxes twice

False - The corporation itself does NOT pay taxes twice.

Instead:

• Corporation pays tax once

• Shareholders pay tax on dividends

👉 So taxes are paid twice overall, but not by the corporation itself.

T/F A corporation is liable for the torts of its agents or officers committed within the course and scope of employment

True - A corporation is liable for torts committed by its agents/officers within the course and scope of employment (respondeat superior).

What is an Agent?

A person who agrees to represent or act on behalf of the principal or another and is subject to the principal’s control.

What is a Principal?

The person who authorizes/represents the agent to act for them in dealing with third parties.

What is a Fiduciary?

A person who has a special duty to act primarily for another’s benefit (trust + loyalty).

What is a Fiduciary Relationship?

A relationship based on trust and confidence where the agent must act in the best interest of the principal.

employer-employee

In an employer–employee relationship, who is the agent?

employee - deal with 3rd parties (clients) on behalf of company.

In an employer–employee relationship, who is the principal?

employer

employer-employee

Are employees who deal with third parties considered agents?

yes

employer-employee

Are an employee’s actions binding on the employer?

Yes (sales, statements, etc.)

employer-employee

How do agency law and employment law differ?

Agency law is broader; employment law applies only to employees

employer-employee

What type of law is agency law vs employment law?

Agency = common law, Employment = statutory law

Employer – Independent Contractor Liability

• Employees: employer liable for employees’ bad acts

• Independent contractors: employer NOT usually liable

👉 Courts look at control, not label
👉 Mislabeling does not avoid liability

👉 Why mislabel?
To avoid liability, taxes, and employment laws (cheaper)

Why are independent contractors not employees?

Employer does NOT control how the work is done

Can independent contractors be agents?

Yes, sometimes

When are independent contractors typically used?

For specific tasks or jobs

Example of independent contractor?

Contractor, subcontractor, freelance worker

Are employment laws applied to independent contractors?

no

What is the most important factor courts use to determine employee status?

degree of control

If employer controls details of work → ?

employee

If worker is independent in how work is done → ?

independent contractor

if employer provides tools → ?

employee

if worker is paid by time (hour/salary) → ?

employee

If worker is paid per job → ?

Independent contractor

Long-term employment suggests → ?

employee

High skill/specialist work suggests → ?

Independent contractor

What is the main IRS factor?

Degree of control

How are independent contractors paid?

By the job

Do employers withhold taxes for independent contractors?

no

Are independent contractors eligible for overtime pay?

no

What happens if a worker is misclassified?

Employer must pay taxes + penalties

Who owns work created by an employee?

The employer

Who owns work created by an independent contractor?

The contractor

When can an employer own an independent contractor’s work?

If there is a written “work for hire” agreement

determining employee status review
main idea: degree of control (most important)

1. More control over details → employee

2. Separate business/occupation → independent contractor

3. Work under direction → employee / specialist w/o supervision → IC

4. Employer provides tools → employee

5. Long-term work → employee

6. Paid by time → employee / paid per job → IC

7. High skill → IC

IRS Criteria

Main factor: control

• Independent contractors:

  • Paid by the job

  • No tax withholding

  • No overtime rules

• If misclassified → employer owes taxes

19.1 - Hobbs v Petroplex Case

Worker can be classified as employee if economically dependent + employer controls work

• 2 Welders labeled as independent contractors and paid as them but:

  • employer set hours, pay, tasks

  • worked only for company.

• Holding: They were actually employees → entitled to overtime

Independent Contractor vs Employee Example

• Independent contractor = no control over work details

• May or may not be an agent

👉 Examples:

• Contractor/subcontractor → independent contractor

• Truck driver w/ own truck → IC

• Truck driver using company truck → employee

👉 Key:

• Employer not liable for IC

• BUT agency can still exist (ex: real estate broker)

How do courts determine employee vs independent contractor? Review

1. High control over details/day-to-day → employee

2. Separate business → independent contractor

3. Under employer direction → employee / specialist w/o supervision → IC

4. Employer provides tools → employee

5. Long-term relationship → employee

6. Paid by time (salary/hourly) → employee / per job → IC

7. High skill required → independent contractor

👉 Courts look at all factors (not just title)

👉 More control = employee
👉 Less control = independent contractor

Works for Hire

• Employee creates work → general rule: employer owns it

• Independent contractor → general rule: contractor owns it, not work for hire. *but can create a contract and then employer can own it.

• Exception → written agreement = “work for hire” - general rule: means employer owns the work

19.2 Estate of Kauffmann v RIT Case

Work for Hire must be agreed at time of creation

• Writer (independent contractor) wrote articles

• Later agreement said “work for hire”

• Holding: Too late → writer’s estate owns the work

Formation of the Agency Relationship (4)

• Agency by Agreement

• Agency by Ratification

• Agency by Estoppel

• Agency by Operation of Law

Agency by Agreement

1. Express Agreement = Clearly stated (written/oral)

   1. Hiring someone (hiring a neighbor to mow lawn)

2. Implied Agreement = Created by conduct (not directly stated)

   1. Someone acts for another and their behavior shows consent

      1. 19.4 Laurel Creek (Bishop case)

         1. Wife signed nursing home papers for husband. Husband couldn’t write but allowed it. Court: implied agency existed → husband bound by contract

Agency by Ratification

Principal approves/accepts an unauthorized act after the fact, and becomes legally binding.

• can be expressed or implied. treated as if authority existed from the start.

ex: Agent makes contract without authority → principal accepts it.

ex: Daughter uses mom’s credit card without permission → mom later accepts charges → ratification

→ Creates agency relationship retroactively

Agency by Estoppel

1. Principal creates appearance of an agency that doesn’t actually exist

   • Third party reasonably believes agency exists

   • Third party relies on that belief

• Principal is prevented (estopped) from denying the agency → held liable

• Must be caused by principal’s actions, NOT agent

• ex: Business lets someone act like employee → customer relies on it.

Agency by Estoppel – Azur v. Chase Bank

Facts:

• CEO let assistant access credit card + review statements

• Assistant made unauthorized charges for years

• CEO later claimed she had no authority

Issue:
Is the bank liable for unauthorized charges?

Holding:
❌ No — CEO is estopped from denying authority

Reason:

• CEO created appearance of authority

• Bank reasonably relied on that

• CEO failed to monitor → caused the situation

RULE: Principal who creates appearance of authority is liable (estopped from denying it)

Case 19.5 - Reidel v Lodi Hospital

• Doctor was independent contractor

• Patient thought doctor worked for hospital

• Court: hospital liable under estoppel

Agency by Operation of Law

an agent is needed due to an emergency.

• Created by courts (no agreement)

• Family situations → spouse buys necessities → other spouse liable

• Emergency situations → agent acts to prevent loss

example: engineer gets medical help for injured person → binds employer

summary of agency relationships

• Agreement = express or implied

• Ratification = approval after fact

• Estoppel = appearance + reliance

• Operation of law = fairness/emergency

Duties, Rights, and Remedies of Agents and Principals

Agency = fiduciary relationship (good faith & trust)

• Agent rights: compensation, reimbursement/indemnification, safe work environment, no interference

• Principal rights: agent must act loyally & follow duties

If duties are breached:

• Remedies = damages, termination, injunction, accounting

• Agent → can stop work or sue

• Principal → can sue (contract/tort) or terminate