February 2020 Question 5
Business Association
(1) TYPE OF BUSINESS ENTITY
GENERAL PARTNERSHIP
A general partnership (GP) is formed when two or more persons associate to carry on a business for profit as co-owners. There are no formalities required to form a GP. The subjective intent of the parties to form a GP is also irrelevant. You don't even need a written or formal agreement. General partners are each personally and jointly and severally liable for the debts of a GP, whether arising in tort or contract. There is no limited liability for the partners of a GP.
A presumption arises that there is a GP and that the persons are partners when such persons share profits, unless those profits are shared due to being rent or repayment of a debt rather than true profit sharing. Other factors that may evidence a partnership (but these factors do NOT create a presumption) include the sharing of gross revenues, the sharing of losses, whether the persons call themselves "partners" and call their business a "partnership" and the extent of the business activities (greater extent of business activities suggests a partnership).
Partners have no right to compensation (meaning wages/salary) absent an agreement to the contrary. Partners have equal rights to manage the business of the partnership and control its affairs.
Here, A B and C formed a law firm, so there is the intent to carry on a business for profit. They didn't file documents with the state, but that is not required for a GP. They share profits after paying expenses, which creates a presumption of a partnership and that they are partners.
They also make all business and management decisions which evidences that they are running a business as co-owners. It is likely the firm is a GP.
CORPORATION
A corporation is formed when articles of association are filed with the Secretary of State. The articles need to have the name of the corporation, the names and addresses of the incorporators and registered agent, the authorized stock of the company and associated rights, and the purpose of the corporation which can be any lawful purpose. A de jure corporation comes into existence only when the secretary accepts the articles. There can also be a de facto corporation if the state has an incorporation statute, the persons make a good faith colorable attempt to comply with the formalities for forming a corporation (but fail to do so), and such persons assert the privileges of a corporation.
Here, there was no filing of articles with the state, so there is no corporation. Also, no de facto corporation because no good faith effort to file.
LIMITED PARNTERSHIP OR LIMITED LIABILITY PARNTERSHIP
In a limited partnership, there are general partners and limited partners. The limited partners have limited liability, meaning they are only liable to make their capital contributions. A limited partnership is formed when a certificate of limited partnership is filed with the state, executed (signed) by the general partners and stating the name of the limited partnership, which must have L.P. or LP or "limited partnership" in the name. An LP comes into existence when that public document is filed or on the deferred date for existence to take place, if any.
A limited liability partnership requires filing of a certificate of qualification executed by at least 2 partners, and must have "LLP" or "limited liability partnership” in the name. An LLP comes into existence when that public document is filed or on the deferred date for existence to take place, if any. All partners in the LLP have limited liability.
Here, there was no filing with the state so the firm is not a LLP or LP.
LIMITED LIABILITY COMPANY
An LLC is a hybrid organization. Its owners (members) have limited liability like a corporation.
However, LLCs get the pass-through tax treatment that partnerships get. On the other hand, corporations are subject to double-taxation (taxed once at the corporation level and then again when distributions are made to shareholders). To form a limited liability company, a certificate of formation must be filed with the state. Here, there was no filing with the state so the firm is not an LLC.
CONCLUSION: The firm is a GP.
(2) ASSOCIATE ATTORNEYS
See rules above as to when persons are considered partners. Here, the associate attorneys are paid a fixed salary, they do not share profits, so no presumption of being partners. They are not given the label or title of partners nor is there any indication they participate in management or control of the business, which would have been evidence of being partners. They get 25% of gross billings for bringing clients to the firm. The fact that this is only a share of gross billings, rather than net billings (which would be profits) is evidence they are not partners. Also the fact that they only get 25%, a relatively small percentage, of such gross billings also evidences they are not partners because this shows the firm is simply providing them with an incentive to bring in new billings. If they were co-owners (partners), they wouldn't need such incentive.
Given all of this, the associate attorneys are not partners.
The owners of an LLC are called members and the owners of a corporation are called shareholders. Since the firm is neither an LLC or corporation (see above), the associate attorneys are not members or shareholders.
An employee is someone who is hired by an employer to provide services to the employer regarding the employer's business. An employee is an agent of the employer, who is the principal. Evidence of an employee-employer relationship can be found when the employee is paid a fixed salary or wages and where the employer has authority for managing the details and method of how the employee performs her job. Here, given the associates get a fixed salary, they are likely employees.
CONCLUSION: The associates are employees of the firm.
(3) SENIOR ATTORNEYS
See rules above as to when persons are considered partners.
Here, the senior attorneys are paid a salary based upon the number of hours they bill, they do not share profits, so no presumption of being partners. Their salary is "fixed" in the sense that it is based upon a unit charge per hour (e.g. $600/hour) and then that unit charge is multiplied against the number of hours the senior bills in every year. The annual bonus is part of the compensation package, but it is contingent.only applies if the senior bills more than 2000 hours a year, so such bonus does not take away from the fact that the senior is paid a "fixed" salary based on number of hours billed. While it is true that the bonus is equal to 5% of profits, split equally among the number of qualifying seniors, this is not evidence of the sharing of profits in the sense that it is not all seniors who get to participate in this share of profits.just the ones who are eligible for the bonus having billed the requisite number of hours. Put another way, it is not as though the position of being a senior automatically provides the right to share in the profits. While it is true that that the seniors have the title "nonequity partner" and that the website and business cards say "partner", the label or title of "partner" is not conclusive. The facts say that A, B and C "agreed to bestow" the title nonequity partner, which makes it seem as though this was just a concession on A, B and C's part to make the seniors feel their position in the firm was one of seniority or importance, rather than an intent for them to actually be partners in the firm. The fact that A, B and C had the power to decide what title seniors get also shows that A, B and C are in a superior position compared to the seniors rather than them all being equal partners.
Furthermore, the seniors do not participate in management or control of the business, which would have been evidence of being partners.
The owners of an LLC are called members and the owners of a corporation are called shareholders. Since the firm is neither an LLC or corporation (see above), the senior attorneys are not members or shareholders.
See above for rules as to employees. Here, given the seniors do not get to participate in the management of the firm, and that all such business and management decisions are made exclusively by A, B and C, it is likely that seniors are simply employees of the firm.
CONCLUSION: The senior attorneys are employees of the firm.
(4) THE AGREEMENT WITH NANCY
A partnership is bound by the contracts entered into by its partners and employees (both of whom are considered agents) where such agents had actual authority, apparent authority or where the partnership ratifies the agreement.
Actual authority can be express or implied. Express actual authority is where the partnership expressly by words or writing provides authority. Implied actual authority exists where based on the manifestations (words or conduct) of the partnership, the agent reasonably believes she possesses authority.
Apparent authority exists where based on the manifestations of the partnership, third parties reasonably believe the agent has authority to bind the partnership. The partnership statute says that apparent authority exists where the partner is acting within the scope of the partnership business or business of a kind conducted by the partnership, unless the partner lacked actual authority and the person knew or received notification of such.
Ratification is where the partnership agrees to the contract after it has been entered into, either formally and expressly through a formal decision or impliedly by accepting the benefits of the contract.
Here, Martha is an employee of the firm and thus is an agent of the firm. She does not possess actual authority (express nor implied) to bind the firm to a contract providing for reduced hourly rates because the firm has a strict policy of not allowing for reduced rates and Martha knows this is so (therefore, she could not have reasonably believed she had such authority).
It is questionable whether Martha possessed apparent authority. On the one hand, she did because the firm gave her a business card that refers to her as a "partner". A third party in the shoes of Nancy upon seeing such an official business card bestowed upon Martha by the firm, and that Martha was given the title "partner" on that card, would reasonably believe that Martha possesses the authority to bind the firm into contracts regarding legal business and to negotiate rates for legal services in exchange for future business. Those kinds of matters are apparently within the regular business of a law firm. Most people would believe that the title "partner" carries with it great seniority and authority. A reasonable third party in Nancy's shoes would have no idea or knowledge of the behind-the-scenes compensation package of persons like Martha which would otherwise reveal that such persons are not really partners. They also would have no idea of the firm's strict policy of not allowing reduced hourly rates because it is likely that policy is just internal and not disclosed to the public. Furthermore, the fact that the website also refers to Martha as a partner also would give third parties the reasonable belief that senior attorneys had authority to negotiate fees and fee agreements with prospective clients.
In addition, Nancy specifically asked Martha if she could agree to the reduced hourly fee arrangement and in response Martha went ahead and signed a written agreement.
Presumably, therefore, Nancy responded to Martha in the affirmative and represented that she did in fact possess authority. She might even have signed her name as "partner" on the agreement or used official firm letterhead. However, it should be noted that under agency principal law, apparent authority exists based on the actions of the principal, not the agent, so here the unilateral actions and representations of Martha alone would not be enough to imbue Martha with apparent authority as those are not actions or manifestations of the firm.
While it is true that Nancy and Martha met a social function, this is of no moment to the issue of whether the firm is bound by the agreement. Persons regularly form business relationships at social functions. It is not as though the agreement was signed at the social function. Probably it was signed afterwards in the office of the law firm.
As to ratification, there is no indication that the law firm ratified the agreement.
CONCLUSION: The firm is bound by the agreement Martha signed with Nancy because Martha possessed the apparent authority to enter into such agreement on behalf of the firm.