Business Associations

Business Associations encompasses the law governing the formation, operation, governance, and dissolution of business entities, as well as the agency relationships that underlie all of them. The California Bar draws from the Revised Uniform Partnership Act (RUPA), the Revised Uniform Limited Partnership Act (RULPA), the Model Business Corporation Act (MBCA), California Corporations Code, the Revised Uniform Limited Liability Company Act (RULLCA), and the Restatement (Third) of Agency.

For exam purposes, the subject breaks into five major clusters:

I. Agency Law

Agency is the foundational relationship in all of business associations. Every partnership, corporation, and LLC operates through agents. Understanding agency law is prerequisite to understanding everything else in this subject.

A. Formation of the Agency Relationship

Key requirements for formation:

No consideration required. Agency is a consensual relationship, not a contractual one. Gratuitous agents owe the same duties as compensated agents once they begin performance.

No writing required. Agency can be created orally or by conduct, with one exception: under the equal dignities rule, if the underlying transaction must be in writing (e.g., a contract within the Statute of Frauds), the agency authorization must also be in writing.

B. Types of Authority

The central question in most agency problems is: Did the agent have authority to bind the principal? There are several types of authority, and they often overlap.

1. Actual Authority (Express and Implied)

Express actual authority arises from the principal's explicit instructions to the agent. Example: "Go buy 100 shares of XYZ stock on my behalf."

Implied actual authority arises from conduct, custom, or the nature of the agent's position. It includes authority to do what is reasonably necessary to carry out expressly authorized tasks, authority implied by custom or trade usage, and authority implied by the agent's position or title.

2. Apparent Authority

Key points about apparent authority:

• The manifestation must come from the principal, not the agent. An agent cannot create their own apparent authority.
• The third party's belief must be reasonable.
• Common sources of apparent authority include: giving someone a title (e.g., "Vice President"), placing someone in a position that customarily carries certain authority, prior dealings where the principal allowed the agent to act similarly, and the principal's failure to notify third parties that an agent's actual authority has been revoked.

3. Inherent Authority (Agency Power)

Under the Restatement (Second), inherent authority allowed a general agent to bind the principal even without actual or apparent authority, based on the agency relationship itself. The Restatement (Third) largely replaced this concept with refined rules on apparent authority and the doctrine of undisclosed principals. However, many jurisdictions (and bar exams) still recognize inherent authority as a distinct category.

Inherent authority is most relevant when the principal is undisclosed (the third party does not know an agency exists) or partially disclosed (the third party knows there is a principal but not the principal's identity). In these situations, apparent authority cannot apply because the third party has no manifestation from the principal to rely on. Inherent authority fills this gap for general agents acting within the usual scope of their authority.

4. Ratification

Requirements for effective ratification:

Ratification can be express or implied from conduct (e.g., accepting benefits of the unauthorized transaction, failing to repudiate within a reasonable time after learning of it, or suing to enforce the contract).

5. Estoppel

Agency by estoppel arises when a principal's conduct (or failure to act) leads a third party to reasonably believe that an agent has authority, and the third party detrimentally relies on that belief. Unlike apparent authority, estoppel may arise from the principal's inaction (failure to correct a known misrepresentation). The remedy is typically limited to the third party's reliance damages rather than full enforcement of the transaction.

C. Liability in Agency

1. Disclosed, Partially Disclosed, and Undisclosed Principals

Type of Principal	Definition	Principal's Liability	Agent's Liability
Disclosed	Third party knows both that the agent acts for a principal and the principal's identity	Bound if agent had authority (actual, apparent, or ratified)	Generally not liable on the contract (unless agent agrees to be)
Partially Disclosed (Unidentified)	Third party knows the agent acts for a principal but does not know the principal's identity	Bound if agent had authority	Liable on the contract unless otherwise agreed
Undisclosed	Third party has no notice that the agent acts for a principal	Bound if agent had actual authority (apparent authority cannot exist here)	Liable on the contract

2. Tort Liability — Respondeat Superior

Scope of employment factors:

• Was the conduct of the kind the employee was hired to perform?
• Did it occur substantially within the authorized time and space limits?
• Was it actuated, at least in part, by a purpose to serve the employer?

Employee vs. Independent Contractor: Respondeat superior generally applies only to employees, not independent contractors. The key distinction is the degree of control the principal exercises over the manner and means of the agent's work. If the principal controls only the result (not how it is achieved), the agent is likely an independent contractor.

Exceptions where a principal may be liable for an independent contractor's torts:

• Non-delegable duties (e.g., maintaining safe premises, complying with regulatory requirements)
• Inherently dangerous activities
• Apparent authority (the principal held out the contractor as its employee/agent)
• Negligent hiring/supervision (direct liability of the principal)

3. Frolic and Detour

A detour is a minor deviation from the scope of employment — the employer remains vicariously liable. A frolic is a major departure from the scope of employment for purely personal reasons — the employer is generally not liable. The distinction is one of degree, and courts consider the extent of the deviation, whether the employee had resumed the employer's business, and the foreseeability of the conduct.

D. Duties in Agency

1. Agent's Duties to Principal

• Duty of Loyalty — The agent must act solely for the benefit of the principal in matters connected with the agency. This includes not self-dealing, not competing with the principal, not using the principal's property for personal benefit, and not acting for adverse parties without the principal's informed consent.
• Duty of Care — The agent must act with the competence and diligence normally exercised by agents in a similar position.
• Duty of Obedience — The agent must follow the principal's reasonable instructions.
• Duty to Account — The agent must keep and render accounts of money or property received or paid on the principal's behalf.
• Duty to Provide Information — The agent must use reasonable efforts to provide the principal with facts the agent knows or should know that are material to the agent's duties.

2. Principal's Duties to Agent

• Duty of Compensation — Unless the agency is gratuitous, the principal must compensate the agent as agreed.
• Duty of Indemnification — The principal must indemnify the agent for losses incurred while acting within the scope of the agency and in accordance with the principal's directions.
• Duty of Cooperation — The principal must not unreasonably interfere with the agent's performance.

E. Termination of Agency

An agency relationship may be terminated by:

• Mutual agreement of principal and agent
• Revocation by the principal (at any time, though this may breach the agency contract)
• Renunciation by the agent
• Expiration of the agency term or accomplishment of the agency purpose
• Death or incapacity of either party (but note: under the Restatement (Third), death or incapacity does not automatically terminate; authority continues until the agent has notice)
• Destruction of the subject matter, or change of law making the authorized act illegal

Agency Coupled with an Interest (Power Given as Security): An agency is irrevocable when the agent holds a security interest or other interest in the subject matter of the agency. The principal cannot unilaterally revoke, and the agency is not terminated by the principal's death or incapacity.

II. Partnerships

A. General Partnerships — Formation

Factors indicating a partnership exists (when disputed):

Partnership by Estoppel

A person who is not a partner can be held liable as if they were a partner if they represent themselves (or consent to being represented) as a partner, and a third party relies on that representation. Under RUPA § 308, the person who held themselves out as a partner is liable to third parties who extended credit in reliance on the representation. If the representation is made publicly, the purported partner is liable even to those who did not actually know of the representation.

B. Partnership Property and Rights

Partnership property belongs to the partnership entity, not to individual partners. A partner has no transferable interest in specific partnership property. Under RUPA, a partner's transferable interest is limited to the partner's share of profits, losses, and distributions — this economic interest can be transferred, but it does not give the transferee any right to participate in management or access partnership information.

C. Management and Authority

• Equal management rights: Each partner has an equal right to participate in management, regardless of capital contribution. RUPA § 401(f).
• Ordinary matters: Decided by a majority of partners.
• Extraordinary matters (e.g., amending the partnership agreement, admitting a new partner, undertaking unusual business): Require unanimous consent.
• Agency of partners: Each partner is an agent of the partnership for the purpose of its business. An act of a partner that is apparently for carrying on the partnership's business in the ordinary course binds the partnership, unless the partner had no authority and the third party knew or had notice of the lack of authority. RUPA § 301.

D. Liability of Partners

Incoming partners: A person admitted as a partner is not personally liable for any partnership obligation incurred before the person's admission. However, the incoming partner's capital contribution is at risk for pre-existing obligations. RUPA § 306(b).

Exhaustion rule: Under RUPA, a judgment creditor must first exhaust partnership assets before proceeding against individual partners (unless the partnership is bankrupt, the partner has agreed to be liable, or a court grants direct enforcement). RUPA § 307.

E. Fiduciary Duties of Partners

Under RUPA, partners owe the partnership and other partners two primary fiduciary duties:

Partners also owe a duty of good faith and fair dealing in the discharge of their duties and exercise of their rights. RUPA § 404(d).

F. Dissociation

Dissociation occurs when a partner ceases to be associated with the carrying on of the partnership business. RUPA § 601 lists events causing dissociation, including:

• The partner's express will to withdraw (a partner has the power to dissociate at any time, though doing so may breach the partnership agreement and create liability for damages)
• Expulsion by unanimous vote of the other partners
• Expulsion by judicial decree (for specified misconduct)
• Bankruptcy, death, or incapacity of the partner
• Expiration of the partnership term or completion of the undertaking

After dissociation, the partner's duty of loyalty terminates (except as to matters arising before dissociation), and the partner's duty of care continues only with respect to pre-dissociation matters. The dissociated partner's apparent authority to bind the partnership continues for two years unless notice is given to third parties. RUPA § 702.

G. Dissolution and Winding Up

Dissociation does not necessarily cause dissolution. Under RUPA, dissolution occurs only in specific circumstances:

• Partnership at will: Dissolution occurs upon any partner's express will to dissociate (by giving notice of intent to withdraw). RUPA § 801(1).
• Partnership for a term or undertaking: Dissolution occurs when the term expires or undertaking is completed; or within 90 days after a partner's dissociation by death, bankruptcy, or wrongful dissociation, if at least half of the remaining partners agree to wind up. RUPA § 801(2).
• Judicial dissolution: A court may order dissolution on application by a partner when the economic purpose of the partnership is likely to be unreasonably frustrated, another partner has engaged in conduct that makes it not reasonably practicable to carry on, or it is not otherwise reasonably practicable to carry on the partnership business in conformity with the partnership agreement. RUPA § 801(5).
• Events specified in the partnership agreement.

Winding up: After dissolution, the partnership continues only for the purpose of winding up its business. Partners who have not wrongfully dissociated may participate in winding up. Priority of distributions during winding up: (1) creditors (including partner-creditors), (2) return of capital contributions, (3) distribution of surplus (per partnership agreement or equally).

H. Limited Partnerships (LP)

Key rules:

• Limited partner liability shield: A limited partner is not personally liable for partnership obligations solely by reason of being a limited partner, even if the limited partner participates in management (under RULPA 2001 and California law). The older "control rule" (limited partner loses protection by participating in control of the business) has been largely abolished but may still be tested.
• General partner liability: General partners in an LP have the same unlimited liability as partners in a general partnership.
• Fiduciary duties: General partners owe fiduciary duties. Limited partners generally do not owe fiduciary duties to the partnership or other partners (but they do owe the contractual duty of good faith and fair dealing).

I. Limited Liability Partnerships (LLP)

An LLP is a general partnership that has elected LLP status by filing a statement with the state. The key advantage: partners in an LLP are not personally liable for the partnership's obligations arising from the negligence, wrongful acts, or misconduct of other partners or employees not under their direct supervision and control. In many states (including California), the liability shield is even broader, protecting partners from all partnership obligations, both tort and contract.

III. Corporations

A. Formation

1. Incorporation Process

To form a corporation:

2. De Jure vs. De Facto Corporations

Concept	Definition	Effect
De Jure Corporation	Formed in substantial compliance with all statutory requirements	Full corporate status; the state cannot challenge corporate existence
De Facto Corporation	There was (1) a relevant incorporation statute, (2) a good faith attempt to comply, and (3) some exercise of corporate privileges	Corporation is recognized as to all parties except the state (which can challenge via quo warranto)
Corporation by Estoppel	A party who dealt with a business as though it were a corporation is estopped from denying its corporate existence	Prevents the third party from holding individual shareholders personally liable; generally applies only in contract, not tort

3. Promoter Liability

The corporation is not automatically bound by the promoter's pre-incorporation contracts. The corporation can become bound by:

• Adoption — The board of directors expressly or impliedly adopts the contract after incorporation (binds the corporation but does not release the promoter).
• Novation — All three parties agree to release the promoter and substitute the corporation (releases the promoter).

4. Piercing the Corporate Veil

Factors courts consider (the "alter ego" test):

IV. Corporate Governance

A. Board of Directors

The board of directors manages the business and affairs of the corporation. Directors are not agents of the corporation; they act as a collective body. Key governance rules:

• Selection: Directors are elected by shareholders at the annual meeting. Vacancies may be filled by the remaining directors or by shareholder vote.
• Removal: Shareholders may remove directors with or without cause (under MBCA). If the board is classified (staggered terms), directors may only be removed for cause unless the articles provide otherwise.
• Quorum: A majority of the fixed number of directors constitutes a quorum. An act of the board requires the affirmative vote of a majority of directors present at a meeting at which a quorum is present.
• Committees: The board may delegate authority to committees composed of one or more directors, but certain actions cannot be delegated (e.g., declaring dividends, amending bylaws, recommending fundamental changes, filling board vacancies).

B. Officers

Officers are agents of the corporation, appointed by the board of directors. They have the authority delegated by the board, the bylaws, or custom. Common officers include the CEO/President, Secretary, and Treasurer/CFO. Officers owe the same fiduciary duties as directors (duty of care and duty of loyalty). Officers serve at the pleasure of the board and may be removed at any time, with or without cause (though removal may give rise to a breach of contract claim if the officer has an employment contract).

C. Fiduciary Duties of Directors and Officers

1. Duty of Care

The duty of care requires directors to:

• Be informed — Make reasonable inquiry before making decisions; review relevant materials.
• Exercise independent judgment
• Attend meetings regularly and monitor the corporation's affairs
• Rely on experts when appropriate (attorneys, accountants, board committees) — but reliance must be in good faith and reasonable

2. Business Judgment Rule (BJR)

The BJR is rebutted when the plaintiff shows:

3. Duty of Loyalty

a. Self-Dealing Transactions (Interested Director Transactions)

A self-dealing transaction is one in which a director has a personal financial interest. Such transactions are not automatically void. Under the MBCA "safe harbor" provisions, an interested director transaction is not voidable solely because of the director's interest if any one of the following conditions is met:

If none of the safe harbors is met, the transaction is reviewed under the entire fairness standard: the interested director bears the burden of proving both fair dealing (process) and fair price (substance).

b. Corporate Opportunity Doctrine

To properly take a corporate opportunity, the director must:

• First present the opportunity to the board with full disclosure
• Wait for the board to reject the opportunity (through a disinterested process)
• Only then may the director personally pursue it

If the corporation is financially unable to take advantage of the opportunity, this may be a defense in some jurisdictions, but it is not a universal defense. The safest course is always to present the opportunity to the board first.

c. Competing with the Corporation

A director may not compete with the corporation while serving as a director. Competition violates the duty of loyalty. A director planning to leave to start a competing business may make preparations (e.g., forming a new entity, negotiating a lease), but may not solicit the corporation's customers or employees or divert business before actually resigning.

4. Duty of Good Faith

Good faith is generally considered a component of the duty of loyalty rather than a freestanding duty (per Stone v. Ritter). Bad faith includes:

• Acting with a purpose other than advancing the corporation's best interests
• Intentional violation of law
• Conscious disregard of known duties (failure of oversight / Caremark liability) — directors have a duty to implement and monitor a reasonable information and reporting system; a sustained or systematic failure to exercise oversight can constitute bad faith

5. Exculpation and Indemnification

Exculpation clauses: Under MBCA § 2.02(b)(4) and Delaware DGCL § 102(b)(7), the articles of incorporation may include a provision eliminating or limiting director personal liability for monetary damages for breach of the duty of care. However, such provisions may never eliminate liability for: (a) breach of the duty of loyalty, (b) acts or omissions not in good faith, (c) intentional misconduct or knowing violation of law, or (d) improper distributions or personal benefit.

Indemnification: Corporations may (and sometimes must) indemnify directors for expenses incurred in defending suits:

• Mandatory indemnification: A director who is wholly successful on the merits must be indemnified for reasonable expenses.
• Permissive indemnification: A corporation may indemnify a director who acted in good faith and in a manner reasonably believed to be in the best interests of the corporation.
• Court-ordered indemnification: A court may order indemnification if the director is fairly and reasonably entitled to it.
• Advancement: The corporation may advance litigation expenses to a director, subject to repayment if the director is ultimately found not entitled to indemnification.

V. Shareholder Rights

A. Voting Rights

Record date: Only shareholders of record as of the record date are entitled to vote. The record date is set by the board, typically 10-70 days before the meeting.

Quorum: A majority of shares entitled to vote, represented in person or by proxy, constitutes a quorum. An act of the shareholders requires the affirmative vote of a majority of shares present and voting at a meeting at which a quorum is present (unless a supermajority is required by the articles or bylaws).

Proxy voting: A shareholder may appoint a proxy to vote on their behalf. A proxy is generally revocable unless it is "coupled with an interest" (the proxy holder has a legal interest in the shares, such as a pledge). Under the MBCA, a proxy is valid for 11 months unless otherwise provided.

Cumulative voting: In cumulative voting, a shareholder may multiply their shares by the number of directors to be elected and cast all votes for a single candidate (or distribute them). This helps minority shareholders elect at least one director. Cumulative voting is mandatory in some jurisdictions and optional in others.

Voting agreements and voting trusts: Shareholders may enter agreements to vote in a specified manner. A voting trust involves transferring legal title to shares to a trustee who votes them. Voting trusts are generally valid for a term of up to 10 years.

B. Shareholder Suits

1. Direct Suits

A shareholder brings a direct suit when the shareholder has suffered a harm that is separate and distinct from any harm to the corporation. Examples include suits to enforce voting rights, compel declaration of a dividend, enforce inspection rights, or challenge an oppressive action against the individual shareholder.

2. Derivative Suits

Requirements for a derivative suit:

Special Litigation Committees (SLC): The board may appoint a committee of independent directors to investigate the claims and recommend whether the suit should proceed. If the SLC recommends dismissal in good faith after a reasonable investigation, the court will generally defer to the committee's recommendation (under the BJR). However, the court retains discretion to deny dismissal if it determines the committee was not truly independent or the investigation was inadequate.

C. Inspection Rights

Shareholders have the right to inspect certain corporate books and records. Under the MBCA, a shareholder must make a written demand stating the purpose, and the purpose must be reasonably related to the shareholder's interest as a shareholder (a "proper purpose"). Certain records are available without any purpose requirement (e.g., articles, bylaws, annual reports, meeting minutes). Other records (accounting records, shareholder lists) require a proper purpose.

D. Appraisal Rights (Dissenters' Rights)

Procedural requirements for exercising appraisal rights:

Market-out exception: Under the MBCA, appraisal rights are generally not available if the shares are publicly traded on a national securities exchange (the theory being that the shareholder can simply sell on the open market). However, this exception does not apply if the consideration offered in the merger is anything other than cash or publicly traded shares.

VI. Fundamental Corporate Changes

Fundamental changes alter the basic nature of the corporation or the shareholders' rights. They generally require: (1) board resolution recommending the change, (2) notice to shareholders, and (3) shareholder approval (typically by a majority of shares entitled to vote, though some changes may require a supermajority).

A. Amendments to the Articles of Incorporation

The board adopts a resolution recommending the amendment, shareholders are given notice, and the amendment must be approved by a majority of shares entitled to vote (or a greater percentage if required by the articles). Certain amendments that adversely affect a particular class of shares may require approval by that class voting as a separate group.

B. Mergers and Consolidations

In a merger, one corporation absorbs another (the surviving corporation continues; the merged corporation ceases to exist). In a consolidation, two corporations combine to form a new entity (both original corporations cease to exist). Procedure: (1) board of each corporation adopts a plan of merger/consolidation, (2) shareholders of each corporation approve (majority of shares entitled to vote), (3) articles of merger are filed.

Short-form merger: A parent corporation that owns at least 90% of a subsidiary's shares may merge with the subsidiary without a shareholder vote of either corporation. The parent's board simply adopts a resolution. Minority shareholders of the subsidiary are entitled to appraisal rights.

Triangular merger: The acquiring corporation creates a subsidiary, and the target merges into the subsidiary. This structure allows the acquirer to avoid a shareholder vote (only the subsidiary's board approves, and the acquirer is the subsidiary's sole shareholder).

C. Sale of Substantially All Assets

A sale of all or substantially all of the corporation's assets outside the ordinary course of business requires board approval and shareholder approval. "Substantially all" is generally defined quantitatively (e.g., more than 75% of assets) and qualitatively (leaving the corporation unable to continue its business). Shareholders of the selling corporation have appraisal rights.

D. Dissolution

Voluntary dissolution: The board recommends dissolution, and shareholders approve. After approval, the corporation files articles of dissolution and proceeds to wind up (pay debts, distribute remaining assets to shareholders).

Involuntary dissolution: A court may order dissolution on the petition of a shareholder if: (a) the directors are deadlocked and the deadlock is causing irreparable injury, (b) the directors are acting illegally, oppressively, or fraudulently, (c) the shareholders are deadlocked and cannot elect directors, or (d) corporate assets are being misapplied or wasted.

VII. Securities Basics

A. What Is a Security?

Under both federal and state law, a "security" includes stocks, bonds, notes, and investment contracts. The Howey test defines an investment contract as: (1) an investment of money, (2) in a common enterprise, (3) with the expectation of profits, (4) derived solely from the efforts of others.

B. Registration and Exemptions

The Securities Act of 1933 requires that securities be registered with the SEC before being offered or sold, unless an exemption applies. Common exemptions include:

• Private placement (Regulation D, Rule 506) — Offers to accredited investors and a limited number of sophisticated non-accredited investors, without general solicitation
• Intrastate offering (Rule 147) — Offers limited to residents of a single state by an issuer incorporated and doing business in that state
• Regulation A — A simplified registration process for smaller offerings
• Rule 144 — Resale of restricted securities after a holding period

C. Anti-Fraud Provisions

Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 prohibit fraud in connection with the purchase or sale of any security. To establish a Rule 10b-5 claim, a plaintiff must prove:

D. Insider Trading

Insider trading under Rule 10b-5 is based on two theories:

• Classical theory: Corporate insiders (directors, officers, controlling shareholders) breach their fiduciary duty by trading on material nonpublic information. They must either disclose or abstain.
• Misappropriation theory: A person who is not a corporate insider misappropriates confidential information from the source of the information (e.g., an employer, a client) and uses it to trade. This violates the duty owed to the source of the information.

Tipper/Tippee liability: A tipper (insider who discloses material nonpublic information) is liable if they disclosed the information for a personal benefit (financial gain, gift, reputational enhancement). A tippee (recipient of the tip) is liable if the tippee knew or should have known that the tipper breached a duty.

Section 16(b) — Short-Swing Profits: Officers, directors, and shareholders holding more than 10% of a class of equity securities must disgorge any profits from purchases and sales (or sales and purchases) of the corporation's equity securities within a six-month period. This is a strict liability provision — no intent or misuse of inside information need be shown.

VIII. Limited Liability Companies (LLCs)

A. Formation

LLCs combine the limited liability of corporations with the flexibility and pass-through taxation of partnerships. Members are not personally liable for the obligations of the LLC solely by reason of being members.

B. Operating Agreement

The operating agreement is the foundational document governing the LLC's internal affairs, including management structure, allocation of profits and losses, distribution rights, transfer restrictions, and dissolution triggers. Under RULLCA, the operating agreement can be oral, written, or implied from conduct. The operating agreement may modify default statutory rules with broad flexibility, but it may not:

• Eliminate the duty of loyalty or duty of care (though it may identify specific activities that do not violate these duties, if not manifestly unreasonable)
• Eliminate the obligation of good faith and fair dealing
• Unreasonably restrict the right of a member to information
• Vary the power of a court to decree dissolution

C. Management Structure

LLCs may be either member-managed or manager-managed:

Feature	Member-Managed (Default)	Manager-Managed
Decision-making	All members have equal authority to manage and bind the LLC; ordinary matters by majority vote; extraordinary matters by unanimous vote	Managers (who may or may not be members) have exclusive authority to manage; members have no management authority unless designated as managers
Agency	Each member is an agent of the LLC for business purposes	Only managers are agents of the LLC; members who are not managers cannot bind the LLC
Fiduciary duties	All members owe fiduciary duties (loyalty and care)	Managers owe fiduciary duties; non-manager members generally do not (but owe good faith and fair dealing)
Analogy	Similar to a general partnership	Similar to a limited partnership or corporation

D. Fiduciary Duties in LLCs

Under RULLCA, the fiduciary duties owed in an LLC parallel those in partnerships under RUPA:

• Duty of Loyalty: Account for property, profit, or benefit derived from LLC business; refrain from dealing with the LLC as or on behalf of an adverse party; refrain from competing with the LLC.
• Duty of Care: Refrain from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.
• Good Faith and Fair Dealing: Non-waivable obligation.

E. Transferability of Membership Interests

By default, a member's economic interest (right to distributions) is freely transferable, but governance rights (voting, management participation) are not transferable without the consent of all other members (or as provided in the operating agreement). A transferee of only the economic interest becomes an "assignee" but not a member.

F. Dissociation and Dissolution of LLCs

Dissociation: A member may dissociate from an LLC by giving notice, or upon the occurrence of events specified in the operating agreement or statute (e.g., death, bankruptcy, expulsion). Upon dissociation, the member's governance rights terminate, but the member retains the right to receive distributions.

Dissolution: An LLC is dissolved upon:

• Events specified in the operating agreement
• Consent of all members (or the percentage specified in the operating agreement)
• The passage of 90 consecutive days during which the LLC has no members
• Judicial decree on grounds that the LLC's managers or controlling members have acted illegally or fraudulently, or that dissolution is reasonably necessary because the economic purpose of the LLC is likely to be unreasonably frustrated
• Administrative dissolution for failure to file required documents or pay required fees

Upon dissolution, the LLC winds up its affairs: it completes existing business, discharges liabilities, and distributes remaining assets to members.

G. Piercing the LLC Veil

Courts apply veil-piercing principles to LLCs in the same manner as to corporations. The same factors are considered: commingling of funds, failure to observe LLC formalities, undercapitalization, use of the LLC as a mere alter ego, and whether recognizing the LLC form would sanction fraud or promote injustice.

IX. California-Specific Entity Rules

X. Common Essay Patterns

Pattern 1: Agency Authority and Liability

Typical fact pattern: An agent enters into a contract on behalf of a principal. The principal disputes being bound, or the agent seeks to avoid personal liability. The third party claims reliance on the agent's authority.

Key issues to spot:

• Was the principal disclosed, partially disclosed, or undisclosed?
• Did the agent have actual authority (express or implied)?
• If not, did the agent have apparent authority? (What manifestation came from the principal?)
• Has the principal ratified the agent's unauthorized act?
• Is the agent personally liable on the contract?
• If a tort occurred, was the agent an employee or independent contractor? Was the tort within the scope of employment?

Approach: Analyze each type of authority in order: actual (express, then implied), apparent, inherent/agency power, ratification, estoppel. Then address liability based on the type of principal.

Pattern 2: Piercing the Corporate Veil

Typical fact pattern: A creditor of a corporation (often a tort victim) seeks to hold individual shareholders personally liable. The corporation is undercapitalized, run informally, or used to siphon funds.

Key issues to spot:

• Is the corporation closely held? (Piercing is far more common here.)
• Was there commingling of personal and corporate funds?
• Were corporate formalities observed (meetings, minutes, separate accounts)?
• Was the corporation adequately capitalized at inception?
• Was the corporation used as a mere instrumentality or alter ego?
• Would adherence to the corporate fiction sanction fraud or promote injustice?
• If in California, apply the specific two-prong alter ego test.

Approach: State the general rule of limited liability, then systematically address each piercing factor. Conclude with whether the injustice/fraud prong is met.

Pattern 3: Director Fiduciary Duties and the BJR

Typical fact pattern: Directors approve a transaction that results in losses. Shareholders challenge the decision. The directors may have a conflict of interest or may not have been fully informed.

Key issues to spot:

• Did the directors satisfy the duty of care (were they informed)?
• Is there a self-dealing transaction triggering duty of loyalty analysis?
• Does the BJR apply, or is it rebutted?
• If self-dealing, was a safe harbor satisfied (disinterested director approval, shareholder approval, or intrinsic fairness)?
• Did the directors usurp a corporate opportunity?
• Is there an exculpation clause in the articles? (It can shield duty of care claims but not duty of loyalty.)
• Was there waste (a transaction so one-sided that no reasonable person would approve it)?

Approach: Start with the BJR presumption. Assess whether it applies or is rebutted. If rebutted, shift to entire fairness. Address self-dealing safe harbors if relevant.

Pattern 4: Partnership Formation and Liability Disputes

Typical fact pattern: Two or more persons collaborate in a business venture. A third party is injured or enters a contract and seeks to hold one or more individuals personally liable. The individuals dispute whether a partnership exists.

Key issues to spot:

• Is there profit sharing? If so, the presumption of partnership applies (unless an exception exists).
• Do the parties share management control?
• Did the parties intend to form a partnership (labels are not dispositive)?
• Is there partnership by estoppel (a person held out as a partner)?
• If a partnership exists, what are the partners' individual liabilities (joint and several under RUPA)?
• Was the partner acting within the scope of the partnership's business?
• Is the creditor subject to the exhaustion requirement (must pursue partnership assets first under RUPA)?

Approach: Analyze formation factors (especially profit sharing). Discuss partnership by estoppel as an alternative theory. Address partner liability and the exhaustion rule.

Pattern 5: Shareholder Derivative Suits and Oppression

Typical fact pattern: A minority shareholder in a closely held corporation is being squeezed out through excessive salaries to controlling shareholders, refusal to pay dividends, exclusion from management, or below-market transactions with insiders.

Key issues to spot:

• Is the suit direct or derivative? (Did the harm affect the shareholder individually or the corporation?)
• If derivative, has the demand requirement been met or is it excused as futile?
• Does the shareholder meet the contemporaneous ownership requirement?
• Has the board formed a special litigation committee? Is it independent?
• Is the controlling shareholder engaged in oppressive conduct (in California, grounds for involuntary dissolution)?
• In California, is the buy-out remedy under § 2000 available as an alternative to dissolution?
• Can the court impose equitable relief (e.g., ordering dividends, requiring proportional employment)?

Approach: Classify the suit as direct or derivative. If derivative, address procedural requirements. Analyze the underlying fiduciary breach. In California, discuss the involuntary dissolution statute and buy-out remedy.

XI. Issue Spotting Checklist

• Agency: Is there an agency relationship? What type(s) of authority does the agent have (actual, apparent, inherent, ratification, estoppel)?
• Principal type: Is the principal disclosed, partially disclosed, or undisclosed? Who is liable on the contract?
• Respondeat superior: Is the agent an employee or independent contractor? Is the tort within the scope of employment?
• Partnership formation: Is there profit sharing? Are any exceptions to the profit-sharing presumption applicable?
• Partnership liability: Are partners jointly and severally liable? Does the exhaustion rule apply? Is there an incoming partner with limited exposure?
• Partnership fiduciary duties: Did a partner breach the duty of loyalty (self-dealing, competition, usurpation) or the duty of care (gross negligence)?
• Dissociation vs. dissolution: Has a partner dissociated, and if so, does that trigger dissolution?
• Corporate formation defects: Is this a de jure corporation, de facto corporation, or corporation by estoppel? Under MBCA, are these doctrines available?
• Promoter liability: Did a promoter contract before incorporation? Has the corporation adopted the contract? Has a novation occurred?
• Piercing the veil: Is there commingling, failure to observe formalities, undercapitalization, alter ego, fraud, or injustice?
• Duty of care: Were the directors informed before making their decision? Does the BJR apply?
• Duty of loyalty: Is there self-dealing, a corporate opportunity issue, or director competition? Was a safe harbor satisfied?
• BJR rebuttal: Is there self-interest, bad faith, gross negligence in process, or waste?
• Shareholder suits: Is the claim direct or derivative? Have procedural requirements been met (demand, contemporaneous ownership)?
• Fundamental changes: Is there a merger, asset sale, amendment, or dissolution? What approvals are needed? Are appraisal rights available?
• Securities: Is there a security? Is registration required or is an exemption available? Is there potential 10b-5 liability?
• Insider trading: Classical or misappropriation theory? Tipper/tippee? Section 16(b) short-swing profits?
• LLC issues: Is the LLC member-managed or manager-managed? Who owes fiduciary duties? What does the operating agreement provide?
• California distinctions: Cumulative voting? Alter ego test? LLP full shield? Involuntary dissolution standard? Dividend test? Close corporation rules?

XII. Exam Tips

XIII. Mnemonics

XIV. Key Distinctions

A. Entity Comparison

Feature	General Partnership	LP	LLP	Corporation	LLC
Formation	No filing required; by agreement or conduct	Certificate of limited partnership filed with state	GP that files LLP statement	Articles of incorporation filed with state	Articles of organization filed with state
Personal Liability	All partners jointly and severally liable	General partners: unlimited; Limited partners: limited to contribution	No personal liability (full shield in CA)	Shareholders not personally liable (absent veil piercing)	Members not personally liable (absent veil piercing)
Management	All partners; equal rights	General partners manage; limited partners do not (traditional rule)	All partners; equal rights	Board of directors; officers execute	Member-managed (default) or manager-managed
Taxation	Pass-through	Pass-through	Pass-through	Double taxation (C-Corp) or pass-through (S-Corp)	Pass-through (default) or elect corporate taxation
Transferability	Economic interest transferable; governance rights require unanimous consent	Same as GP for limited partner interests	Same as GP	Freely transferable (unless restricted by agreement)	Economic interest transferable; membership rights require consent
Duration	At will or for a term	As specified in certificate	Same as GP with LLP status	Perpetual (default)	Perpetual (default under RULLCA)

B. Duty of Care Standards

Entity	Standard	Notes
Agent	Ordinary care and competence	Measured by what a reasonable agent in similar position would do
Partner (RUPA)	Gross negligence / reckless conduct	Liability only for gross negligence, recklessness, intentional misconduct, or knowing violation of law
Corporate Director	Ordinarily prudent person	Protected by BJR; exculpation clause may eliminate monetary liability
LLC Member/Manager	Gross negligence / reckless conduct (RULLCA)	Same standard as RUPA; may be modified by operating agreement

C. Direct vs. Derivative Suits

Feature	Direct Suit	Derivative Suit
Nature of harm	Harm to the individual shareholder	Harm to the corporation
Recovery goes to	The shareholder personally	The corporation
Demand required?	No	Yes (written demand on the board, or demand excused as futile)
Contemporaneous ownership?	No	Yes (plaintiff must have been a shareholder at time of wrong)
Standing to sue	Any shareholder with individual injury	Shareholder meeting procedural requirements, suing on behalf of corporation
Examples	Denial of voting rights, denial of inspection, breach of shareholder agreement	Director self-dealing causing loss to corporation, corporate waste, usurpation of corporate opportunity

D. Disclosed vs. Undisclosed Principal Liability

Issue	Disclosed Principal	Partially Disclosed	Undisclosed Principal
Principal bound?	Yes, if agent had authority	Yes, if agent had authority	Yes, if agent had actual authority only
Agent liable on contract?	Generally no	Yes (presumed)	Yes
Apparent authority available?	Yes	Yes	No (third party unaware of principal)
Third party election?	N/A	May elect to hold principal or agent liable (once principal revealed)	May elect to hold principal or agent liable (once principal revealed); obtaining judgment against one may bar suit against the other

E. Merger vs. Asset Sale

Feature	Merger	Sale of Substantially All Assets
Entity survival	Merged entity ceases to exist; surviving entity continues	Both entities continue to exist (seller is left as a shell with cash proceeds)
Transfer of assets	Automatic (by operation of law)	Must be individually conveyed
Assumption of liabilities	Surviving entity assumes all liabilities by operation of law	Buyer generally does not assume liabilities unless agreed (but exceptions apply: continuity of enterprise, mere continuation, de facto merger)
Board approval	Required for both entities	Required for seller
Shareholder approval	Required for both entities (except short-form mergers)	Required for seller; generally not for buyer
Appraisal rights	Available (subject to market-out exception)	Available for seller's shareholders