CHAPTER 3: OTHER ORGANIZATIONAL FORMS FOR SMALL BUSINESSES 17
whole or in part.
contributions. A joint venture is treated much like a partnership and is taxed like a partnership but it differs in that its
creation is in contemplation of a limited activity or single transaction.
perpetual existence. Yet a joint stock company is usually treated like a partnership because it is formed by agreement
CHAPTER 3: OTHER ORGANIZATIONAL FORMS FOR SMALL BUSINESSES 19
Suppose that Kuhn and Tumminelli had signed a written operating agreement that required both
this requirement, would the result have been different? Why or why not? Yes. In the actual case, as one of the
owners of the LLC and its manager, Tumminelli had the authority to indorse its checks and was placed in this position
by the LLC and Kuhn. Under those facts, it was not unreasonable for Quick Cash to rely on Tumminelli’s authority. It
would have been unreasonable, however, for Quick Cash to have known that it was cashing checks for someone who
did not have the authority to receive the payment.
20 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
whole or in part.
series of transactions or projects. The elements of a joint venture are (1) a contract to engage in a common
undertaking; (2) the parties’ contributions of money, property, time, or skill to it; (3) an interest in, and mutual
right to control, its property; and (4) an agreement to share its profits. The agreement between the parties in
this problem and their subsequent conduct meets all of these requirements.
4. Suppose that during construction, Lafayette had entered into an agreement to rent space in a
warehouse that was close to the bridge so that she could work on her sculptures near the location at
which they would eventually be installed. She entered into the contract without the knowledge or
consent of Davidson Masonry. In this situation, would a court be likely to hold that Davidson Masonry
was bound by the contract that Lafayette entered? Why or why not? A court would probably hold that
Davidson Masonry was not bound by the contract that Lafayette entered. Joint venturers have less implied
and apparent authority to bind their venture than partners do to bind their partnership, because the activities
of a venture are more limited than the business of a partnership. In this situation, Davidson Masonry did not
even know of Lafayette’s contract. In other circumstances, however, a court might hold differently, since
courts may apply to joint ventures the same principles that they do to partnerships. If a court did, it might hold
a joint venturer liable for debts incurred on the venture’s behalf.
DEBATE THIS
Because LLCs are essentially just partnerships with limited liability for members, all partnership
laws should apply. While there are certainly some differences between how LLCs operate relative to how
partnerships operate, the similarities are sufficiently obvious that no new laws or operating rules need be
created for LLCs, except with respect to the limited liability of LLC members. The law of partnerships has a
long history, one that has created a solid body of case law that should be applied to LLCs, too.
Yes, LLCs do resemble partnerships in many respects. But since their humble beginnings in 1997, they
have become a form of business organization in their own rights. Why shouldn’t business owners be allowed
to choose from the largest array of business organizations possible? The more LLCs are used, the more
they will gradually become increasingly distinct from partnerships. Blanket application of partnership law to
LLCs would stifle their development.
EXAMPREP—
ISSUE SPOTTERS
1. Gabriel, Harris, and Ida are members of Jeweled Watches, LLC. What are their options with
respect to the management of their firm? The members of a limited liability company (LLC) may designate
a group to run their firm. In that situation, the firm would be a manager–managed LLC. The group may include
only members, only nonmembers, or members and nonmembers. If instead, all members participate in
management, the firm would be a member-managed LLC. In fact, unless the members agree otherwise, all
members are considered to participate in the management of the firm.
whole or in part.
22 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
whole or in part.
by the Louisiana secretary of state. Finally, the court noted that, while LLC’s are not bound by corporate laws
to hold regular meetings, the fact that MBW had not had a meeting in over a year further evidenced that
Washauer was operating MBW “at his leisure and direction.”
(d) Conclusion: What was the court’s conclusion? The court concluded that the trial court did not err
when it judged that MBW was being operated as the alter ego of Washauer. The court affirmed the trial
court’s judgment in ORX’s favor and held that Washauer could be held jointly and severally liable with MBW
for the MBW’s debt to ORX.”
CHAPTER 3: OTHER ORGANIZATIONAL FORMS FOR SMALL BUSINESSES 19
Suppose that Kuhn and Tumminelli had signed a written operating agreement that required both
this requirement, would the result have been different? Why or why not? Yes. In the actual case, as one of the
owners of the LLC and its manager, Tumminelli had the authority to indorse its checks and was placed in this position
by the LLC and Kuhn. Under those facts, it was not unreasonable for Quick Cash to rely on Tumminelli’s authority. It
would have been unreasonable, however, for Quick Cash to have known that it was cashing checks for someone who
did not have the authority to receive the payment.
20 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
whole or in part.
series of transactions or projects. The elements of a joint venture are (1) a contract to engage in a common
undertaking; (2) the parties’ contributions of money, property, time, or skill to it; (3) an interest in, and mutual
right to control, its property; and (4) an agreement to share its profits. The agreement between the parties in
this problem and their subsequent conduct meets all of these requirements.
4. Suppose that during construction, Lafayette had entered into an agreement to rent space in a
warehouse that was close to the bridge so that she could work on her sculptures near the location at
which they would eventually be installed. She entered into the contract without the knowledge or
consent of Davidson Masonry. In this situation, would a court be likely to hold that Davidson Masonry
was bound by the contract that Lafayette entered? Why or why not? A court would probably hold that
Davidson Masonry was not bound by the contract that Lafayette entered. Joint venturers have less implied
and apparent authority to bind their venture than partners do to bind their partnership, because the activities
of a venture are more limited than the business of a partnership. In this situation, Davidson Masonry did not
even know of Lafayette’s contract. In other circumstances, however, a court might hold differently, since
courts may apply to joint ventures the same principles that they do to partnerships. If a court did, it might hold
a joint venturer liable for debts incurred on the venture’s behalf.
DEBATE THIS
Because LLCs are essentially just partnerships with limited liability for members, all partnership
laws should apply. While there are certainly some differences between how LLCs operate relative to how
partnerships operate, the similarities are sufficiently obvious that no new laws or operating rules need be
created for LLCs, except with respect to the limited liability of LLC members. The law of partnerships has a
long history, one that has created a solid body of case law that should be applied to LLCs, too.
Yes, LLCs do resemble partnerships in many respects. But since their humble beginnings in 1997, they
have become a form of business organization in their own rights. Why shouldn’t business owners be allowed
to choose from the largest array of business organizations possible? The more LLCs are used, the more
they will gradually become increasingly distinct from partnerships. Blanket application of partnership law to
LLCs would stifle their development.
EXAMPREP—
ISSUE SPOTTERS
1. Gabriel, Harris, and Ida are members of Jeweled Watches, LLC. What are their options with
respect to the management of their firm? The members of a limited liability company (LLC) may designate
a group to run their firm. In that situation, the firm would be a manager–managed LLC. The group may include
only members, only nonmembers, or members and nonmembers. If instead, all members participate in
management, the firm would be a member-managed LLC. In fact, unless the members agree otherwise, all
members are considered to participate in the management of the firm.
whole or in part.
22 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
whole or in part.
by the Louisiana secretary of state. Finally, the court noted that, while LLC’s are not bound by corporate laws
to hold regular meetings, the fact that MBW had not had a meeting in over a year further evidenced that
Washauer was operating MBW “at his leisure and direction.”
(d) Conclusion: What was the court’s conclusion? The court concluded that the trial court did not err
when it judged that MBW was being operated as the alter ego of Washauer. The court affirmed the trial
court’s judgment in ORX’s favor and held that Washauer could be held jointly and severally liable with MBW
for the MBW’s debt to ORX.”