934 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
Notes and Questions
If the court had ruled that there was no joint venture in this case, how would that have affected the result? Under
that ruling, Cameron would likely have been entitled to the possession of the plane or at least to the possession of
some of its components, including the engine. Why? Because if Anderson and Cameron had not been involved in a joint
venture, Cameron would have had a lien on the engine, assuming it was not paid for, and this lien would have been
superior to SPW’s interest.
ANSWER TO “THE LEGAL ENVIRONMENT DIMENSION”
QUESTION IN CASE 38.3
On what basis might Cameron maintain a suit against Anderson? Under the principles of partnership law, as
applied in this case, a partner who acts within his or her scope of authority can bind the partnership to agreements
ANSWER TO “WHAT IF THE FACTS WERE DIFFERENT?” IN CASE 38.3
How might the outcome of this case have been different if Cameron had been merely an aircraft parts supplier,
with his only profit to be from the sale of components to Anderson? Under that circumstance, one of the elements of a
joint venture would have been lacking, and the court might have ruled in Cameron’s favor with respect to the
possession of the plane, or at least with respect to the components that could be traced to him. Under the facts as they
were, however, the parties’ written agreement “expressly recognizes a much broader, on-going role by Cameron in the
construction of the airplanes. The agreement does not merely envision that Cameron will sell parts to Anderson, but
creates reciprocal duties and obligations between Cameron and Anderson in the design and manufacture of
component parts and completed airplanes,” which supports the court’s ruling.
ADDITIONAL BACKGROUND—
Federal Tax Laws and Joint Ventures
For tax purposes, the Internal Revenue Service (IRS) treats joint ventures the same as partnerships, with a few
exceptions. Generally, the income of a joint ventures (and a partnership) is not taxed to the firm, but taxed to the
CHAPTER 38: LIMITED LIABILITY COMPANIES AND SPECIAL BUSINESS FORMS 935
• Except for certain real estate ventures, a joint venture must file an informational tax return.
• A joint venture can choose its own taxable year, but without the consent of the IRS, that year cannot be
different from the taxable year of a principal partner (a partner with more than a 5 percent interest in the
capital or the profits).
• Transactions between the joint venture and one of the joint venturers is treated as if it occurred between the
venture and a party outside the firm.
• Joint venturers can change the allocation of their profits and losses any time before the deadline for filing the
2. Differences from Partnerships
Joint venturers have less implied and apparent authority than partners. Unless specified otherwise, a joint
venture terminates when the project for which it was formed is done.
B. SYNDICATE
A group of individuals getting together to finance a particular project, such as the building of a shopping center or
the purchase of a professional basketball franchise, is a syndicate. It may exist as a corporation or a partnership.
In some cases, the members merely own property jointly and have no legally recognized business arrangement.
C. JOINT STOCK COMPANY
A joint stock company is a hybrid of a partnership and a corporation. Its ownership is in shares of stock; its
management is by directors and officers; its property is usually held in the names of the members; its share–
holders have personal liability (but are not considered to be agents of one another); it is not usually treated as a
legal entity for purposes of a suit.
936 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
TEACHING SUGGESTIONS
1. Ask students what sort of business organization they would use if they went into business for themselves and the
reasons for their particular selections. Does any single form of business organization appear to be superior? What
sorts of questions would one want to ask before selecting a business organization?
2. In the absence of a written operating agreement, ask students what factors they would look for in determining the
interests in a dispute among the members of an LLC. Of course, the state LLC statute will most likely determine the
3. Inadequate financing can be the cause of the failure of any business. Have students determine for themselves how
much capital might actually be needed to start a small business by asking them to project a budget covering the
expenses. Initial expenses may include down payments for the purchase or lease of property; amounts to buy or lease
furniture, fixtures, machinery, equipment, and inventory; amounts to pay for the installation of telephones, utilities,
4. After students have begun to realize what it can cost to start a business and what the rights and liabilities are of
the people who start it, ask them under what circumstances a lack of capital might be desirable (or at least not a major
obstacle) in beginning a business. A better mousetrap, more efficiency, creative marketing, and hard work have served
as a springboard for many successful enterprises.
Cyberlaw Link
Should online businesses adopt a limited liability form of business organization? Why or why not? Which form of
business organization would be best for a business that transacts deals only online?
DISCUSSION QUESTIONS
1. Why are LLCs and partnerships attractive to businesspersons? For many businesspersons, these business forms
2. Why might the members of an LLC prefer to put the terms of their operating agreement in writing? Generally, LLC
3. What is the difference between an LLC and a limited liability partnership (LLP)? An LLP is similar to an LLC. The
4. Should fraud be required to pierce the veil of an LLC? Probably not. A showing of fraud or an intent to defraud is not
5. In some circumstances, the principles of partnership law may be applied to a limited liability company. Should the
principles of partnership law apply to other forms of business entities? Reasons to apply these principles to other entities in-
6. What is a joint venture? A joint venture is created when two or more persons or entities combine their interests in a
7. What is a syndicate? A syndicate is created when a group of individuals get together to finance a particular project
8. Discuss the principal characteristics of a joint stock company and a business trust. A joint stock company has many of
the characteristics of a corporation in that (1) its ownership is represented by transferable shares of stock, (2) it is usually
managed by directors or officers of the company or association, and (3) it can have perpetual existence. Yet a joint stock
company is usually treated like a partnership because it is formed by agreement (not statute). Moreover, the company’s
9. When might individuals choose to do business as a cooperative? Because a cooperative is organized to provide an
938 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
ACTIVITY AND RESEARCH ASSIGNMENTS
1. Experts predict that limited liability companies (LLCs) will replace both corporations and partnerships for most small
businesses as a result of Internal Revenue Service (IRS) regulations. The regulations allow a small business that is not
incorporated to choose whether to be taxed as a corporation or a partnership by checking a box on an IRS form. Ask students to
find and take a look at these regulations. Are there any restrictions? Why will these regulations effect such a change?
3. Ask students to research their state’s statutes and case law on any of the forms of business organization discussed in this
chapter.
4. Ask students about running businesses on the Internet. Is it easier to start a business in “virtual” space than in “real”
space? Is it less (or more) expensive? What are the applicable laws? Perhaps most important from a business person’s
perspective, is it possible to turn a profit? How? Are there different considerations for choosing an organizational form for
doing business on the Net than there are for doing business elsewhere? If so, what are they?
EXPLANATIONS OF SELECTED FOOTNOTES IN THE TEXT
Footnote 4: Clifford Kuhn, Jr., and Joseph Tumminelli formed Touch of Class Limousine Service under the New
Jersey Limited Liability Company Act in 1999. They did not sign a written operating agreement, but orally agreed that Kuhn
would provide the capital and customers, and Tumminelli would operate the company day-to-day. Tumminelli embezzled
$283,000 from the company after cashing customers’ checks at Quick Cash, Inc. Kuhn filed a suit in a New Jersey state court
against Tumminelli and others to recover the funds. The court ordered Tumminelli to pay Kuhn and to transfer his interest in
Touch of Class to Kuhn, but issued a summary judgment in favor of the others. Kuhn appealed. In Kuhn v. Tumminelli, a state
When indorsing each check, Tumminelli signed only his name and did not indicate that he was indorsing the check on
behalf of the LLC. Should Quick Cash have been alerted that something was wrong by this indorsement? The court said no. A
New Jersey state statute “provides in part that if a person acting, or purporting to act, as a representative signs an instrument
by signing either the name of the represented person or the name of the signer, the represented person is bound by the
signature to the same extent the represented person would be bound if the signature were on a simple contract. In other
CHAPTER 38: LIMITED LIABILITY COMPANIES AND SPECIAL BUSINESS FORMS 939
words, if under the law of agency the represented person [here the LLC] would be bound by the act of the representative [here
Tumminelli] in signing either the name of the represented person or that of the representative, the signature is the authorized
signature of the represented person. By signing only his name, Tumminelli as the representative of the LLC also bound the LLC
and could receive payment on behalf of himself and the LLC.” Also, “because of Tumminelli’s high ranking position with the LLC,
if Quick Cash had asked Tumminelli to endorse the name of the LLC or state that he was signing on behalf of the LLC, Tumminelli
could have easily endorsed in this fashion and still have been able to convert the funds to his own purposes.”
Footnote 6: PGI, Inc., and Rathe Productions, Inc., provided services to the Smithsonian Institute for “America’s
Smithsonian Exposition,” a traveling museum. After a brief U.S. tour, the Smithsonian asked PGI and Rathe to study the
feasibility of touring an international show. PGI submitted the study with an invoice that included charges for the previous tour.
When payment was not forthcoming, Rathe negotiated with the Smithsonian and agreed to accept $250,000, but refused to
give PGI any of the money. PGI filed a suit in a Virginia state court against Rathe, alleging conversion. The court entered a
judgment in Rathe’s favor. PGI appealed. In PGI, Inc. v. Rathe Productions, Inc., the Virginia Supreme Court reversed and
remanded. “[A] joint venture exists where two or more parties enter into a special combination for the purpose of a specific
business undertaking, jointly seeking a profit, gain, or other benefit, without any actual partnership or corporate designation.”
Among other things, a letter about the tour from the Smithsonian had referred to PGI and Rathe as “‘PGI/Rathe,’ for a limited
purpose.” The letter was “signed ‘ACCEPTED AND AGREED’ by representatives of PGI and Rathe,” and the title of the study was
“A Joint Venture Report by Rathe/PGI.” Also, Rathe executed the settlement agreement on behalf of itself and PGI.
PGI sought, in part, punitive damages for Rathe’s withholding of the settlement money. What is the theory on which
punitive damages are awarded? According to the court, “[t]he theory upon which exemplary, punitive, or vindictive damages,
sometimes called ‘smart money,’ are allowed is not so much as compensation for the plaintiff’s loss as to warn others, and to
punish the wrongdoer if he has acted wantonly, oppressively, recklessly, or with such malice as implies a spirit of mischief, or
criminal indifference to civil obligations. . . . Willful or wanton conduct imports knowledge and consciousness that injury will
result from the act done. The act done must be intended or it must involve a reckless disregard for the rights of another and will
probably result in an injury.” This issue was remanded for the lower court’s consideration.
ANSWERS TO ESSAY QUESTIONS IN
940 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
STUDY GUIDE TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
BY HOLLOWELL & MILLER
1. What are the advantages of doing business as a limited liability company? A limited liability company (LLC) is taxed as a
2. What are the principal characteristics of a cooperative? A cooperative is an association organized to provide an
economic service without profit to its members. An incorporated cooperative is subject to state laws governing nonprofit
corporations. Unincorporated cooperatives are often treated like partnerships. Cooperatives are often exempt from certain
federal laws because of their special status.
REVIEWING—
LIMITED LIABILITY COMPANIES
AND SPECIAL BUSINESS FORMS
A bridge on a prominent public roadway in the city of Papagos, Arizona, was deteriorating and in need of repair.
The city posted notices seeking proposals for an artistic bridge design and reconstruction. Davidson Masonry LLC,
owned and managed by Carl Davidson and his wife, Marilyn Rowe, decided to submit a bid for a decorative concrete
project that incorporated artistic metalwork. They contacted Shana Lafayette, a local sculptor who specialized in large-
scale metal designs, to help them design the bridge. The city selected their bridge design and awarded them the
contract for a commission of $184,000. Davidson Masonry and Lafayette then entered into an agreement to work
1. Would Davidson Masonry LLC automatically be taxed as a partnership or a corporation? This limited liability
company (LLC) would be taxed as a partnership unless it opted to be taxed as a corporation. With a few exceptions, any
LLC with at least two members can choose whether to be taxed as a partnership or a corporation. (A one-member LLC
is taxed as a sole proprietorship unless it chooses to be taxed as a corporation.) If a firm prefers to be taxed as a
2. Is Davidson Masonry LLC member managed or manager managed? The LLC in this problem is a member-managed
3. When Davidson Masonry and Lafayette entered into an agreement to work together, what kind of special business
form was created? Explain. These parties formed a joint venture. In a joint venture, two or more persons or entities
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 that LLCs are used, the more they will gradually
become increasingly distinct from partnerships. Blanket application of partnership law to LLCs would stifle their
development.
942 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
ANSWERS TO QUESTIONS—
SPECIAL CASE ANALYSIS
Case No. 38.2
ORX Resources, Inc. v. MBW Exploration, LLC
Court of Appeals of Louisiana, 2010.
32 So.3d 931.
(a) Issue: What was the main issue in this case? The issue in this case was whether Louisiana law allowed the court to
“pierce the veil” of the debtor LLC and hold the single shareholder–member of the LLC personally liable for the LLC’s
debt to ORX.
(b) Rule of Law: What rule of law did the court apply? According to the court, Louisiana statutory law provides that
the veil of an LLC can be pierced “when the situation so warrants.” The court went on to say that “piercing the veil of
an LLC is justified to prevent the use of the LLC form to defraud creditors.” So the rule of law in this instance was that
the court could pierce the veil of Washauer’s company, MBW Exploration, LLC, if the situation warranted such action,
and such action was warranted if Washauer was using the LLC merely to defraud creditors. Specifically, the court
(c) Applying the Rule of Law: Describe how the court applied the rule of law to the facts of this case. Applying the
rule of law to MBW’s situation, the court found that piercing the veil of MBW was warranted in this situation.
Washauer had used MBW merely as a “shell” to avoid paying a legitimate debt of the LLC. He had commingled the
LLC’s funds with his own personal funds and a separate company of Washauer’s. The commingling occurred because
MBW was undercapitalized and did not have a separate bank account to transact its own affairs. Furthermore, MBW
began contracting with ORX before it was recognized as an LLC 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