Business Associations: Formation/Liability Flashcards

Two entrepreneurs in Hartford begin operating a food truck business as a general partnership but never file any formation documents with the state. They agree to split profits and losses equally. One partner, while negligently operating the food truck, causes an accident resulting in significant damages to another vehicle. Who is liable for the damages?

Answer: Both partners are jointly and severally liable for the full amount of the damages.

In a Connecticut general partnership, partners are jointly and severally liable for the tortious acts of any partner acting in the ordinary course of partnership business. This means the injured party can sue either partner individually for the full amount of the damages, or both partners together. The partnership itself is also liable. There is no liability shield for general partners' personal assets.

A promoter signs a 5-year lease for office space in New Haven on behalf of 'Future Tech, Inc.,' a corporation that has not yet been formed. The lease is signed by the promoter as 'Jane Doe, President of Future Tech, Inc.' After the corporation is properly formed, the board of directors formally adopts the lease at its first meeting. If the corporation later defaults on the lease, who is the landlord's primary party to sue for breach of contract?

Answer: The corporation, Future Tech, Inc., because it adopted the contract.

Generally, a promoter is personally liable on pre-incorporation contracts. However, once the corporation is formed and it adopts the contract, the corporation becomes liable. Adoption can be express (like a board resolution) or implied (by knowingly accepting the benefits of the contract). While the promoter may remain liable unless a novation occurs (an agreement between all parties to release the promoter), the corporation that adopted the contract is the proper defendant. In this scenario, the corporation's express adoption makes it liable on the lease.

Under Connecticut law, which of the following is NOT required to pierce the corporate veil and hold a shareholder personally liable for a corporation's debt?

Answer: The shareholder's failure to observe corporate formalities, such as holding annual meetings.

Connecticut General Statutes § 33-673b(d) explicitly states that the 'failure of a domestic entity to observe formalities relating to the exercise of its powers or the management of its activities and affairs is not grounds for imposing personal liability on an interest holder'. The other three elements—(1) complete domination and control, (2) use of that control to commit a fraud, intentional wrong, or other unlawful act, and (3) proximate causation of the injury—are the required elements under the statute to pierce the corporate veil.

An individual attempted to form a limited liability company (LLC) in Connecticut by sending the certificate of organization to the Secretary of State. Due to a clerical error at the post office, the document was never delivered or filed. Believing the LLC was formed, the individual entered into a contract with a supplier on behalf of the purported LLC. If a dispute arises, which legal doctrine might protect the individual from personal liability against the supplier who believed they were dealing with an LLC?

Answer: Corporation by estoppel

The doctrine of corporation by estoppel prevents a third party who has dealt with an entity as if it were a corporation (or LLC) from later denying its existence to hold the owners personally liable. Since the supplier contracted with the business believing it to be an LLC, the supplier may be 'estopped' from arguing otherwise. A 'de jure' corporation is one that has fully complied with all statutory requirements. 'De facto' corporation status might also apply if there was a good faith attempt to incorporate and an actual use of corporate power, but estoppel is the more precise doctrine applicable to the third party's claim.

Three friends decide to form a Connecticut Limited Liability Company (LLC) for their new consulting business. To properly form the LLC, what is the essential document they must file with the Connecticut Secretary of the State?

Answer: The Certificate of Organization

Under the Connecticut Uniform Limited Liability Company Act, an LLC is formed by filing a Certificate of Organization with the Secretary of the State. An operating agreement governs the internal affairs of the LLC but is not required to be filed. Articles of Incorporation are for forming a corporation, and a Statement of Partnership Authority is for partnerships.

Which of the following business structures provides limited liability to ALL of its owners by default, protecting their personal assets from the business's debts and obligations?

Answer: Limited Liability Partnership (LLP)

A Limited Liability Partnership (LLP) provides all of its partners with a shield from personal liability for the debts and obligations of the partnership, including the negligence or malpractice of other partners. In a general partnership and sole proprietorship, owners have unlimited personal liability. In a limited partnership, only the limited partners have limited liability; the general partner(s) have unlimited personal liability.