Agency For centuries, the common law has recognized that a person can employ another person to act
on their behalf. This arrangement is known as agency, and the person who employs another person is
called the principal, and the person who is employed to act on behalf of the principal is called the agent.
For example, if Ben asks Jason to go to the cleaners, pick up his cleaning, and charge the cost to his
account at the cleaners, and if Jason agrees, an agency is created with Ben as the principal and Jason as
the agent. In that agency, Jason has the authority to pick up Ben’s cleaning and charge the cost to Ben’s
account at the cleaners. While an individual, as principal, can employ an agent to act on their behalf to
do anything that the principal could do themselves, the most important impact of agency is in business.
In a small business, the owner can do whatever needs to be done to operate that business successfully,
but if there is more to do in that small business than the owner can accomplish on their own, the owner
has the option of hiring someone to help do the things that need to be done. In hiring someone to help
in the business, the owner is authorizing that
person to do some of the things that the owner could do themselves; that is, the owner is capable of
doing what they are employing an agent and authorizing that agent to do. In a larger business organized
to be a legal entity that is separate from the people who own the business, the use of agents becomes a
necessity rather than the convenience that agents bring to a small business. That is because a business
that is organized so that it is a legal entity separate from its owners literally cannot do anything itself; it
must act through people who are the agents of the business. For example, we will discuss corporations
beginning in this unit, and a corporation is a legal entity that is separate from its owners. If there is a
corporation that is in the business of selling computers, for example, the corporation, though it is
considered to be a legal entity that can own things and that can be legally responsible if anyone suffers
any damage because of the corporation, cannot physically call potential customers or visit with potential
customers or talk with potential customers who come into a store operated by the corporation. All of
those activities and every other physical activity that the corporation has to carry on can only be done
through people who are hired to act as agents for the corporation. In fact, the corporation itself cannot
even hire the people who hire the other people that the corporation needs to carry on its business.
Without the concept of agency, where someone (a corporation) employees someone else (an agent or,
in the case of a corporation, an employee) to do something, corporations and other businesses that are
considered to be separate legal entities could not exist. Small businesses that are not organized to be
separate legal entities would be constrained by the limited ability of the owner to do everything that
needed to be done in the business.
Creation of an Agency In most situations, an agency is created by the express agreement, either oral or
in writing, of the principal and the agent. In other words, a person who will be the principal says to the
person who will be the agent, “I want you to go to the cleaners, pick up my cleaning, and charge the cost
to my account at the cleaners.” If the person to whom that statement is addressed says, “Okay,” an
express agency is created, and the agent has the express authority to carry out the activities that the
principal directed. There are less common ways that agencies can be created. An agency may be implied
from the actions of the principal and agent, even if no words are spoken. If a principal does or says
certain things to a third party that indicates that a certain person is the principal’s agent, an apparent
agency may be created even if the principal has not communicated with the agent. If someone who has
not been appointed as an agent by any of these circumstances does something on behalf of someone
else, and the person on whose behalf the action was taken accepted the benefits of the action, an
agency by ratification has been created. Duties and Rights Involved in an Agency When an agency has
been created, a contract is created, and both the principal and the agent have certain duties and certain
rights. An agent has a right to expect that the principal will pay the agent whatever compensation is
agreed upon at the time the agency was created and that the principal will reimburse the agent for
expenses incurred, if reimbursement is part of the agency agreement. The agent also has a right to
expect that the principal will cooperate with the agent in accomplishing the purpose of the agency. For
example, if the principal employs an agent to pick up the principal’s cleaning and charge the cost of the
cleaning to the principal’s account at the cleaners, the agent has a right to expect that the principal
actually has an account at the cleaners. If the principal has employed the agent to do certain work at a
specific place, the principal has a duty to provide a safe place for the agent to do that work. The agent
also owes the principal certain duties. The agent has to be loyal to the principal, which means that the
agent cannot take for themselves opportunities that belong to the principal. For example, if a principal
employs an agent to find a piece of real estate that satisfies specific requirements, and the agent finds a
piece of real estate that satisfies those requirements, the agent cannot then buy that real estate for his
own benefit. An agent also has an obligation to obey the legal directions of the principal and to perform
the actions necessary to carry out the agency.
If either the principal or the agent fails to fulfill these duties or purposefully fails to accomplish the
purpose of the agency, the party who is damaged by the failure has a range of remedies against the
other party including recovery of any damages suffered and cancellation of the agency contract. Forms
of Doing Business A business can be conducted in a variety of forms, and, because each form of doing
business has its own advantages and disadvantages, the form of business that is the best choice
depends on what the business is intended to accomplish and the specific circumstances and needs of
the business. Sole Proprietorship The simplest form of business is the sole proprietorship, which consists
of one owner who may or may not have employees who are agents of the business. The advantages of a
sole proprietorship are that it is easy to establish since there are few formal requirements involved in
establishing the business, and they are easy to operate since all business decisions can be made by the
sole proprietor. However, there are several disadvantages of sole proprietorships that make them a
poor choice in many situations. Since there is legally no difference between the business and the sole
proprietor who operates the business, the sole proprietor has unlimited liability for the legal obligations
incurred by the business. Also, since there can be only one owner of a sole proprietorship business, the
owner cannot raise capital to operate or expand the business by selling interests in the business. Finally,
continuity of the business is an issue in a sole proprietorship; that is, the individual sole proprietor
cannot actually sell the business without the sole proprietorship ending and a new business in the same
form or a different form beginning. That also means that when the sole proprietor dies, the business
dies with them. The assets of the business can be inherited by someone, but whoever inherits those
assets will have to form a new business to carry on the original business.
Partnership Another form of business is a partnership, which is created by two or more entities,
individuals, or other business organizations that agree to carry on a business with an intention to earn a
profit. A partnership has an advantage over a sole proprietorship because a partnership can take in
more partners to raise capital for the operation or expansion of the partnership business, and partners
(owners) may be able to sell their interests in the partnership if they do not wish to continue in the
partnership business. However, partnerships carry the same disadvantage that a sole proprietorship
carries—unlimited liability. Each partner in a partnership is liable for all of the legal obligations incurred
by the partnership. There is a variation available in partnerships that addresses the disadvantage of
unlimited liability. A limited partnership is composed of at least one general partner who has unlimited
liability for partnership legal obligations and at least one limited partner who has limited liability. A
limited partner is not liable for the legal obligations of the partnership and has at risk only the amount of
investment that they made to acquire their interest in the partnership. There is a trade-off for limited
partners; a limited partner cannot be involved in the active management of the partnership business.
Corporations The third traditional form of doing business is the corporation. A corporation has to be
formally created, and, once created, the corporation is a legal entity that is separate from the people
who own the corporation and are called stockholders. The status of the corporation as a separate legal
entity has advantages and disadvantages for stockholders. A corporation is liable for its legal obligations,
and its stockholders are not liable; in other words, stockholders have limited liability for the legal
obligations of the corporation. If a corporation fails, stockholders may lose their investment in the
corporation, but they will not be liable for the debt of the corporation.
As a separate legal entity, the corporation pays its own income taxes. However, corporations do present
a tax disadvantage for stockholders that has come to be known as double taxation. When a corporation
is successful, it may pay some of its profits to its stockholders in the form of dividends. Dividends paid by
a corporation are not deductible as expenses of the corporation in computing the corporation’s income
taxes, so dividends paid by a corporation to stockholders are essentially paid in after-tax dollars by the
corporation. However, when a stockholder receives a payment of dividends from a corporation, those
dividends are
taxable to the stockholder. The end result is that money paid by a corporation to stockholders as
dividends is taxed twice—once at the corporate level and once at the stockholder level. Agency is an
important part of any business, but the actual form that a business takes should be the result of careful
considerations of the advantages and disadvantages of each form of doing business.
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on their behalf. This arrangement is known as agency, and the person who employs another person is
called the principal, and the person who is employed to act on behalf of the principal is called the agent.
For example, if Ben asks Jason to go to the cleaners, pick up his cleaning, and charge the cost to his
account at the cleaners, and if Jason agrees, an agency is created with Ben as the principal and Jason as
the agent. In that agency, Jason has the authority to pick up Ben’s cleaning and charge the cost to Ben’s
account at the cleaners. While an individual, as principal, can employ an agent to act on their behalf to
do anything that the principal could do themselves, the most important impact of agency is in business.
In a small business, the owner can do whatever needs to be done to operate that business successfully,
but if there is more to do in that small business than the owner can accomplish on their own, the owner
has the option of hiring someone to help do the things that need to be done. In hiring someone to help
in the business, the owner is authorizing that
person to do some of the things that the owner could do themselves; that is, the owner is capable of
doing what they are employing an agent and authorizing that agent to do. In a larger business organized
to be a legal entity that is separate from the people who own the business, the use of agents becomes a
necessity rather than the convenience that agents bring to a small business. That is because a business
that is organized so that it is a legal entity separate from its owners literally cannot do anything itself; it
must act through people who are the agents of the business. For example, we will discuss corporations
beginning in this unit, and a corporation is a legal entity that is separate from its owners. If there is a
corporation that is in the business of selling computers, for example, the corporation, though it is
considered to be a legal entity that can own things and that can be legally responsible if anyone suffers
any damage because of the corporation, cannot physically call potential customers or visit with potential
customers or talk with potential customers who come into a store operated by the corporation. All of
those activities and every other physical activity that the corporation has to carry on can only be done
through people who are hired to act as agents for the corporation. In fact, the corporation itself cannot
even hire the people who hire the other people that the corporation needs to carry on its business.
Without the concept of agency, where someone (a corporation) employees someone else (an agent or,
in the case of a corporation, an employee) to do something, corporations and other businesses that are
considered to be separate legal entities could not exist. Small businesses that are not organized to be
separate legal entities would be constrained by the limited ability of the owner to do everything that
needed to be done in the business.
Creation of an Agency In most situations, an agency is created by the express agreement, either oral or
in writing, of the principal and the agent. In other words, a person who will be the principal says to the
person who will be the agent, “I want you to go to the cleaners, pick up my cleaning, and charge the cost
to my account at the cleaners.” If the person to whom that statement is addressed says, “Okay,” an
express agency is created, and the agent has the express authority to carry out the activities that the
principal directed. There are less common ways that agencies can be created. An agency may be implied
from the actions of the principal and agent, even if no words are spoken. If a principal does or says
certain things to a third party that indicates that a certain person is the principal’s agent, an apparent
agency may be created even if the principal has not communicated with the agent. If someone who has
not been appointed as an agent by any of these circumstances does something on behalf of someone
else, and the person on whose behalf the action was taken accepted the benefits of the action, an
agency by ratification has been created. Duties and Rights Involved in an Agency When an agency has
been created, a contract is created, and both the principal and the agent have certain duties and certain
rights. An agent has a right to expect that the principal will pay the agent whatever compensation is
agreed upon at the time the agency was created and that the principal will reimburse the agent for
expenses incurred, if reimbursement is part of the agency agreement. The agent also has a right to
expect that the principal will cooperate with the agent in accomplishing the purpose of the agency. For
example, if the principal employs an agent to pick up the principal’s cleaning and charge the cost of the
cleaning to the principal’s account at the cleaners, the agent has a right to expect that the principal
actually has an account at the cleaners. If the principal has employed the agent to do certain work at a
specific place, the principal has a duty to provide a safe place for the agent to do that work. The agent
also owes the principal certain duties. The agent has to be loyal to the principal, which means that the
agent cannot take for themselves opportunities that belong to the principal. For example, if a principal
employs an agent to find a piece of real estate that satisfies specific requirements, and the agent finds a
piece of real estate that satisfies those requirements, the agent cannot then buy that real estate for his
own benefit. An agent also has an obligation to obey the legal directions of the principal and to perform
the actions necessary to carry out the agency.
If either the principal or the agent fails to fulfill these duties or purposefully fails to accomplish the
purpose of the agency, the party who is damaged by the failure has a range of remedies against the
other party including recovery of any damages suffered and cancellation of the agency contract. Forms
of Doing Business A business can be conducted in a variety of forms, and, because each form of doing
business has its own advantages and disadvantages, the form of business that is the best choice
depends on what the business is intended to accomplish and the specific circumstances and needs of
the business. Sole Proprietorship The simplest form of business is the sole proprietorship, which consists
of one owner who may or may not have employees who are agents of the business. The advantages of a
sole proprietorship are that it is easy to establish since there are few formal requirements involved in
establishing the business, and they are easy to operate since all business decisions can be made by the
sole proprietor. However, there are several disadvantages of sole proprietorships that make them a
poor choice in many situations. Since there is legally no difference between the business and the sole
proprietor who operates the business, the sole proprietor has unlimited liability for the legal obligations
incurred by the business. Also, since there can be only one owner of a sole proprietorship business, the
owner cannot raise capital to operate or expand the business by selling interests in the business. Finally,
continuity of the business is an issue in a sole proprietorship; that is, the individual sole proprietor
cannot actually sell the business without the sole proprietorship ending and a new business in the same
form or a different form beginning. That also means that when the sole proprietor dies, the business
dies with them. The assets of the business can be inherited by someone, but whoever inherits those
assets will have to form a new business to carry on the original business.
Partnership Another form of business is a partnership, which is created by two or more entities,
individuals, or other business organizations that agree to carry on a business with an intention to earn a
profit. A partnership has an advantage over a sole proprietorship because a partnership can take in
more partners to raise capital for the operation or expansion of the partnership business, and partners
(owners) may be able to sell their interests in the partnership if they do not wish to continue in the
partnership business. However, partnerships carry the same disadvantage that a sole proprietorship
carries—unlimited liability. Each partner in a partnership is liable for all of the legal obligations incurred
by the partnership. There is a variation available in partnerships that addresses the disadvantage of
unlimited liability. A limited partnership is composed of at least one general partner who has unlimited
liability for partnership legal obligations and at least one limited partner who has limited liability. A
limited partner is not liable for the legal obligations of the partnership and has at risk only the amount of
investment that they made to acquire their interest in the partnership. There is a trade-off for limited
partners; a limited partner cannot be involved in the active management of the partnership business.
Corporations The third traditional form of doing business is the corporation. A corporation has to be
formally created, and, once created, the corporation is a legal entity that is separate from the people
who own the corporation and are called stockholders. The status of the corporation as a separate legal
entity has advantages and disadvantages for stockholders. A corporation is liable for its legal obligations,
and its stockholders are not liable; in other words, stockholders have limited liability for the legal
obligations of the corporation. If a corporation fails, stockholders may lose their investment in the
corporation, but they will not be liable for the debt of the corporation.
As a separate legal entity, the corporation pays its own income taxes. However, corporations do present
a tax disadvantage for stockholders that has come to be known as double taxation. When a corporation
is successful, it may pay some of its profits to its stockholders in the form of dividends. Dividends paid by
a corporation are not deductible as expenses of the corporation in computing the corporation’s income
taxes, so dividends paid by a corporation to stockholders are essentially paid in after-tax dollars by the
corporation. However, when a stockholder receives a payment of dividends from a corporation, those
dividends are
taxable to the stockholder. The end result is that money paid by a corporation to stockholders as
dividends is taxed twice—once at the corporate level and once at the stockholder level. Agency is an
important part of any business, but the actual form that a business takes should be the result of careful
considerations of the advantages and disadvantages of each form of doing business.
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