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Legal Issues - Business Law

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Legal Issue

A paper submitted in the course of

Business Law BUS/415

University of Phoenix

March 16, 2008


Agency Law in a Business Environment

A principal is the party who employs another person to act on his or her behalf; an agent is a party who agrees to act on behalf of another. In order for the agent to successfully fulfill their tasks for their principal’s they have duties that they are expected to fulfill. The duty to obey instructions, to act with skill, loyalty, protects information, to notify and give information and to be accountable for their actions. An agency is the principal-agent relationship, which are formed by the mutual consent of a principal (employer) and an agent (employee). Agency Law is a large body of common law, which is a mixture of contract law and tort law that governs the agency (Cheesemen, 2004). This law separates and regulates the relationships between agents and principals, agents and third parties and principals and third parties. An agency law exists because it is impossible for one person to travel everywhere to negotiate all transactions to maintain and grow the business. With the many travels there are relationships that are established and maintained.


There are two types of relationships that exists in a business environment; Employment Relationships that are initiated with the hiring of an employee or a contractor. The other relationships are Agency Relationships that make the contracts binding between the principal and the third party. Three kinds of Employment Relationships are used in a business environment; Employer-Employee Relationships, which initiate when an employer hires an employee to perform physical duties that are assigned. This gives the right to control the physical conduct of the employee to the employer. The employee can only become an agent when the employer empowers him or her to enter into contracts on the employer’s behalf. Principal-Agent Relationships are formed when an employer hires an employee and gives that employee authority to act and sign contracts on his or her behalf. This means that the employee can only have authority to enter into contracts that are based on their particular position and makes the employee the agent of his employer. Principal-Independent Contractor Relationships are formed when the business hires outside contractors to perform certain tasks. The business has no control over the details of the independent contractor’s conduct. These outsiders are known as independent contractors unless they are known as a professional, such as a doctor or lawyer, then they are considered a professional agent (Cheeseman, 2004).

Agency Relationships are contracts that are binding between the principal and the third party. There are four types of agencies; express, implied, apparent, and agency by ratification. Express agency is the most common form and gives the agent authority to contract or act on the principal’s behalf. Both parties expressly agreed to enter into an agency agreement with each other. Implied agency is created when the principal and the agent do not agree to create an agency between them. The authority is implied from the conduct of the parties, their actions are bound to the contract. Apparent Agency is created when a principal creates the appearance of an agency that does not exist. The authority is created when the principal leads a third party into believing that the agent has authority. The last relationship is known as agency by ratification this happens when a person misrepresents themselves as another’s agent or the principal accepts an unauthorized act (Cheeseman, 2004). Relationships are set up to protect the business organization, regardless of size and type.

Sole Proprietorship

Sole proprietorships are the simplest form of business organization (Cheesman, 2004). In a sole proprietorship one single individual owns and operates the business and is not considered and employee of the business, rather a self-employed individual. Sole proprietorships are the most common form of business organization in the United States (Cheeseman, 2004). A sole proprietorship is an inexpensive way to become the owner of a small business. In a sole proprietorship the owner makes all decisions involving the business and has access to all profits made by the business. A major downside to sole proprietorships is the personal liability, which can be unlimited in some cases. For tax purposes a sole proprietor and the owner are treated as one.

General Partnership

A business must meet four criteria to qualify as a general partnership under the Uniform Partnership Act (UPA) (Cheeseman, 2004). The first requirement is the business is owned and operated by two or more individuals. The Second requirement is that the business must continue over a period of time. A single transaction is not acceptable and would not qualify as a general partnership. The third requirement is co-ownership; the partners must share the business’s profits and share management responsibility (Cheeseman, 2004). The last requirement is the business is profit motive. In some cases businesses will not make a profit; however, having a profit motive will qualify them as a partnership.

Limited partnership

Limited partnerships are made up of two types of partners. The first is a general partner; the general partner invests capital, manages the business, and is liable for partnership debts (Cheeseman, 2004). The second is a limited partner; the limited partner invests capital but does not participate in management and is not liable for the partnerships debts (Cheeseman, 2004). Limited partnerships are common when individuals are investing in real estate. A limited partnership has not limits to the number of limited or general partners; however, there must be a minimum of one limited and one general partner. A person may also be a limited and general partner in the same limited partnership (Cheeseman, 2004). Limited liability partnerships (LLPs) are mainly used by business professional like lawyers, physicians and accountants. The limited liability partnerships are a new form of partnerships which limit the liability of the partners (Cheeseman, 2004).

C Corporation

The main advantage to a regular corporation is that the personal liability is limited and protects the individual from being personally



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