9: Business organizations: Agency and partnership

Question	Answer
Agency is a	Agency is a relationship between the principal and its agent, according to which the principal has authorized the agent to enter into contracts with third parties in the principal’s name
In a typical agency relationship, there are two distinct	contracts: • the contract the principal has with the agent (the agency contract) • the contract the principal has with a third party (made by the agent on behalf of the principal)
The agent who makes the contract is not a	party to the contract. There is no privity of contract between the agent and the third party.
There are four main ways of creating an agency relationship:	by contract, by estoppel, by ratification, and by necessity.
An express agency agreement is an agreement where	there is a definite arrangement: a contract, either oral or in writing, that gives authority to the agent. The agent is said to have express or actual authority to bind the principal. An agent may also have implied authority
Apparent authority occurs when	the agent has no real authority but the circumstances convey the impression to the third party that the agent has some authority, usually by conduct, a representation, or acquiescence
Estoppel is a bar or a barrier that prevents a person from	denying the truth of certain facts when this person, by words or conduct, has led another person to believe that certain facts are true, and this has led the other person to act or rely upon these facts.
Upon ratification, a contract is made	retroactively between the principal and the third party, and the contract between the agent and the third party is dissolved.
For ratification to be effective, there must be a	pre-existing agent-principal relationship
Agency by necessity occurs when	the agent enters into a contract with a third party for the benefit of the principal, without the principal’s authority, in order to limit the losses that the principal would suffer if the agent did not intervene.
An agency can be terminated at	at a specified time, upon completion of a particular project, upon notice given by either party, or for various other reasons, such as death or insanity of the principal.
Duties of the agent	Agent owes duty of care Agent must perform as required by principal Agents cannot delegate responsibility Agent must turn money over to principal, must account for funds Agent must disclose information
Rights of the third party:	• Where agent makes it clear she is acting as agent for undisclosed principal, the third party cannot sue or be sued by the agent. • Where the agent acts as principal, only the agent can sue or be sued by the third party • Where agent acts ambiguously as to whether principal or agent, 3rd party can also be sued by either • Apparent authority doesn’t apply where principal undisclosed • Undisclosed principal cannot ratify • 3rd party can repudiate when identity of undisclosed principal important • 3rd party can sue agent for unauthorized acts
some advantages to a sole proprietorship	including ease of formation and low start-up costs. The sole proprietor pays taxes as an individual, and all profits belong to the owner and all losses are deductible
disadvantage of the sole proprietorship;	The sole proprietorship has no separate legal identity. This is the greatest single disadvantage of the sole proprietorship; the liability of the sole proprietor is unlimited
A partnership is	the relation between parties who carry on business in common with the intention of making a profit
A partnership does not have a	separate legal identity from the partners who make up the partnership. The partners are the partnership and are personally liable for the debts and actions of the partnership.
Partnerships can inadvertently be formed by estoppel,	even if the parties were not carrying on business together, if others are led to believe, by words or conduct, that the parties are a partnership.
When partnerships are presumed:	• Joint contribution of capital to establish a business • Intention to share expenses, profits or losses • Joint participation in the management of a business
A partner is both the	principal and the agent of the other partners
each partner is liable for	the totality of the debts of the partnership
because the partnership does not have a separate legal identity from the partners, the	personal assets of each partner are available to satisfy a debt incurred by one or all of the partners in the course of the partnership business.
New partners are not liable for any debts incurred	before they became partners
Retiring partners remain liable for	debts incurred while they were a partner under the doctrine of apparent authority, and run the risk of continuing liability if a person relies on the impression that they are still a partner. Retiring partners should therefore publish an announcement in the government’s official journal, remove their names from all stationery, and inform all parties with whom the partnership had business dealings that they are no longer members of the partnership.
Partners are liable	• Partners as agents • Vicarious liability – Partners liable for wrongful acts of employees • Partners liable for breach of trust • Partners liable for each other’s acts • 3rd party can collect from any partner regardless of agreement • All personal assets at risk • Retiring partner remains responsible
Partnership agreements only allow	partners to vary the terms that govern their relationship with each other. They do not allow the partners to vary their responsibility to third parties
Upon termination of a partnership, assets will be divided as set out in the partnership agreement. If the agreement does not specify, assets of the firm must be applied in the following manner as per the Partnership Act:	1. Partnership debts 2. Pay advances made by partners 3. Capital accounts 4. Any remaining profits must be divided in the proportion in which profits are divisible
A limited partnership is an arrangement used for allowing certain partners to limit their liability.	Limited partners are only liable for their contribution to capital, and they cannot participate in the management of the partnership without losing the benefit of the limitation on their liability. Limited partnerships tend to be formed for tax purposes by people who want to contribute money or property without needing to take an active role in the partnership.
Limited liability partnerships (LLPs) are	an LLP must be formed in writing, it must be registered, and the partnership name must state that it is an LLP. LLPs are only allowed for certain professions, such as lawyers and accountants. LLPs allow a partner to avoid liability for the negligence of another partner. Partners are still liable for their own negligence and that of anyone they supervise. Forming an LLP does not eliminate liability for other torts and contractual obligations, including debts of the partnership. With an LLP, the partnership remains liable for negligent acts. So a partner could lose his or her share of the partnership assets, but the limited liability partners who were not negligent do not have their own personal assets in jeopardy, as would happen in the usual partnership.

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9: Business organizations: Agency and partnership

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