Chapter 16: Agency Law
Creating an Agency Relationship To create an agency relationship, there must be: (1) A principal (2) an
Agent (3) who mutually consent that the agent will act on behalf of the principal and (4) be subject to the
principals control (
General Partnerships A Partnership is an unincorporated association of two or more co-owners who carry
on a business for profit. Each co-owner is called a general partner.
Taxes Partnerships are not a taxable entity, which means that profits flow through
Principal or Agent Can No Longer Perform Required Duties If either agent or principal cannot
perform the duties required under the agency agreement, the agreement terminates.
If either the agent or the principal fails to obtain (or keep) a license neces
Duties of Agents to Principals Agents owe a fiduciary duty to their principals. There are four elements to this
Duty of Loyalty An agent has a fiduciary duty to act loyally for the principals benefit in all matters
connected with the agency relation
Duration An LLC can continue in operation even after a member withdraws.
Going Public Once an LLC goes public, it loses its favorable tax status and is taxed as a corporation,
not a partnership. LLCs usually change into corporations once they go public.
Agents Liability For Contracts The agents liability on a contract depends upon how much the third party
knows about the principal. Disclosure is the agents best protection against liability.
Fully Disclosed Principal An agent is not liable for any contrac
1. Competition with the Principal Agents are not allowed to compete with their principal in any matter
within the scope of the agency business.
2. Conflict of Interest Between Two Principals Unless otherwise agreed, an agent may not act for two
Liability The agency relationship dramatically increases the risk of legal liability to third parties. A principal
may be liable in tort for any harm the agent causes and also liable in contract for agreements that the agent
signs. The principal may be li
Limited Liability Companies (LLC) An LLC offers the limited liability of a corporation and the tax status of
Limited Liability Members are not personally liable for the debts of the company. They risk only
their investment, as if they were
Terminating An Agency Relationship Either the agent or the principal can terminate the agency relationship
at any time. In addition, the relationship terminates automatically if the principal or agent no longer can perform
their required duties or a chang
Scope of Employment Principals are liable only for torts that an employee commits within the scope
of employment. An employee is acting within the scope of employment if the act:
Is one that employees are generally responsible for.
Takes place during
S Corporations (Small Corporations) These businesses often incur financial losses early so
congress offered tax breaks to encourage entrepreneurship. Shareholders of S Corps have both
the limited liability of a corporation and the tax status of a partners
Limited Liability Partnerships (LLP) In an LLP, the partners are not liable for the debts of the partnership.
They are naturally, liable for their own misdeeds, just as if they were a member of an LLC or a shareholder of a
corporation. They must file a st
Principals Remedies When the Agent Breaches a Duty: There are three potential remedies when an agent
breaches their duty:
1. The principal can recover from the agent any damages the breach has caused.
2. If an agent breaches the duty of loyalty, he must t
Principals Liability For Torts An employer is liable for a tort committed by its employee acting within the
scope of employment or acting with authority. This is called respondeat superior, which means, let the master
answer. The employer (principal) is l