Agency, Partnerships, and Corporations
Overview
This domain covers how businesses act through agents and how the major entity forms allocate liability and control. Expect questions on authority, fiduciary duties, partner liability, corporate formation, and piercing the veil.
Agency
An agency relationship arises when a principal manifests assent that an agent act on the principal's behalf and subject to control. Authority may be actual (express or implied), apparent (a third party reasonably relies on the principal's manifestations), or conferred by ratification. Agents owe fiduciary duties of loyalty, care, and obedience; principals owe compensation and indemnity.
A disclosed principal is bound by an authorized contract; an undisclosed principal may also be bound, and the agent may be personally liable. Under respondeat superior, a principal is liable for torts the agent commits within the scope of employment, but generally not for independent contractors.
Partnerships
A general partnership is an association of two or more persons carrying on a business for profit; under the UPA, absent an agreement, profits and losses are shared equally, ordinary matters are decided by majority, and fundamental changes require unanimity. Partners are personally liable for partnership obligations and owe each other fiduciary duties. LLPs and LPs limit liability for some partners.
Corporations
Formation requires articles of incorporation filed with the state; the board manages the business, officers run daily operations, and shareholders elect directors and vote on fundamental changes. Piercing the veil is an equitable remedy used where the corporation is an alter ego, undercapitalized, or used to commit fraud. Securities offerings must be registered under the 1933 Act absent an exemption; the 1934 Act imposes periodic reporting, and Rule 10b-5 prohibits insider trading.
Worked example
A company's purchasing agent, without express authority, orders $50,000 of supplies from a regular vendor who has dealt with the company for years and always seen such orders honored. The company is bound by apparent authority because the vendor reasonably relied on the principal's manifestations; the company's remedy is against the agent for exceeding actual authority.
Traps
- Apparent authority comes from the principal's conduct, not the agent's.
- Partners are personally liable; shareholders generally are not.
- Piercing the veil is rare and requires more than a small or informal business.
- Ratification requires knowledge of the material facts.