BUS 3301 Unit VII Q11

BUS 3301, Business Law 1

Course Learning Outcomes for Unit VII Upon completion of this unit, students should be able to:

8. Differentiate the characteristics of the forms of business ownership. 8.1 Recognize agency as the common characteristic of all businesses. 8.2 Identify the attributes that account for the differences in the forms of business.

Required Unit Resources Chapter 20: Agency and Liability to Third Parties Chapter 21: Forms of Business Organization In order to access the following resources, click the links below. Burton, H. A. (2019, February). Current developments in partners and partnerships. Tax Adviser, 50(2), 1–18.

https://link.gale.com/apps/doc/A574696563/ITBC?u=oran95108&sid=ITBC&xid=bcc1831b Fay, J. R. (1998). What form of ownership is best? The CPA Journal, 68(8), 46.

https://link.gale.com/apps/doc/A21085360/ITBC?u=oran95108&sid=ITBC&xid=022d0c8d Unit Lesson

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

UNIT VII STUDY GUIDE Agency and Forms of Business

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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

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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. Learning Activities (Nongraded) Nongraded Learning Activities are provided to aid students in their course of study. You do not have to submit them. If you have questions, contact your instructor for further guidance and information.

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View the Unit VII Glossary to review key terms presented in this unit. Alternate format for Unit VII Glossary

Reference Photogl. (n.d.). Books on library shelves (ID 20785201) [Photograph]. Dreamstime.

https://www.dreamstime.com/stock-image-books-library-shelves-image20785201

(Photogl, n.d.)