The Agency Relationship
- A sole proprietorship is an unincorporated business owned by a single person. It may or may not have employee-agents.
- An agency relationship comes into existence when there is a manifestation by the principal of consent that the agent act on his behalf and subject to his control, and the agent consents to so act. The requisite manifestation of consent can be implied from the circumstances, which makes it possible for the parties to have formed a legally effective agency relationship without realizing they had done so. (i.e. Send a buddy to get you a soda from the vending machine, you may have retained an agent).
- (1). Formalities of Creation: Common law- No formalities associated with the creation of a sole proprietorship. As a result, the sole proprietorship is one of the two default types of business organizations, in the sense that it can be created without any formal action, and can be created without the owner even being aware that he has done so. (The other is a General Partnership).
Exception- In some states, however, the proprietor must register under a “Fictitious Business Name” statute in order to conduct business under a name other than the proprietor’s own. In addition, if the proprietor hires an agent, some agency relationships are subject to additional statutory requirements, such that the relationship be manifested by a writing. These requirements vary considerably though from state to state and occupation to occupation.
- (2). Unity of Ownership and Control: As a legal matter, the proprietor both owns and controls the sole proprietorship. This is true even if the proprietor hires an agent to whom substantial responsibility is delegated. The definition of the agency relationship requires the principal have the right to control the agent’s conduct. This is supplemented in agency law by imposing fiduciary duties on the agent. (However, proprietors will just fire a bad agent instead of suing them on breach).
- (3). Legal Personality: A sole proprietorship has no legal existence or identity separate from that of its owner. Although the owner may maintain some degree of separation between his personal life and the business, there is no legal distinction between the owner’s personal assets and the business’ assets.
- (4). Duration: A sole proprietorship has an indefinite duration, but not a perpetual one. A sole proprietorship’s life will end with that of its owner.
Common Law- An agent relationship was “at will.”
Modern Law- The principals right to unilaterally terminate the relationship by firing the agent has been limited.
- (5). Free Transferability: The sole proprietor is always free to sell the business to another party. If the proprietor has hired an agent, a sale may terminate the agency relationship, depending on the nature of the agreement of the parties, but the agent has no right to block the sale.
- (6). Unlimited Liability: The sole proprietorship’s lack of a separate legal personality results in unlimited personal liability on the proprietor’s part for the business’ obligations. Agency law imposes liability on a principal for certain torts committed by his agent and for certain contract entered into by the agent on the principal’s behalf.
II. The General Partnership
- A partnership is an association of two or more persons to carry on as co-owners a business for profit. Modern partnership law is a mixture of common law decisions and statutory rules. Almost all states adopted the Uniform Partnership Act (UPA) of 1914. In recent years, a growing number of states have adopted the Uniform Partnership Act of 1997.
- (1). Formalities of Creation: Under both the UPA (1914) and UPA (1997), forming a partnership involves none of the formalities required in the corporate context. All that is required is an agreement, explicit or implicit, between two or more people to act as co-owners of a business for profit. Like the sole proprietorship, the general partnership thus is a default form of business organization that “exists as soon as two or more people start doing business together without choosing another form of business” organization. Some partnerships though may be subject to special statutory requirements.
- (2). Unity of Ownership and Control: All partners have an equal right to participate in the partnership’s management on a one-person/one-vote basis, with mostmay be unmanageable in the large firm setting. Fortunately, very few partnership rules are mandatory. Instead, most of partnership law consists of “default rules.” This allows the partners to agree to just about any governance system they want.
- (3). Quasi-Separate Legal Personality: A debate has been raging over whether a partnership is an entity separate from the partners or merely an aggregation of the partners. The UPA (1914) does not come down squarely on the issue, but instead treats the partnership as an entity for some purposes and as an aggregate for others. Today, most states have adopted separate statutes treating the partnership as a separate legal entity in most situations in which the partnership’s status matters. The UPA (1997) codifies this result by declaring the partnership to be a legal entity separate from its partners.
-(4). Duration: Under the UPA (1914), a partnership dissolves whenever one partner dies, resigns, or otherwise leaves the partnership. As a legal matter, a dissolution leads to a winding up of the firm. As such, the legal consequences of a dissolution can be a significant drawback to the partnership form of doing business. As here, the flexibility of a partnership provides a solution; within certain limits the partners can agree that the firm will continue to function even when one member withdraws. The UPA (1997), moreover, adopts a complex regime under which partners may sometimes disassociate themselves from the firm without triggering a dissolution.
- (5). Limited Transferability of Ownership Interests: No one can become a partner without the unanimous consent of all other partners. A partner thus is effectively barred from selling his membership in the firm. A partner may assign his interest in the partnership to another party, but that interest consists only of the right to receive his share of partnership profits and losses. As a result, the assignee does not become a partner of the firm and has no rights vis-à-vis the firm other than the right to receive whatever profits are owed to the assignor partner. These rules significantly impede transferability of a partner’s rights in the business, although they do not wholly preclude transfers.
- (6). Unlimited Liability: Under the UPA (1914), each partner is jointly and severally liable for a tort or breach of trust committed by another partner if committed within the scope of the firm’s business. In addition, each partner is jointly liable for all other partnership debts and obligations. The UPA (1997) rules are the same, except that partners are jointly and severally liable for both types of obligations.
- Because the partnership can be held liable for the acts of its non-partner agents, so too can the individual partners. The resulting liability exposure is compounded by the fact that each and every partner is an agent of the partnership with respect to its business and thus can enter into contract binding the entire partnership. The partners’ liability exposure is unlimited, so that each partner could be forced to pay his share of a partnership obligation to the full extent of his personal assets. This rule may be the single most important deterrent to doing business in the partnership form.