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Ted Brown and Jim Green have been discussing going into business together for several months, and they are anxious to start that business before the end of this month. However, both Ted Brown and Jim Green each have to be out of town for several weeks on other business, so Ted Brown has told his son, Theodore, who is 16, about the discussions with Jim Green and has appointed Theodore to complete negotiation of the final details of the business. Jim Green has told his son James, who is 18 years old, about the discussions with Ted Brown and appointed James to complete the negotiations.
The business that Ted Brown and Jim Green want to create will develop an app for cell phones that will identify family-oriented attractions along major highways so families can download the app to help in planning family vacations. The development of the app will take 4 months, and then it will take approximately another 4 months to fully deploy the app. As the app becomes popular, the business will solicit family-oriented businesses to advertise on the app. Ted Brown and Jim Green have very little capital to use in the development and deployment of the app and will probably need to raise the capital necessary to develop and deploy a quality app.
In your case study, address the questions below.
Can Theodore Brown and James Green legally create the business that Ted Brown and Jim Green have been discussing? Why, or why not?
If Theodore and James do create the business, what duties do they each owe their father? Describe what those duties mean in this case.
UNIT VII STUDY GUIDE
Agency and Forms of Business
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.
Course/Unit
Learning Outcomes
8.1
8.2
Learning Activity
Unit Lesson
Chapter 20
Unit VII Case Study
Unit Lesson
Chapter 21
Article: “Current Developments in Partners and Partnerships”
Article: “What Form of Ownership Is Best?”
Unit VII Case Study
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
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person to do some of the things that the owner could do themselves; that is, the
owner
is capable
of doing
UNIT
x STUDY
GUIDE
what they are employing an agent and authorizing that agent to do.
Title
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
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.
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If either the principal or the agent fails to fulfill these duties or purposefully failsUNIT
to accomplish
the purpose of
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the agency, the party who is damaged by the failure has a range of remedies Title
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
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
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taxable to the stockholder. The end result is that money paid by a corporation UNIT
to stockholders
as dividends is
x STUDY GUIDE
taxed twice—once at the corporate level and once at the stockholder level. Title
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.
View the Unit VII Glossary to review key terms presented in
this unit.
Alternate format for Unit VII Glossary
(Photogl, n.d.)
Reference
Photogl. (n.d.). Books on library shelves (ID 20785201) [Photograph]. Dreamstime.
https://www.dreamstime.com/stock-image-books-library-shelves-image20785201
BUS 3301, Business Law
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