LAW 611: CORPORATIONS Spring 2007
PROFESSOR ATHENA MUTUA
A. THE SOLE PROPRIETORSHIP & AGENCY PRINCIPLES:
a. Definition of Sole Proprietorship: the most common form of business is the sole proprietorship. It is a business without a legal structure. The business and the owner are the same person and the same legal person. It is the default setting if you create a business if you open the business with one person. You do it whether you know it or not. You do not need a lawyer for this.
i. Quote: “The sole proprietorship is as old as business itself. With it, one person owns the enterprise, is responsible for management decisions, receives all profit and bears all loss. The business is indistinguishable from its proprietor. Business income is part of the proprietor’s taxable income for federal and state personal income tax purposes. The law imposes no formalities for forming a sole proprietorship. The proprietorship simply owns and operates a business, which is a sole proprietorship even if the proprietor is unaware of that fact.
ii. Agency Law Is Central to Analysis
b. Proving Agency: the person asserting that there is a principal-agent relationship has the burden of proving it. An agency relationship can arise even if the parties do not intend to be an agent and principal to each other, and may not arise even it the parties so intend if certain conditions are not met. In order for an agency relationship to exist, there must be an agreement between the parties that the agent will undertake some act on behalf of the principal, with the understanding that the principal is to remain in control of the undertaking.
2. Agent – Principal Relations:
a. Restatement (Second) of Agency:
i. 3 Elements of Agency à § 1: “agency is the fiduciary relation which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act.”
a. Fiduciary Relation: every agent is a fiduciary. This means that there is a high standard of care owed to the principal. Fiduciaries must also avoid conflicts of interest, self-dealing, disloyal acts, etc.
b. Manifestation of Consent: there must be some manifestation of consent by the principal to the agent that the agent shall act on the principal’s behalf and subject to the principal’s control. There needs to be some delegation of authority. We use manifestation because the delegation may not only be words, it may also be conduct. You can create an agency relationship whether you know it or not.
c. Consent of Agent: there must be consent by the agent so to act. Consent may come from actually telling someone to do something or without telling the person to do something (i.e., when a message is left).
b. Ways to Create an Agency Relationship: there are several ways for an actual agency relationship to be formed.
i. Agency by Agreement
ii. Agency by Ratification: this occurs when the principal accepts the benefits or otherwise affirms the conduct of someone purporting to act for the principal, even though no actual agency agreement exists.
iii. Agency by Estoppel: a principal may act in such a way that a third person reasonably believes that someone is the principal’s agent.
c. Restatement (Second) of Agency – §26. Creation of Authority;
ve his principal information which is relevant to affairs entrusted to him and which, as the agent has notice, the principal would desire to have and which can be communicated without violating a superior duty to a third person. See Restatement (Second) of Agency §381.
e. Duty to Keep & Render Accounts: Unless otherwise agreed, an agent is subject to a duty to keep, and render to his principal, an account of money or other things which he has received or paid out on behalf of the principal. See Restatement (Second) of Agency §382.
f. Duty to Act Only as Authorized: Except when he is privileged to protect his own or another’s interests, an agent is subject to a duty to the principal not to act in the principal’s affairs except in accordance with the principal’s manifestation of consent. See Restatement (Second) of Agency §383.
g. Duty to Obey: Unless otherwise agreed, an agent is subject to a duty to obey all reasonable directions in regard to the manner of performing a service that he has contracted to perform. See Restatement (Second) of Agency §385.
3. Agent – Third Party Relations:
a. Generally: after establishing that an agency relationship exists, a third party wanting to hold the principal liable must demonstrate the scopr of the agent’s authority to act for the principal. There are several sources of authority: