SimplyCPA
CPA/REG/Business Law: Agency & Business Structures

Business Law: Agency & Business Structures

Agency authority and liability, plus the legal characteristics of partnerships, LLCs, and corporations.

Medium 55 minArea II: Business Law

Three kinds of authority

TypeSource
Actual expressPrincipal's words — spoken or written
Actual impliedReasonably necessary to carry out express authority, or customary for the position
ApparentThe principal's conduct causes a third party to reasonably believe authority exists

IMPORTANT: Apparent authority comes from the principal's manifestations to the third party — never from the agent's own claims. That's why an agent who says "I have authority" creates none. Apparent authority can survive termination of actual authority until third parties get proper notice.

Duties

  • Agent owes the principal: loyalty, obedience, reasonable care, accounting, notification
  • Principal owes the agent: compensation, reimbursement, indemnification, cooperation

Business entity comparison

EntityOwner liabilityFederal tax treatment (default)
Sole proprietorshipUnlimited personalSchedule C — no separate entity
General partnershipUnlimited, joint and severalFlow-through (Form 1065)
Limited partnershipGeneral partner unlimited; limited partners limited to investmentFlow-through
LLPPartners shielded from other partners' malpracticeFlow-through
LLCLimited for all membersSingle member → disregarded; multi-member → partnership; may elect corporate treatment
C corporationLimitedEntity-level tax, then dividends taxed again
S corporationLimitedFlow-through (Form 1120-S), with eligibility restrictions

EXAM TIP: A limited partner who takes part in control of the business risks losing limited liability protection to third parties who reasonably believed the limited partner was a general partner.