Mutual agency in partnership is a legal relationship entered into by business partners, which gives each partner authority to act on behalf of the business. Under this arrangement, each partner becomes an agent of the business and can bind the business to contracts with third parties. The scope of the agency can be limited, but the actions of a partner can have legal consequences for the entire partnership.
What are the advantages of partnerships is mutual agency?
A retail apparel partner who purchases goods from a supplier and necessitates the partnership to provide the procurement is a classic example of mutual agency. The purchase would be allowed because it falls within the scope of normal business operations for the retailer. However, a retail apparel partner could not contract the partnership into a deal to invest in real estate property because it wouldn’t be within the scope of the partnership business.
One of the disadvantages of mutual agency is that it exposes all partners to liability for the unwise actions of a single partner. In addition, if a contract is signed by one partner without the consent of others, they are liable to pay for any damages.
The partners can limit the risks of mutual agency by clearly defining the scope of each partner’s authority in the partnership agreement and by considering setting up a limited liability partnership or a limited liability company to protect themselves from personal liability. In addition, they should consider getting professional legal advice before establishing the relationship.
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