Mutual Agency: Everything You Need to Know
A mutual agency is a legally binding relationship entered into by business partners, which gives each partner authority on behalf of the business. 3 min read
2. Advantages and Disadvantages of a Mutual Agency
A mutual agency is a legally binding relationship entered into by business partners, which gives each partner authority on behalf of the business. With this agreement, each of the partners becomes an agent of the business and, therefore, has the power to make business decisions, such as creating a binding agreement with a third party.
To form this relationship, each of the partners must have authorization powers, as well as the ability to enter into a business contract. When the mutual agency is formed, a partnership agreement should be created. This agreement should outline the benefits of the agreed partnership and provide details of each partner's position. All details should be put into writing, to reduce any change of confusion or misunderstandings at a later time.
A mutual agency may be thought of as a business marriage, and makes each partner accountable for the actions of the other, even if they do not agree with what has been done. Each partner may act as individuals in their everyday responsibilities, but ultimately, the partners are each responsible for the actions taken by the other. However, the mutual agency only exists if the partners are acting within range of normal business operations or practices.
Mutual Agency Example
An example of mutual agency may include a retail partner who purchases goods from a supplier and, therefore, requires the partnership to provide payment for the purchased items. The partnership is responsible for the purchase because it falls within scope of normal business operations.
An example of mutual agency would not include a retail apparel partner who is purchasing an investment real estate property. The partner would not be able to contract their partners into this deal because it does not fall within the scope of standard operations of their retail business.
Another example of a mutual agency would include the selection of an insurance representative. When hiring this representative, you provide them with the authorization to deal with insurance companies and act on your behalf during the process. Since working with insurance companies can be difficult and confusing if you don't have experience, the insurance representative can make the process easier to understand. In this process, you have created a mutual agency with the insurance representative.
Advantages and Disadvantages of a Mutual Agency
There are both advantages and disadvantages that should be considered when entering into a mutual agency:
- Multiple partners will have the authority to carry out deals and transactions for the business
- Allows for business responsibilities to be spread out among all of the partners
- The divided responsibilities allow for quicker business expansion and growth
- All partners can be hindered by undesirable actions of one partner
- If one partner makes a poor decision, all the partners are impacted by the result
All potential business partners should analyze the risk of mutual agency before starting a company. The mutual agency contracts entered into by each of the partners are legally binding to all involved parties. The partnership agreements typically state the number of partners who will be entering the agreement, which may be two or more. The agreement will also specify the split and sharing of profits made by the company and which partner(s) will hold majority of the the business' financial gain.
Although the details of the mutual agency may differ for various sectors or business industries, the standards and requirements of the agreements are still the same. There must always be a clear indication of the partner responsible for performing certain business duties and who will be relied upon for managing those duties. Establishing these roles and expectations within the agreement will help lessen any chance for confusion in the future of the partnership.
Effectively establishing these boundaries and expectations at the beginning of a business formation is also important for the success of the business and the involved parties. Waiting until after the business has already been established leaves room for issues, such as misunderstandings, errors, or lawsuits. Ultimately, this delay in the creation of the partnership agreement can easily ruin the relationship among partners and create negative impacts for the business.
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