How the Law of Agency Affects Small Businesses

After setting up a business, a business owner must ensure that it operates efficiently and that it is protected from potential liability. Yes, every business, big and small, faces some level of potential liability. This is particularly tricky for small businesses that have limited resources. It is crucial for a small business owner to have adequate checks to minimize potential risks.

“How these risks can come from a variety of sources. Take the conduct of an agent, for example. Under Illinois law, a business may be held liable for the wrongful conduct of an agent. Under the principle of agency, a person, i.e. an employee, can act on behalf of a principal, i.e. the business. This happens every day. Employees enter into contracts with vendors or customers on behalf of businesses. This same principle, however, creates liability for the wrongful conduct of an agent if the conduct is committed within the scope of the principal agent relationship. See Lang v. Silva, 306 Ill. App. 3d 960 (1999).

The simplest way an agency relationship is created is when the principal shows assent for the agent to act on its behalf. An agency relationship can be created retroactively when the principal ratifies, by its action or inaction, the agent’s conduct. See Rest 3d Agen §§1.01-1.03. In either case, liability that the agent creates may flow through to the principal.

Fortunately, a small business can protect itself, among other things, setting up strong internal policies and procedures designed to limit liability. A construction company, for example, can have a policy to lock up all tools and equipment at the end of each day. One thing is certain, agent-created liability can be controlled and virtually eliminated with proper planning.

Each small business faces unique challenges. An experienced a business law attorney can recognize and address potential risks. At the Gierach Law Firm we have extensive experience dealing with challenges that Naperville business face, and we are here to answer any questions you have.

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