Question

What is agency problem within the context of a limited liability company

Answer 1

Agency problem arises when there is a conflict of interest between the principal and the agents in the corporation, this typically occurs when the agent acts solely in his/her own interests.

In a principal-agent relationship, the principal is the party that legally appoints the agent to make decisions and take actions on its behavior.

In Limited Liability Company, the principals are the Partners or who owns a stake in the company. In management consultancy firm the Partners who are not involved in the day to day operations will be the principal. The agents will be the middle management or the directors. When the partners will be willing to drive risky engagements which goes on against the interest of the management, there will be agency problem in an LLC or LLP