Who Has the Authority to Bind an LLC to a Contract?

By Kay Lee

A limited liability company is a type of unincorporated business. It is a relatively new business form and is a hybrid of other business forms. It offers limited personal liability for its members, who are the owners of the LLC, which means the members cannot be sued for a monetary amount greater than their investment in the company. On the other hand, the business is taxed like a partnership, which means the taxes flow down to the owners’ personal income taxes. The business itself does not pay taxes. LLCs are governed by state law; while state law permits LLCs to determine how they will be managed, there are sometimes questions concerning who has the authority to bind the business organization to a contract.

A limited liability company is a type of unincorporated business. It is a relatively new business form and is a hybrid of other business forms. It offers limited personal liability for its members, who are the owners of the LLC, which means the members cannot be sued for a monetary amount greater than their investment in the company. On the other hand, the business is taxed like a partnership, which means the taxes flow down to the owners’ personal income taxes. The business itself does not pay taxes. LLCs are governed by state law; while state law permits LLCs to determine how they will be managed, there are sometimes questions concerning who has the authority to bind the business organization to a contract.

Agency Law

Agency is a legal term that explains the relationship between two parties when one acts on the other's behalf. A very common agency relationship is one between the employer and employee since the employee acts on behalf of the employer. The one who benefits is the principal, while the one acting is the agent. Therefore, the principal is the employer while the employee would be the agent. State law relating to LLCs was based on state partnership law, which provides for joint and several liability. This type of liability meant that all partners were equally liable for each other's actions. One benefit to the LLC form is that it eliminates this type of liability and limits the liability of each of its members.

Ready to start your LLC? Start an LLC Online Now

Members and Managers

There are two types of LLCs. One can be managed by its owners, who are called members, and are called member-managed LLCs. The other type allows members to hire managers to manage the LLC and these are called manager-managed LLCs. The majority of state statutes provide that if the operating agreement (the document that governs the operations of the LLC) does not specify, the LLC will be managed directly by its members. However, the founding members of the LLC can decide to centralize management for the organization and hire managers. Most state statutes provide that members have the authority to bind member-managed LLCs to a contract. Accordingly, if it is a manager-managed LLC, the managers have been delegated the authority to bind the LLC to a contract. The LLC operating agreement can also be written to specifically limit the ability for any manager or member to bind an LLC to a contract.

Third Parties

The members or managers may also delegate the authority to bind an LLC to a contract to a third party, such as an employee or a contractor. Whether a member or manager can delegate that authority will be provided for in the operating agreement as the authority to delegate will depend on the management structure.

LLC Liability

If the LLC is bound to a contract, members are liable for the actions of the LLC only to the extent that they are invested in the LLC with their capital contribution. This means that a member can only be responsible for the amount of money they contributed when they became a member of the LLC. Limited liability is one of the key features of this business form. However, limited liability is not without its own limitations. Members or managers of the LLC are liable for their negligent or intentional actions with respect to the LLC. Just because a member of an LLC has limited liability does not afford that member the right to engage in unlawful acts, such as contracts that would be against the law.

Ready to start your LLC? Start an LLC Online Now
Legal Aspects of an LLC

References

Related articles

Does an LLC Have to Have Officers?

A limited liability company is a state-regulated business organization that is a hybrid between a corporation and a partnership. Like a corporation, the owners, otherwise known as members, are generally not held personally liable for the business’s liabilities. However, the business is taxed like a partnership; the LLC is not taxed but the business’s profits and losses are included on the members’ returns. An LLC does not have to have officers like a corporation does, but some businesses may find it useful as it helps establish a clear hierarchy and the roles of each member of management.

How to Sign on Behalf of an LLC

A limited liability company is a legal entity you can create to operate your business. Every state has its own LLC laws that specify how to create an LLC and establish its management structure. An LLC is a unique type of legal entity because it protects your personal assets from the debts and liabilities of the business, while giving you considerable flexibility regarding how to manage the business, including designating who is authorized to sign on behalf of the LLC.

The Law & LLCs

A limited liability company is a creation of state law. The requirements you must meet to form, dissolve and manage an LLC may vary from state to state. However, the law of the state in which you create the LLC is the law that you must adhere to. Most jurisdictions in the country employ LLC regulations that are quite similar to one another.

LLCs, Corporations, Patents, Attorney Help

Related articles

Rights & Authorities of the Manager of an LLC

Inherent in the limited liability company structure is the right of owners, who are known as members, to participate in ...

LLC President Vs. LLC Principal

Every limited liability company, or LLC, is created under state law in the state where the LLC is located. The general ...

LLC Components

When evaluating what type of organizational form to choose for your business, one option for you to consider is a ...

Can I Have a Partner With an LLC?

A Limited Liability Company is a common business entity that may be owned and managed by one or more individuals. LLCs, ...

Browse by category