“Who has the authority to sign on behalf of this entity?” If you haven’t spent much time thinking about how to answer that question, you’re not alone. For an owner whose business is behind on its debts, though, the question shows up with every new loan, forbearance agreement or settlement, and you may be wondering who has the authority to bind a business. Who has the right to sign? The short answer is: it depends. There are some general rules, then a mess of exceptions. Let’s start with the general rules.
Authority to Sign Documents on Behalf of the Company
An authorized agent can bind a corporation or LLC. In fact, the company could authorize literally anyone to sign an agreement on its behalf and the contract would be binding. What really matters is whether the other person signing the contract can be sure that you, the company, did in fact authorize that person. So when a bank makes a mortgage loan, it will usually want a resolution signed by every member or shareholder saying that a specific person is authorized to sign the mortgage documents.
The bylaws (corporations) or operating agreement (LLCs) are the primary documents that outline the signing requirements for a company. A partnership agreement plays the same role for a partnership, and a bank will want to see whichever one you have. Think of it this way: The President of the United States is the most powerful individual in the government. He (or she) can still take some action that is unconstitutional and not binding. You’d have to sit down and read the Constitution; maybe you’d have to read prior acts of Congress, too. Even then, there might be room for argument and you might have to wait for a Supreme Court decision. The operating agreement or bylaws are like a constitution and the resolutions are like acts of Congress. In a dispute, a court may have to interpret them. When it comes to borrowing money, you wouldn’t want to have this much uncertainty about how your company can make a deal.
Generally speaking, the President of a corporation, and the manager of an LLC, has authority to sign documents on behalf of the company. But that authority has limits. The president of a company can only do what is within the regular scope of its business. Selling a major asset that is owned by the company is not considered within the “ordinary course of business,” which puts it among the “extraordinary or unusual,” not “ordinary and usual” transactions. In one Virginia case, the secretary and treasurer of an automobile and garage business held about half the stock, was one of its three stockholders and sat on its four-member board, and still could not bind the corporation to buy an expensive piece of real estate to expand. That power belonged to the board of directors. For an extraordinary transaction, it is often wise to have all the shareholders, the president and the board sign a resolution.
Apparent Authority
Then there is apparent authority. This is power the company never actually gave, but the person could reasonably be thought to have it by a third party. A principal is bound by the acts of an agent who acts under actual authority. A principal can be bound by the acts of an agent who acts under apparent authority too. If someone is generally hired to act in a certain way, they can bind the company for anything they do as part of that job, even if the company told them to do something different, as long as the other party did not know. And if the company made it look like the agent had authority to outsiders or to the other party, the company is on the hook even if the agent went beyond their actual instructions. Reasonable reliance is the key. It is the company’s responsibility to prevent other people from getting the idea that its agents have more power than they do. Don’t give people titles that suggest they have authority if they don’t.
An old Virginia case shows what happens otherwise. A theater company let the manager of one of its theaters make large purchases, furnishings included, and paid every bill. A supplier with an open account for the theater knew this, so when the manager bought heavily to renovate and the company refused to pay, the court sided with the supplier. The manager’s authority to buy for the company had been established in the past, and the supplier had reason to know about the manager’s purchasing power. The company would have to pay. The Virginia company had already given the agent the keys to the castle, and it couldn’t disavow the agent’s actions once it had done so. Keeping the benefits matters too. If the company holds on to what an agent bought without authority, a court will probably say the company ratified that deal.
The Title Holder’s Power to Act for the LLC
Traditionally the highest title in the LLC was either manager or managing member. Usually the manager is someone who can act for the LLC, even if they are not a member. The president of a corporation can generally do the most things all by himself or herself. To know for sure, you’d have to check the operating agreement, or any resolution. By the way, these days LLC managers often have titles like president, vice president, or some other title from the corporate world. Those titles do tell you something about the title holder’s power to act for the LLC. Ownership is a different matter. Can you imagine the racket that would ensue if every shareholder in a publicly traded company had the power to sign contracts on behalf of the corporation? So just like a common stock owner in a C or S Corp. doesn’t have the power to sign for the company, a member of an LLC is not automatically a signer. Of course, titles aren’t everything, even in the corporate context.
The courts will not help you if you deal with someone and don’t ask if they have real authority. You do it at your own risk. If there is no agency relationship, or the person overstepped, the only person you can go after is that individual, not the company. Most business owners don’t worry about this, because they are comfortable taking the signature of the company’s president. Under apparent authority, a trade creditor is generally satisfied with a signature from a manager, managing member or president. Most would accept a signature from a member or vice president. I just want to point out that a lot of this stuff is not black and white.
The most difficult title issues are the gray areas. You may ask, “Is a vice president empowered to bind the corporation? Is a member empowered to bind an LLC?” The only sure answer is in the company’s operating agreement or its bylaws, and you want all the members or shareholders to sign a resolution authorizing the signature. If you are a business owner who is facing a distressed situation, and you are signing a loan, forbearance, or settlement document, you have to put all this in order before you sign. In short, you must know who can actually sign on your company’s behalf, and whether the person signing has the authority to do so. And never assume that whoever you think has power to bind the company really does.
