Who can bind a company to a contract? Is a “Managing Member” signature good enough for an LLC, or a “President” for a corporation? Those are questions that can only be answered by determining whether the person who signed did so with actual or apparent authority. The effect on the signing company depends on whether the person signing actually is authorized to sign on behalf of the company. And if the person isn’t so authorized, the company still may be bound if it gave the person “apparent authority” to sign.
Any authorized agent of an LLC or corporation will bind it, but the evidence you have to produce as to who that is can make a difference. If you want to prove who that person is, look for the resolution authorizing the signature or appointing the person, or to the bylaws or operating agreement to determine who acts on the company’s behalf, usually an officer such as a president for a corporation, or a managing member for an LLC. Equally, if you are dealing with a partnership (now less common), there may be a partnership agreement to look for, which will explain who can sign documents for it. Most lenders that advance money based on property owned by an LLC or corporation will want to see a resolution of the members or shareholders approving the loan, and such resolutions are often required to be signed by all of the owners. Check the bylaws and ask to see such a resolution in writing before you spend time or money on the deal.
The president of a corporation generally has the power to bind the corporation, but it is always a better practice to have a resolution of the corporation’s board of directors authorizing the signature. Similarly, the manager of an LLC generally has authority to bind the LLC, but again it is better to look to the operating agreement or to a resolution of the members for certainty on who has that authority. You are probably familiar with the structure of the federal government and recognize that congressional or judicial intervention limits the power of the president. The LLC and corporate structures are similar. As in the case of the president of the United States, even those who can sign on behalf of the company must follow the governing documents (bylaws or operating agreement) or applicable resolutions in doing so. Always look first to the documents that contain the agreement, such as bylaws or operating agreements for the corporation and the LLC, respectively. Like the Constitution, they control who can bind the LLC or corporation to a contract, and what the obligations of the corporation or LLC are. Another way it gets resolved is for a judge to say who binds the company, and that is settled only at the time of a court ruling.
Even if a person has some authority, there are natural limits. The authority to bind the company does not include the authority to sell the assets needed to conduct operations. Generally, someone who can “bind” a company to a contract can enter only into what are considered ordinary course deals. Whoever deals with an LLC or corporation must use common sense about what someone could do in the ordinary course of business.
Apparent authority is very simple: if the company dresses a person up to look like she has authority, the company may be on the hook. Apparent authority, so called because it appears to the other party that there is authority, even if it is not in fact there, is power inferred from acts of the company and relied upon by third parties. Secret instructions have no force whatsoever against a third party unaware of them. The test for determining whether there has been reliance on apparent authority is whether the conduct of the company led a reasonable person to conclude that the agent had the authority he claimed to have. That’s because apparent authority is based not on what the company intended but what the company held out to the public. Always avoid introducing any possibility that your statements can create “apparent authority,” or risk being bound to a deal that violates your business’ internal limitations, or that you didn’t know about or contemplate.
Who Has Authority in an LLC
An LLC is simpler than a corporation in this way: whoever is the managing member or manager usually has strong authority, and can bind the company. A manager of an LLC is usually authorized to act on behalf of the company even when that person is not a member of the LLC. A president generally is given broad signing authority. A simple member of an LLC may have very limited authority in reality, because not every LLC member is automatically authorized to sign documents. Compare the authority of a single shareholder of General Motors with the President of General Motors. As LLCs are evolving, they are adopting the same titles and structures, and often an LLC now has a president as its officer empowered to make important decisions. You always have to look at the operating agreement to be certain.
The title helps, but is not conclusive. You have to go a little deeper and find out who has authority. Checking the actual authority behind a title should be a matter of course before closing any major business transaction. Since there’s little sympathy in courts for those who think that was unnecessary or burdensome or expensive, spend a little money and make sure you get what you think you are getting.
Most companies and suppliers accept a president’s signature based on apparent authority. In the case of a debt for everyday supplies and services, the person who provides them will generally assume that a manager or president is authorized to order them. But a better way is to ask for proof of authority, before signing the document, or at least before closing the deal.
Hard cases to call are titles such as “vice president” in the case of the corporation, or “member” in the case of the LLC. The only way to absolutely know for sure in the tricky cases, including who has authority in an LLC, is to ask for documentary proof and read the documents you are provided. Have the other side produce an updated operating agreement and a resolution of all the owners, approving a given transaction.
Sell the Company’s Main Real Estate
In Virginia, the president of a company does not have the implied power to sell the company’s main real estate, because such a transfer is beyond the usual authority of a president. (Mosell Realty Corp. v. Schofield, 183 Va. 782, 790 (1945).)
Mosell (183 Va. at 791) adds that if a company owns the premises where it conducts business, the manager of the company has no implied power to transfer the premises.
Mosell in turn relied on Sterling v. Trust Co. of Norfolk, 149 Va. 867 (1928). There, a secretary-treasurer of a corporation could not buy property for the corporation, even though he held about half the stock. Only the directors of a corporation have the power to commit the business to a purchase of real estate.
Apparent Authority
Authority is granted from the “principal” to the “agent” in a principal-agent relationship. Two kinds of authority that an agent may have are: (1) actual authority (express or implied) and (2) apparent authority (permitted or held out by the principal). Actual authority occurs when an agent has been formally given authority by a principal. Apparent authority is never granted by the principal. The principal only lets it seem that it has been granted. See Progressive Casualty Ins. Co. v. Ehrhardt, 69 Md. App. 431, 440 (1986).
The agent’s apparent authority is only as broad as the apparent authority the principal actually permitted or held out. The principal then is “estopped” to deny authority where he has held the agent out as having it. Wright v. Shortridge, 194 Va. 346 (1952). A principal is not bound if his agent has no actual authority and the principal had not held out the agent as having that authority. Kern v. J. L. Barksdale Furniture, 224 Va. 682, 685 (1983).
An agent hired generally as factor, broker, attorney, etc., binds principal within range of employment. Brager v. Levy, 122 Md. 554, 559 (1914).
The important aspect for you in testing apparent authority is the reliance on authority that is reasonably apparent, not what you believe someone was or was not authorized to do. Progressive Casualty, 69 Md. App. at 441.
Authorizing payment of past bills of a manager may extend apparent authority to new purchases made by the manager. That was the result in Southern Amusement Co., 125 Va. 429 (1919). The theater was held liable to a seller for purchases made by a manager after the company always paid him for other purchases, where the company said nothing about how far his purchases could go. You have to notify vendors that a manager is in any way restricted in making purchases if you do not want them to take his word. Also, if the principal keeps the benefits of what the agent did, the principal may ratify it. It is a common sense application of the equitable doctrine of ratification, which holds that keeping benefits may bind you to a contract. Avoid any implication of ratifying a contract you do not want.
One who deals with an agent and does not inquire as to the actual authority of the agent acts at his own risk as to the validity of the agent’s authority, and no recovery can be had against the principal unless it is shown that he actually held out the agent as having the authority. Kern, 224 Va. at 685. From his point of view it is a gamble. Without such actual holding out, the agent is the only party who can be bound if the agent lacked authority.
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