As business owners or managers, you are surely more focused on the day to day realities of managing your business than on what may sometimes seem like the ivory-tower minutia of business law. That is certainly understandable. A little education and awareness about certain business law formalities, however, can save business owners or managers considerable time, headache, and potential expense down the road.
In this article, I will focus today on a legal question we regularly hear: Are my contracts and other important business documents signed by the right person? Note that this question can apply both to (a) how you sign your company’s contracts and other documents and (b) how other parties sign your contracts or other documents. This is a concern because, if a contract or other document is not signed by the right person, you may not have a valid contract or document.
Whether the business is new or mature, most contracts and many other documents must be signed on behalf of the business by individuals who possesses the proper authority to represent or bind the business. But who is that? Well, it generally depends on the type of legal entity used for the business. Here are some general guidelines:
Corporations are owned by their shareholders, but as owners of the corporation, shareholders, in that capacity, generally have no authority to act on behalf of the corporation. Instead, shareholders elect a board of directors to represent the shareholders and oversee the affairs of the corporation. You would think, therefore, that directors would have authority to sign a corporation’s contracts and documents. Generally speaking, however, directors, in that capacity, similarly have no authority to act on behalf of the corporation. Instead, such authority is typically granted by law and the board of directors to the officers of the corporation. You are no doubt familiar with the titles used by such officers: Chief Executive Officer, President, Chief Financial Officer, Chief Technology Officer, etc. Each officer’s authority is subject to any limitations the board of directors or the corporation’s bylaws may impose, but generally the CEO or the President of a corporation has the authority to sign most contracts and documents. It is more unusual for a CFO or other officer to have such authority, but many times they do. Many people will be comfortable assuming that if a contract with a corporation is signed by a CEO or President that the officer actually has the authority to sign and in many cases that turns out to be true or the contract is otherwise found to be valid. However, if you want to be certain that the person signing has the proper authority to sign (or if you doubt whether an officer is in fact authorized to act on behalf of the corporation), you will want to ask for proof of the officer’s authority. Such authority may be found in the corporation’s bylaws or in resolutions of the corporation’s board of directors.
LIMITED LIABILITY COMPANIES
An LLC is owned by its members. Unlike a corporation, unless the LLC’s articles of organization or operating agreement specifically state otherwise, LLC members also manage the day to day affairs and business operations of the LLC. If an LLC is member-managed, therefore, the LLC members may sign contracts and other documents on behalf of the LLC. There can be a question, however, about whether the signature of one member is sufficient or whether more than one or all members must sign a contract or document to be valid. To be sure a contract or document is properly signed on behalf of a member-management LLC, therefore, you may want to ask for proof of a member’s authority to sign the document.
Not every LLC is member managed, however. An LLC may alternatively be “manager-managed.” If the articles of organization and operating agreement specify that the LLC is “manager-managed,” then the LLC members may appoint one or more managers to manage and oversee the day to day affairs and business operations of the LLC on behalf of the LLC members. Managers do not have to be members of the LLC, and one or more of the members may act as the manager(s). In this case, it is one or more managers that would sign a contract or document on behalf of the LLC. As with member managed LLCs, there can be a question about whether the signature of one manger is sufficient or whether more than one or all managers must sign a contract or document to be valid. To be sure a contract or document is properly signed on behalf of a member-management LLC, therefore, you may want to ask for proof of a manager’s authority to sign the document. Such proof of authority is often found in the LLC’s article of organization or operating agreement.
There are two types of partnership: general and limited.
In a general partnership, there must be two or more “partners.” Each partner is personally liable for all actions and liabilities of the partnership. Generally, each partner is deemed by law to be an authorized agent of the partnership. Therefore, if business is operating as a general partnership, any partner may act on behalf of the partnership and sign contracts and other documents on behalf of the partnership.
In a limited partnership, there must be at least one “general partner” and one “limited partner.” Generally, only a general partner is authorized to sign contracts and other documents on behalf of the limited partnership. If there are more than one general partner in a limited partnership, there can be a question about whether the signature of one general partner is sufficient or whether more than one or all general partners must sign a contract or document to be valid. To be sure a contract or document is properly signed on behalf of a limited partnership, therefore, you may want to ask for proof of a general partner’s authority to sign the document. Such proof can often be found the partnership agreement for the partnership.
Sometimes a general partner will itself be a corporation or a limited liability company, so you have to also consider the general rules provided above for corporations or limited liability companies in evaluating who has authority to sign on behalf of a partnership.
If you are confused by these issues of proper authority, don’t worry, you aren’t alone. However, these seemingly technical distinctions can be extremely important when dealing with sophisticated parties (e.g., banks), entering into major transactions, or if you find yourself having to enforce a contract. Also, please note that these general guidelines may not apply in all instances; some documents have their own special signing requirements governed by law (some tax returns, for example) or custom, for which these general guidelines would not apply. Hopefully, these guidelines are helpful and provide a way to determine who is authorized to act on behalf of your business and the other companies with whom you deal.