Authority to Bind a Limited Liability Company

Authority to Bind a Limited Liability Company

Authority to bind is always an important issue in any commercial transaction.  In a member-managed LLC, one would usually expect each member to have authority to bind.  In a manager-managed LLC, one would usually expect the manager to have authority to bind. 

Certain provisions in the 2014 Utah Revised Uniform Limited Liability Company Act, Utah Code Ann. § 48-3a-101, et seq., (the “2014 LLC Act”) should be reviewed on this issue.  Section 48-3a-407(1) of the 2014 LLC Act provides the default rule for a LLC’s management structure by stating that an LLC is member-managed unless the operating agreement “expressly provides” that the LLC is or will be “manager-managed” or words of similar import.  Thus, if an LLC has no written operating agreement, it is by default a member-managed LLC.

Member Authority to Bind.  The 2014 LLC Act states, without any qualification or exception, that “A member is not an agent of a limited liability company solely by reason of being a member.”  Utah Code Ann. § 48-3a-301(1).  Yet, in Section 407(2)(b) of the 2014 LLC Act, it also states that, in a member-managed LLC: “Each member has equal rights in the management and conduct of the limited liability company’s activities and affairs.”  But what about equal authority to manage and bind a member-managed LLC?

Additional provisions in Section 48-3a-407(2) of the 2014 LLC Act give related guidance for member-managed LLCs:

(c)  A difference arising among members as to a matter in the ordinary course of the activities of the limited liability company shall be decided by a majority of the members.  [per capita voting]

(d)  An act outside the ordinary course of the activities and affairs of the limited liability company may be undertaken only with the affirmative vote or consent of all members.

Manager Authority to Bind.   Section 48-3a-407(3) of the 2014 LLC Act gives somewhat parallel rules for the authority of a manager in a manager-managed LLC:

(a)  Except as expressly provided in this chapter, any matter relating to the activities and affairs of the limited liability company is decided exclusively by the manager, or, if there is more than one manager, by a majority of the managers.

(b)   Each manager has equal rights in the management and conduct of the limited liability company’s activities and affairs.

(c)  The affirmative vote or consent of all members is required to: . . approve a [merger] . . undertake any act outside the ordinary course of the limited liability company’s activities and affairs; or . . amend the operating agreement.  

Operating Agreements may define the authority of members and managers, but operating agreements for an LLC are not public documents.  Under the Prior LLC Act, the Articles of Organization may include “a statement of whether there are limitations on the authority of managers or members to bind the company and, if so, what the limitations are, set out in detail and not with reference to any other document.”  Utah Code Ann. § 48-2c-403.

Statement of Authority For Non-Real Estate Transactions

The 2014 LLC Act states “a statement in a certificate of organization is not effective as a statement of authority.”  Utah Code Ann. § 48-3a-201(3). It allows an LLC to prepare and file a separate document called a Statement of Authority. Utah Code Ann. § 48-3a-302.

Focusing on non-real estate related transactions, Section 48-3a-302 states in part:

(1)  A limited liability company may deliver to the division for filing a statement of authority.  The statement:

            (a)  must include the name of the [LLC] and the . . [address of the LLC‘s registered agent];

            (b)  with respect to any position that exists in or with respect to the [LLC], may state the authority, or limitations on the authority, of all persons holding the position to:

            . . . .

            (ii)  enter into other transactions on behalf of, or otherwise act for or bind, the [LLC]; and

            (c)  may state the authority, or limitations on the authority, of a specific person to:

            . . . .

            (ii)  enter into other transactions on behalf of, or otherwise act for or bind, the [LLC].

            . . . .

(3)  A statement of authority affects only the power of a person to bind a [LLC] to persons that are not members.

(4)  Subject to Subsection (3) and Subsection 48-3a-103(4), and except as otherwise provided in Subsections (6), (7), and (8), a limitation on the authority of a person or a position contained in an effective statement of authority is not by itself evidence of knowledge or notice of the limitation by any person.

(5)  Subject to Subsection (3), a grant of authority not pertaining to transfers of real property and contained in an effective statement of authority is conclusive in favor of a person that gives value in reliance on the grant, except to the extent that when the person gives value:

            (a)  the person has knowledge to the contrary;

            . . . .    

A Statement of Authority will bind the LLC when filed if the Statement of Authority is signed by a person authorized by the LLC.  Utah Code Ann. § 48‑3a‑203(1)(a).  Question: How does one know if the signer was authorized?

 © 2014 Mark A. Larsen