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

A limited liability company possesses many characteristics of an individual. The LLC can be a party to a contract in its own name, allowing it to participate in activities such as buying, holding and selling property and providing and receiving services. However, the LLC cannot act without individuals; even a business that owns the LLC must have people to act for it. To have enforceable contract rights, a business or individual that contracts with an LLC must rely upon the authority of one who acts in its name.

A member-managed LLC operates similar to a partnership in that the members, or owners, run the LLC and can bind it to contracts. The LLC is member-managed unless the operating agreement says otherwise; in some states, the LLC can choose on its "Articles of Organization" form to be managed by members. Generally, each member may bind an LLC to a contract, so that the party dealing with an LLC can rely on the action or signature of only one member. If the LLC's organizing papers require more than one member to authorize a contract, the LLC can still be bound unless the party dealing with the LLC knows that only one member is not enough.

Only managers can enter into contracts on behalf of manager-managed LLCs. The owners have no authority to operate or bind the LLC unless the managers give it to them. Thus, manager-managed LLCs behave like corporations, where their shareholders do not have authority to contract for the corporation. As with the owners in a member-managed LLC, the act or signature of single manager is usually enough to hold the LLC to a contract.

The managers, or members in member-managed LLCs, can assign to someone the authority to make contracts for the LLC. The agents appointed by the members or managers can bind the LLC for its general business activities or specific matters. A member or manager can authorize its attorney to enter into settlement agreements in lawsuits involving the LLC.

An LLC can ratify, and thus bind itself to, a contract made originally without its authority or before its existence. Ratification occurs when the LLC expressly adopts a contract. This often occurs with organizers who enter into contracts before the LLC is formed. An LLC also ratifies a contract by accepting its benefits, such as renting space for an office or store; the LLC, once it has received the benefits, cannot avoid paying for them on the grounds the contract was not authorized.