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Common Mistakes with Entities:
Who has authority to sign?

by Mary Hanson

Individuals and businesses dealing with corporations and other entities often make mistakes in getting business commitments documented and signed. The most common error involves determining what authority an individual has to enter into commitments on behalf of an entity and who should sign contracts on behalf of a corporation, a partnership, or an LLC. If you ignore this issue, you may find your contract later repudiated on the basis that it was not validly executed.

First, in dealing with any business, you must know what type of entity it is. If you enter into a contract with a party without knowing whether it is a corporation, partnership, limited partnership, or LLC, you can't even begin to know who might have authority to commit the entity to the contract.

Each type of entity is subject to a different structure and different laws affecting authority to enter into contracts. You need to picture the type of structure and then proceed to determine who should have the authority to make commitments on behalf of the entity.

The Corporation

The corporate structure is most predictable. No matter what state law is involved, the same visual image may help in understanding the authority structure.

With that background, it is easier to understand that obligations entered into by a corporation should be signed by officers, on behalf of the corporation, using authority granted by the Board of Directors. Commitments made on behalf of a corporation by anyone not an officer of the corporation are of questionable validity and need further investigation or proof.

How do you know who has been given authority to execute documents on behalf of a corporation? One way is to obtain a copy of the resolution of the Board of Directors approving the agreement and authorizing particular officers to sign it.

Another way that works in California is to obtain signatures in accordance with the corporations code that grants a presumption of authority to certain combinations of signatures. The most common "power combination" created by the California corporations code is the President and the Secretary. However, the law also provides that, unless you know that the signing officers do not have the authority of the Board to execute a contract, the signature of the President, Vice President, or Chairman of the Board PLUS the signature of the Secretary, Treasurer, or an Assistant Secretary or Assistant Treasurer can be relied on to create a valid contract.

A recent California court of appeals case has interpreted this law as requiring two signatures in order to make a binding corporate commitment under California law. Until this erroneous ruling is corrected, it is wise to get two signatures from a corporation in order to assure enforceability in California.

How do you know who those officers are? Again, a resolution of the Board of Directors sets out the election of officers.

Dealing with owner-operated corporations can be particularly challenging. The owners may not have formal meetings of the Board of Directors. I have seen situations in which the business owners didn't keep minutes and couldn't remember which individuals held which corporate offices. We had to obtain a copy of the Statement by Domestic Stock Corporation filed with the Secretary of State to determine who would sign as President and Secretary.

The Limited Liability Company

The new type of entity called a limited liability company ("LLC") presents even more challenging issues in determining who has authority to act on behalf of the entity.

The limited liability company is new, and the whole idea of having this new entity is to provide flexibility and a structure very different from that of a corporation. So you can't expect to find officers with the same titles as those in a corporation. In fact, if an LLC does have a President or other officers, you need to investigate where their authority has been established. It must be established in the LLC Operating Agreement, since the law provides no authority whatsoever for such officers. The law referred to above regarding corporations has nothing to do with LLCs.

Since flexibility is a key feature of the California LLC, determining who has authority to act on behalf of the entity utilizes a checklist of questions rather than a visual image. Ask these questions to determine what the structure of the particular LLC is:

The Partnership

Partnerships are very different from LLCs and corporations. In a general partnership each partner is an agent of the partnership. Partnerships traditionally are not entities distinct from the partners, and power or authority is not centralized in any one individual.

Since January 1, 1999, partnerships in California are subject to a new partnership law that treats a partnership more like an entity. A "statement of partnership authority" can be (but need not be) filed by the partnership with the Secretary of State, stating the names of partners who are authorized to execute contracts transferring real property, and specifying the authority or limitations on the authority of individual partners to enter into other contracts on behalf of the partnership.

If you are entering into a contract with a partnership, you will now want to check the Secretary of State's office for any filed "statement of partnership authority." If there is no statement filed, you should want to review the partnership agreement among the partners to determine, at a minimum, who the partners are (to be certain you are dealing with an individual, who, as a partner, may act as an agent of the partnership). The partnership agreement may also provide limitations on authority of certain partners, grants of authority to certain partners, or a procedure for authorizing contracts.

If you have any reason to be more cautious (for a transaction beyond the ordinary course of business, a contract that is particularly large for you or the partnership you are dealing with, and certainly if you have any reservations about the authority of a partner), obtain the signature of all partners in the partnership.

The Limited Partnership

The structure of a limited partnership requires both limited partners (the investors) and one or more general partners (who may be individuals or corporations). The role of limited partners is traditionally very limited. Business dealings with a limited partnership must be with the general partners, and commitments must be authorized by the general partner or partners in accordance with authority given them by the limited partnership agreement. The general partners are liable for the obligations of the business, just as they are in any other general partnership. If a general partner is a corporation, the rules of corporate law must be considered to determine who has the authority to act on behalf of the incorporated general partner.

Conclusion

Don't risk having a contract invalidated because it wasn't properly authorized. Be aware of the issue of authority to contract. Every business commitment involved in day-to-day business dealings involves the issue of authority. Don't get caught up in whether a business activity is "a contract" or not. Consider instead whether the purchase order, offer, billing, or any type of business dealing is significant enough that you would not want it repudiated based on lack of authority. When it means enough to you, get proof of authority.

1999 Mary Hanson All rights reserved.