A limited liability company is a type of unincorporated business. It is a relatively new business form and is a hybrid of other business forms. It offers limited personal liability for its members, who are the owners of the LLC, which means the members cannot be sued for a monetary amount greater than their investment in the company. On the other hand, the business is taxed like a partnership, which means the taxes flow down to the owners’ personal income taxes. The business itself does not pay taxes. LLCs are governed by state law; while state law permits LLCs to determine how they will be managed, there are sometimes questions concerning who has the authority to bind the business organization to a contract.
Agency is a legal term that explains the relationship between two parties when one acts on the other's behalf. A very common agency relationship is one between the employer and employee since the employee acts on behalf of the employer. The one who benefits is the principal, while the one acting is the agent. Therefore, the principal is the employer while the employee would be the agent. State law relating to LLCs was based on state partnership law, which provides for joint and several liability. This type of liability meant that all partners were equally liable for each other's actions. One benefit to the LLC form is that it eliminates this type of liability and limits the liability of each of its members.
Members and Managers
There are two types of LLCs. One can be managed by its owners, who are called members, and are called member-managed LLCs. The other type allows members to hire managers to manage the LLC and these are called manager-managed LLCs. The majority of state statutes provide that if the operating agreement (the document that governs the operations of the LLC) does not specify, the LLC will be managed directly by its members. However, the founding members of the LLC can decide to centralize management for the organization and hire managers. Most state statutes provide that members have the authority to bind member-managed LLCs to a contract. Accordingly, if it is a manager-managed LLC, the managers have been delegated the authority to bind the LLC to a contract. The LLC operating agreement can also be written to specifically limit the ability for any manager or member to bind an LLC to a contract.
Read More: Can I Change an LLC From Members to Managers?
The members or managers may also delegate the authority to bind an LLC to a contract to a third party, such as an employee or a contractor. Whether a member or manager can delegate that authority will be provided for in the operating agreement as the authority to delegate will depend on the management structure.
If the LLC is bound to a contract, members are liable for the actions of the LLC only to the extent that they are invested in the LLC with their capital contribution. This means that a member can only be responsible for the amount of money they contributed when they became a member of the LLC. Limited liability is one of the key features of this business form. However, limited liability is not without its own limitations. Members or managers of the LLC are liable for their negligent or intentional actions with respect to the LLC. Just because a member of an LLC has limited liability does not afford that member the right to engage in unlawful acts, such as contracts that would be against the law.
- Unincorporated Business Entities 2nd Edition, Larry Ribstein
Kay Lee began freelance writing for Answerbag and eHow in 2010. She is an attorney in Washington, DC, practicing since 2006. Lee specializes in employee benefits and executive compensation. She holds a Juris Doctor from the Columbus School of Law and a Master of Laws from Georgetown University Law Center.