By: Rudman Winchell Attorney Jonathan Bench
Whether a well-penned forgery or a contract signed by a disgruntled ex-partner or ex-employee, no business manager wants to see a contract binding on the business that management did not authorize. A statement of authority is a two-page document filed with the Secretary of State (currently a $50 filing fee) alerting third parties which members or employees of a limited liability company (LLC) have authority to bind the company in its business dealings with third parties. This authority may be extended or limited either by listing the name of the person (Joe Smith) or the position (Treasurer) or both.
Under laws in effect prior to 2011, the LLC’s articles of organization, its charter document, indicated who possessed binding authority. Today, without a statement of authority on file, all LLC members and managers, its president (if any) and treasurer may bind the LLC because they each have apparent authority. “Apparent authority” refers to authority that a person of responsibility within a company generally possesses by virtue of his or her position, whether or not that is actually the case within a specific LLC. Without a statement of authority on file, any third party who gives value in reliance on the apparent authority of one of the aforementioned individuals may hold the LLC to that obligation, unless that third party has reason to know that the individual is acting outside the scope of her authority. This broad grant of authority to an LLC’s members, managers, president and treasurer, if no statement of authority is filed, is not necessarily a negative thing if the individuals have worked together and trust each other. But if your company has any potentially “rogue” member, or if you frequently use agents who do not necessarily possess one of the aforementioned titles but who often properly enter into contracts with third parties (such as a foreman in a construction company), a statement of authority may be desirable to indicate under which circumstances the person may bind the company (e.g. construction contracts but not financing arrangements with banks or investors). A statement of authority may protect a company and its employees, members and those with binding authority in situations where a company’s officer or authorized agent goes beyond the scope of his or her authority.
A statement of authority is a simple method for third parties to verify that the person purportedly binding the company is authorized to do so. However, even with a statement of authority on file, some third parties, such as lenders, will generally ask for more documentation to support that authority, often in the form of written consents signed by the members authorizing the LLC to borrow money and designating who has authority to sign contracts relating to a specific transaction.
A person named in a statement of authority may file a statement of denial of authority by filing the appropriate form with the Secretary of State and copying the LLC. This denial of authority would protect an individual who has left an organization and wants to ensure she is protected from any misuse of her name or her former authority.
Members and officers of an LLC may gain other protection by filing a statement of authority that merely directs inquirers to the LLC agreement. The statement of authority language could indicate that only those persons or positions specifically mentioned in the LLC agreement have authority to bind the company. Editing the LLC agreement is an easier way (and without the $50 statutory fee each instance) to expand or contract the number of persons authorized to wield the LLC’s authority. This ad hoc authorization is less helpful to third parties but likely provides the LLC with greater protection. It is also a less public display of the company’s internal changes. You should carefully consider whether and when to file a statement of authority. If you plan to file a statement of authority, you should do so at the time the certificate of formation is filed, but you may also do so at any time thereafter. For further consultation on whether and when to file a statement of authority, consult with a qualified attorney.