California’s Limited Liability Company Act provides that when an LLC is a manager-managed limited liability company, as defined in Corp. Code § 17701.03(o), every manager is an agent of the LLC for purposes of its business or affairs. Cal. Corp. Code § 17703.01(b)(2). This, of course, leads to the question of a manager’s authority as agent to execute documents on behalf of the LLC. The statute answers this question, but only in part, by providing that the execution in the name of the LLC of any instrument for “apparently carrying on in the usual way the business or affairs of the limited liability company of which the person is a manager binds the limited liability company . . . “. Id. There are at least two significant limitations to this rule.
First, the statute applies only when the instrument is for apparently carrying on the LLC’s business or affairs in the “usual way”. In some instances, it may be unclear what falls within the scope of business in the “usual way”.
A “Saving Dullness” May Be Required
The second limitation is also found in the statute which adds the following exception “unless the manager so acting has, in fact, no authority to act, for the limited liability company in the particular matter and the person with whom the manager is dealing has actual knowledge of the fact that the manager has no such authority”. In addition Section 17703.01(c) provides that no act of a manager in contravention of a restriction on authority binds the LLC to persons having actual knowledge of the restriction.
When One Is Better Than Two And Two Is Sufficient
Notwithstanding Ecclesiastes 4:9 (“Two are better than one”), there can be an advantage in having only one manager when it comes to signing LLC documents. Section 17703.01(d) of the Corporations Code provides:
Notwithstanding the provisions of subdivision (c), any note, mortgage, evidence of indebtedness, contract, certificate, statement, conveyance, or other instrument in writing, and any assignment or endorsement thereof, executed or entered into between any limited liability company and any other person, when signed by at least two managers, or by one manager in the case of a limited liability company whose articles of organization state that it is managed by only one manager, is not invalidated as to the limited liability company by any lack of authority of the signing managers or manager in the absence of actual knowledge on the part of the other person that the signing managers or manager had no authority to execute the same.
Section 17703.01(d) begins with the proviso “Notwithstanding the provisions of subdivision (c)”. This proviso is curious because subdivision (c) simply provides that no act of a manager or member in contravention on authority binds the LLC to persons having actual knowledge of the restriction. This same limitation is include in subdivision (d) which raises the question of why the drafters of the LLC Act thought it necessary to include the proviso referencing subdivision (c).
What signatures would be required in the following situations if the LLC is manager-managed and has two or more managers?
- The LLC will be bound by the execution of a single manager if: (i) the instrument is for apparently carrying on the LLC’s business in the “usual way”; and (ii) the manager has in fact no authority to act and the other person actually knows it.
- The LLC will be bound by the execution of at least two managers if the other person does not actually know that the signing managers have no authority. This will be the case regardless of whether the instrument is for carrying on the LLC’s business in the “usual way”.
If the LLC has officers, yet another statute comes into play – Section 17704.07(w), but that is a subject for another blog post.
Note that these statutes apply to LLCs organized under California’s act.