When a Member Inadvertently Binds the LLC and How to Avoid (Georgia)
The overriding purpose for forming a limited liability company (“LLC”) is to limit the individual liability of its members. But sometimes a member may act in such a way that binds the whole company, even though the act may be outside of his authority and inconsistent with the rules of the organization. When this happens, a member may be liable to the other members for the wrongdoing, but the company remains on the hook!
A review of the Georgia Code states, “the act of any member, including, but not limited to, the execution in the name of the limited liability company of any instrument for apparently carrying on in the usual way the business and affairs of the limited liability company of which he or she is a member, binds the limited liability company . . .” (O.C.G.A. § 14-11-301(a)). Translated into English, this means that by merely signing an agreement in the company’s name, an individual member may create a binding obligation of the company. At the end of the day, the other members may have a private claim against the member who acted wrongfully, but the organization is still bound.
However, it is possible to prevent an LLC from being bound by the apparent authority of its members. Under Georgia law, “If the articles of organization provide that management of the limited liability company is vested in a manager or managers . . . No member, acting solely in the capacity as a member, is an agent of the limited liability company . . .” (O.C.G.A. 14-11-301(b),(b)(1)). In order to benefit from this statutory presumption and protection, the company would need to include as a provision in its Articles of Organization, that “management of the Company is vested in one (1) or more Managers.” Without this specification in the articles, a company bears the risk of its members inadvertently binding the LLC. Additionally, the operating agreement would need to be crafted to include the responsibilities and duties of a manager designated to carry out the acts of the company.
Is it time for a tune up or review of your Articles of Organization and other company documents? At Redmond Law Group, our corporate practice includes entity formations as well as changes to your organizational structure or documents. If you have questions with regard to formation or to evaluate an existing company, please contact us.