Limited Liability Company Contracts– Words of Caution for the Small Business Owner
Take Caution When Signing Limited Liability Company Contracts by Elizabeth A. Brown, Esq
One of the principal reasons for forming and conducting business as a limited liability company is to minimize the chance that you and the other members of the company will be held personally liable for debts incurred by or on behalf of the limited liability company. If you are a manager or a member of a limited liability company, who has authority to execute an agreement on the behalf of the LLC, take care when you sign the contract so that you do not sign in a way that makes you a party liable under the contract.
New Hampshire law contains the general rule that a New Hampshire LLC that executes a contract is liable for the obligations created under the contract, not its individual members. But, there is a BIG EXCEPTION to the general rule and it might be hiding on the signature page of a standard boiler plate agreement. Therefore, if you will be executing contracts on behalf of a New Hampshire LLC, ignorance of how to sign the contract could cost you big bucks if something goes wrong.
Carefully Review When Signing Limited Liability Company Documents
One of the most important steps in achieving this goal is to make sure that when you sign any documents on behalf of the limited liability company you do so in a way that makes clear that you are acting as an agent or manager of the limited liability company and that you are not acting in your individual capacity. In order to do so, it is important that you sign all documents binding the limited liability company in the following manner:
New Co, LLC
John Smith, Manager (or member if it is a member managed LLC)
And, while that looks simple enough, business people often get caught up in trying to get the deal done and simply sign on the dotted line without looking to see if the document is in order before executing it. They may not notice that the contract simply has them sign their name as “John Smith” and does not identify that the individual is, in fact, executing the agreement as an agent for the LLC.
A recent Delaware decision illustrates how easy it is for members to create ambiguity due to the manner that they signed the contract and open the door to personal liability. The Delaware Superior Court in TMC Consulting Services, LLC v. Wright, et al, refused to dismiss an action against to members of the LLC even though the agreement identified the LLC as the contracting party. The court found there was an argument that the two members had incurred personal liability under a consulting agreement because they had signed the agreement in two places. The court noted that if they had not intended to be name individually they could have simply signed the agreement once on behalf of LLC.
If you are responsible for signing contracts on behalf of your LLC, you should carefully review the contract and make sure it does not contain language that would obligate you individually. If you aren’t sure about how you should sign the agreement for your LLC so that it will not cause you to incur liability, ask your attorney to review the contract.