Who can sign a business contract?
By Nadia Cabrera-Mazzeo, Esq.
Short Answer: Literally anyone can sign a contract on behalf of your business. Whether they have authority to do so and whether your company will be bound by the contract is a more complicated question.
To avoid potentially serious problems, business owners should be clear about who has the authority to sign contracts and bind the business.
Who has signing authority?
For sole-proprietorships and single-member LLCs, figuring out who has signing authority is a piece of cake: it’s the sole owner of the business.
For businesses with multiple owners, partners, employees, etc., the answer is a lot less obvious.
To be clear, when we talk about signing authority, we are talking about the larger topic of agency—a relationship where someone (the agent) can take action and make promises on behalf of someone else (the principal).
Business owners should take it upon themselves to make it very clear who has actual authority to bind the company. This could take the form of a written company policy or could be included in a company’s governing documents (operating agreements or bylaws).
Apparent Authority
It is equally important to back any policy up with correct action. Otherwise, the company could still be bound by anyone’s promises on its behalf if it looks like that person had authority even if they didn’t. This is called apparent authority and it can have serious unintended consequences for a business.
Business owners should not act in ways that make it seem like someone has authority to bind the business when they don’t. For example, giving someone without authority the title of Vice President, a title which usually comes with significant authority. Or when a business owner knows someone is overstepping their authority but doesn’t do anything about it. The owner is essentially acting as if that person has authority which, at the end of the day, may trump any written policy that says otherwise.
A company can be locked into a contract if a third party reasonably believes the company representative had authority to enter into that contract.
What can business owners do to avoid being locked into unauthorized contracts?
Avoiding apparent authority can be tough because a lot of it comes down to how a third party perceives the situation. Business owners should take steps to make it clear to the greater world whether someone has authority over the company. The following are best practices to that end:
Clearly state who has signing authority in a written policy or governing documents;
Explain the parameters of an employee’s authority in a written job description (this is important for high-level employees);
Give employees appropriate titles that don’t sound like they convey more authority than they actually have;
If an employee starts overstepping their authority, either nip it in the bud or formally update the parameters of their authority;
Set clear expectations with third parties when delegating tasks to someone else in the company (e.g. telling someone “please negotiate the details with our Assistant Director” vs “please negotiate the details with our Assistant Director and then I’ll review and sign;”
Keep organized records of written policies and documents.
Compared to the million other aspects of running a business, it can be easy to deprioritize the issue of signing authority and let things run on their own, especially if you have a trusted team that is running smoothly. At the very least, it is worth the small investment of time to add a sentence in a governing document or policy about signing authority. You never know when a situation can come up where that will make a big difference.
Honest Contracts can help set your business up right with comprehensive governing documents or can help with damage control if you see trouble on the horizon.
Law office of Nadia Cabrera-Mazzeo, Esq.
Based in Taos, serving clients throughout New Mexico
505 427 2025
nadia@honestcontracts.com
