Often in my practice I’ll write documents that call upon a client who owns all or part of a limited liability company (“LLC”) or other entity to sign more than once on the same signature page. This may seem silly, but it serves an important purpose. Sometimes the dual signature is required because the client is both the manager and a member (owner) of the LLC, and sometimes it’s because the client’s signature is required both as a representative of the LLC and in his or her personal capacity. In any case, whether a person’s signature is meant to bind their company or just that person individually is an important distinction.
A key benefit of the LLC entity structure is that individuals who wish to start a business can do so with a great deal of flexibility and relatively little formality required. Providing a hybrid between the pass-through taxation of partnerships and the limited liability for owners provided by corporations, LLCs have become the dominant form of entity for most types of businesses, from mom-and-pop shops, to real estate holding companies, to subsidiaries of large corporations. LLCs are inherently simple; and yet, even simplicity has its complications.
One issue that frequently arises with LLCs is that the distinction between the LLC and its owner(s) can become blurred, especially when the LLC is member-managed. Because the formalities required of LLCs are fairly few compared to corporations, it can be easy to forget that the LLC is supposed to be treated as being completely separate from its owners. Business owners who don’t adequately separate their personal finances from those of their company or who fail to follow organizational formalities do so at their own peril – creditors of the corporation may attempt to nullify the benefits of limited-liability status via a concept known as “piercing the corporate veil,” whereby an entity is deemed to be the mere “alter ego” of its owners because the owners didn’t maintain a distinction between their own affairs and those of their company. This potential blurring effect doesn’t just affect the owners of the company though. Anyone entering a contract with an LLC or someone who owns an interest in an LLC needs to know whom they’re dealing with. More specifically, they need to know which “hat” that person is wearing when he or she signs the contract.
Recently, the Missouri Court of Appeals decided State ex rel. Wills v. Depriest, which held that the signature and initials of an LLC’s owners in an equipment-purchase contract with the LLC were not sufficient to bind the owners in their personal capacities where the capacity in which they were signing was ambiguous. In that case, Arizon Structures Worldwide (“Arizon”), had entered into an agreement to sell domes designed to cover man-made ponds used to raise shrimp to Global Blue Technologies (“GBT”). GBT contracted to buy six of these domes, but defaulted on the contract. In the lawsuit that followed, Arizon sued not just GBT but also GBT’s two owners (the “GBT Owners”) who had signed the sale contract.
On the contract, GBT was titled as the “Buyer” and the signature block contained one signature line for each member, beneath of which were the words “Duly Authorized Representatives.” On each page of the contract was a place for initials designated simply as “Buyer’s Initials,” and the GBT Owners placed their initials on each of these lines. Based on the GBT Owners’ initials on each page without a qualifier as to their representative capacity, the trial court held that Arizon had succeeded in stating a claim against the owners individually. In reversing the trial court’s decision, the Court of Appeals observed that
The lesson is that you should always be mindful of which “hat” the person signing the contract is wearing. Is it the “member” hat? The “manager” hat? The “individual” hat? If it’s a member or manager hat, consider whether that member is an entity or a trust. If so, the parties need to ensure the proper person is signing in the proper role on behalf of that entity or trust.
Luckily for LLC owners signing contracts involving the LLC as a party, whenever it’s not clear which capacity a signature is made in and there’s only one signature line per member, Missouri courts will presume that the member is signing on behalf of the company and does not intend to be personally bound. In contrast, those who enter contracts with LLCs and wish to obtain the personal guaranties of the LLC’s members must either expressly state that intention in the contract and have the members sign twice (once in each capacity) or execute a separate written agreement establishing a personal guaranty from each member. It’s a manageable distinction, but picking the right “hat” for the right occasion can be the difference between limited liability of an LLC and limited utility of an LLC for its members and creditors.