Even though LLCs are not corporations, owners and their lawyers like for LLCs to look and act like corporations. One of the most prevalent corporate characteristics seen in LLC operating agreements is the concept of a board of managers intended to act like a board of directors. Corporate board members, however, do not have an independent right to act on behalf of the corporation. That may not be the case with managers of an LLC. Iowa Code Section 489.407(3)(b) says that “Each manager has equal rights in the management and conduct of the activities of the company.” Depending on the circumstances this may permit one manager among many to act as agent for the LLC.
The comments to NCCUSL’s Uniform Revised Limited Liability Company Act highlight this issue:
“The actual authority of an LLC’s manager or managers is a question of agency law and depends fundamentally on the contents of the operating agreement and any separate management contract between the LLC and its manager or managers. These agreements are the primary source of the manifestations of the LLC (as principal) from which a manager (as agent) will form the reasonable beliefs that delimit the scope of the manager’s actual authority. Restatement (Third) of Agency § 3.01 (2006). See also Restatement (Second) of Agency §§ 15, 26….
“While the individual members of a corporate board of directors lack actual authority to bind the corporation, 2 William Meade Fletcher, Fletcher Cyclopedia of the Law of Corporations, § 392 (noting “the overwhelming weight of authority”), subsection (c) does not describe “board” management. Instead, subsection (c) provides management rules derived from those that govern the members of a general partnership and multiple general partners of a limited partnership. RUPA, § 401 and ULPA (2001), § 406….
“The common law of agency will also determine the apparent authority of an LLC’s manager or managers, and in that analysis what the particular third party knows or has reason to know about the management structure and business practices of the particular LLC will always be relevant. Restatement (Third) of Agency § 3.03 cmt. d (2006) (“The nature of an organization's business or activity is relevant to whether a third party could reasonably believe that a [manager] is authorized to commit the organization to a particular transaction.”)…
“As a general matter, however – i.e., as to the apparent authority of the position of LLC manager under this Act – courts may view the position as clothing its occupants with the apparent authority to take actions that reasonably appear within the ordinary course of the company’s business.”
To boil all this down to one simple rule: If your operating agreement calls for more than one manager, clearly proscribe the limits of the managers management authority and whether or not each has independent agency authority.
Also keep in mind that 489.407(3(c) does provide a statutory limit on the agency authority of managers when it says “A difference arising among managers as to a matter in the ordinary course of the activities of the company may be decided by a majority of the managers.”
Subsection (d) further limits the authority of managers (unless otherwise provided in the operating agreement) when it provides that the consent of all members is required to sell all of substantially all of the assets of the LLC, merge, convert or domesticate the LLC, take any action outside the ordinary course of business, or amend the operating agreement.