Purse Strings – Why to Cap your Managers’ Authority to Spend Company Money

Budgets and cash flow are extremely important for any business, particularly for a new company. Cash is king, so you want to make sure you can control how and when money is spent. In a Limited liability company (“LLC”), members are the owners of the LLC, while managers have the right, power and duty to conduct the business of the company. LLC’s can be managed in two basic ways: (a) member-managed or (b) manager-managed. If managers are elected, members are reserved the power for only certain decision-making rights (such as liquidation, admission of new members, selecting managers, etc.). An Operating Agreement is the document that sets out the rules for how the company operates. It’s a flexible document that allows the members to delegate as much or as little authority to manager(s).

When you form an LLC and appoint your day-to-day manager or officer to help run the company and take the venture to the next level, don’t forget to clearly define how much money he or she can spend on expenses. Our team sees far too many simplistic Operating Agreements being used by entrepreneurs that fail to place spending caps on managers and officers.

Make sure that when you appoint your LLC’s manager or officer, they accept and agree to be bound by the terms of your LLC’s Operating Agreement. Then, make sure the Operating Agreement puts spending caps on his or her ability to spend the company’s money on operating expenses. Limitations may also be placed on the managers’ authority to bind the LLC. This cap should be both on single transactions and monthly aggregates. For example, Susan the manager cannot spend more than $5,000 on any single transaction or more than $20,000/month without getting the LLC’s members written approval.

 

Other Restrictions to Consider

Other very basic restrictions may look like the following:

Restrictions on Authority of Manager(s). The Manager(s) may not do any of the following without the consent of a majority of the members:

 

1.        Transfer, sell, or dispose of all or substantially all of the Company’s assets or funds;

2.        Refinance, increase, or extend loans of the Company;

3.        Admit new members to the Company and to define the terms of such admission; or

4.        Engage the Company in any business other than that specified in this Agreement.

 

Each restriction encourages transparency with how the company operates and lays the foundation for consistent growth and building value within the company. Each members’ or managers’ authority can be limited in any way the members may agree. The foregoing is simply a couple examples of what you should consider for your company.

 

Attracting Investors and Adding Members

Basic managerial authority limitations make your firm operate smoothly, which becomes increasingly more important as the number of individuals involved grows. For instance, adding more than one manager, adding more members, or eventually taking capital investment (raising money), each adds complexity to your organization. Tightly constrained limitations help to put each party’s mind at ease. If the manager exceeds his or her authority it creates a cause of action for breach of contract. Ultimately, this will protect the interests of the members and company.

 

Bottom Line

 This spending cap won’t protect your LLC from those managers who plan on ripping off your company, but it will create a breach of contract claim for your company to use if your manager decides to break the rules and spend more money than is allowed. You should also make sure to implement dual-signature protocols and other common sense protections to make sure your management team is spending company resources properly. As with all contracts, defining the terms allows you to move quickly, enforce those terms and keep your business on track with as little expense as possible.

Briefcase’s attorneys have already anticipated this important need and have your tools available to make sure your management is held accountable when spending your company’s hard earned money. Sign up at www.thebriefcase.co to Ask Briefcase what makes sense for your company and access dozens of essential contracts that help protect your business.

 

Question: What’s one example where you could see someone exceeding his or her authority in your business? How could you easily fix this? Are these risks acceptable?