Limiting Individual Authority

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1. Feature: Template Tuesday: Limiting Individual Authority (4 min)

2. From the Archive:

   • Email Service Costs are Skyrocketing

   • The Silent Fees Eating Your LLC Alive

   • Stop Making NDAs Awkward

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A supplier calls with a time-sensitive deal. An operations manager agrees to the terms, assuming it is within their discretion, and the company is suddenly bound to a contract the owners never saw. What begins as a sensible effort to delegate work can turn into a broader problem, where managers or employees make commitments that exceed their role.

Most of the time, those commitments are well intentioned. But under state law, it is not intention that determines whether a company is bound, it is appearance. If authority seems to exist, it may be treated as real. That is why limiting authority is not a question of trust. It is a question of clarity.

If someone appears empowered to act for the company, the company may be held accountable even when no one meant to grant that power. A clear authority framework reduces that risk by drawing the lines before a dispute arises.

Start by defining who is covered

Many authority problems begin with definitions that are too narrow. Owners may think in terms of managers or officers, but in practice authority extends to anyone asked to act for the company.

A strong starting point is language like this:

“Authorized Person means any Manager, Member, officer, employee, or other individual authorized to act on behalf of the Company.”

This definition fits the way small and mid-sized businesses actually operate. Members often work in the business. Employees negotiate with vendors. Consultants manage transactions. If those roles are not clearly covered, the company ends up with gaps that undermine the entire framework.

The point is not to accuse anyone of overreach. It is to acknowledge how work gets done and place it under a single, consistent rule.

Draw a clear baseline around authority

Every effective authority document begins with a general limitation that defines where authority starts and ends. Without this baseline, individual restrictions lose meaning.

In the resolution, that baseline is stated this way:

“No Authorized Person shall have authority to bind the Company outside the scope of their assigned role or responsibilities.”

Internally, this sentence reminds everyone that participation in a project does not equal authority. Externally, it strengthens the company’s argument if it later needs to show that someone acted beyond their proper scope.

The resolution also makes clear that an Authorized Person may not tell a third party they have more authority than the company has granted. These limits do not eliminate all risk, but they help show that boundaries were established as part of governance.

Make approval workable

Authority limits only protect the business if approvals reflect how decisions are actually made. Requiring formal meetings for every decision may look tidy, but most small and mid-sized businesses do not run that way.

A practical approach is to define “Approval” in a way that fits daily operations. In the resolution, Approval means prior written approval, including written consents, email confirmations, or other written records kept with the company’s files.

From there, the document sets approval thresholds that match the company’s real risk. Those thresholds are expressed as specific dollar ranges, with higher amounts reserved to the Managers or Members and mid-range amounts requiring secondary approval from one additional decision-maker. Higher-risk commitments usually merit collective approval, for example:

“Obligating the Company to any expenditure equal to or exceeding $25,000 in the aggregate that is not expressly approved in the Company’s current budget.”

Mid-level commitments are treated differently. The resolution requires written approval from one additional Manager or Member for expenditures, contracts, and asset sales in the mid-range amounts. That two-tier structure recognizes that not all decisions carry the same weight, while still making sure meaningful obligations receive a second look.

The specific dollar amounts in the template are placeholders and should always be tailored to the business. The structure exists to protect the company from large, unexamined bets without dragging the owners into every routine, low-risk purchase.

Reserve certain decisions regardless of dollar amount

One common mistake is to rely only on dollar thresholds. Some of the most important decisions a company makes involve modest immediate costs but long-lasting consequences.

For that reason, the authority framework sets aside certain actions for approval by the Managers or Members, regardless of dollar amount. Examples include:

“Settling, compromising, or otherwise resolving any material litigation, claim, arbitration, or governmental investigation involving the Company.”

and

“Admitting new Members, issuing equity interests, or modifying ownership percentages.”

These actions change the company’s risk profile or ownership structure in ways that are hard to unwind. Treating them as ordinary operational matters invites conflict among owners and with third parties.

Real estate deserves the same care. Whether the company is buying property or signing a lease, these obligations are typically long-term, can be expensive to exit, and often come with additional requirements. In the template, they are brought under control through the same dollar thresholds and approval requirements that apply to other major contracts and financial commitments.

Address third-party reliance directly

Authority documents are not only internal management tools. Banks, lenders, and investors regularly ask who can sign and within what limits.

The authority framework addresses this directly:

“The Company may provide copies of this Resolution to banks, vendors, counterparties, or other third parties as evidence of authority.”

This language makes it easier to complete transactions with third parties who need clarity and reinforces internal discipline. The resolution also states that third parties are not entitled to rely on authority beyond the limits in the document unless the company expressly authorizes it in writing. When people know that authority limits may be shown to outsiders, they are more likely to follow them in day-to-day work.

Why this must be formal company action

Authority limits are not effective if they exist only as informal guidance. To carry weight, they should be adopted as formal company action, usually through a written consent or resolution approved by the members or managers under the operating agreement.

Formality matters because disputes often turn on whether a limit was actually adopted or merely discussed. A properly executed written consent in the company’s records carries far more weight than an email thread or a verbal understanding. It also shows that the company is honoring the governance structure in its operating agreement rather than relying on unwritten practices.

Formal adoption forces owners to answer an important question in advance: which decisions are too important to leave to assumption. It is far less costly to make that list when everyone is in agreement than during a lawsuit or a falling-out.

The practical objective

Limiting individual authority is not about control for its own sake. It is about matching responsibility to risk so the business can move quickly without stumbling into commitments that surprise the owners.

A well-designed authority framework fits how the company actually operates. It protects against a few high-risk decisions that could do real damage, clarifies expectations for managers and employees, and makes delegation safer for everyone involved. When authority is clear, owners are free to focus on the decisions that genuinely require their judgment.

The absence of clear authority limits is rarely noticed when everything goes smoothly. It becomes highly visible, and often very expensive, when things do not.

Have an interesting business question and need a free bit of advice? Send your question to [email protected]. No confidential info, please!