How to Avoid Personal Liability When Signing Contracts

You formed your LLC, or other incorporating entity, for protection so that your business liabilities do not affect your personal assets. when signing a contract for your business, it is critical that the contract reflects the fact that your company is entering the agreement, not you personally. While an LLC or corporation can enter and be bound by a contract, it must do so through a person acting in a managerial capacity. This can be you the owner or an authorized agent.

Litigation is common over whether an officer of the company signed in personal or representative capacity. To determine this issue, the law looks at the intention of the parties based on the ordinary meaning of the language contained within the contract. Be sure to make the intent clear that you are signing in a representative capacity:

  1. Contract should use your business name, not your personal name.

This should go without saying, but if your business name is not on the contract, then the intent will likely be construed that you are signing in a personal capacity.

      2. The signature block must identify the capacity that you're signing in.

If there's going to be an issue, it will likely be over this part. An LLC or corporation cannot sign a document. However, the law allows a person to sign on behalf of a company simply by identifying the person's position in the LLC and a short statement explaining what capacity they are signing in.

Incorrect Signature Block:

Company Name, Agreed this day, Month, Day, Year, by:

John Smith

Correct Signature Block:

Company Name, Agreed this day, Month, Day, Year, by:

John Smith, Owner/Member of Business Name, LLC

In a recent Tennessee Supreme Court issue in which a contract had a "Personal Capacity" section in the middle of the contract and three representative signatures at the end of the contract, found that the intent was to be in a personal capacity. It is a bedrock principle of contract law that an individual who signs a contract is presumed to have read the contract and is bound by its contents. To hold otherwise would make contracts not "worth the paper on which they are written."

Make the intent clear that you are signing in a "Representative Capacity" by following the two steps above. As a business person, any ambiguity will likely be construed against you. This simple mistake could put your personal assets at risk.

Cite: MLG Enterprises, LLC v Richard L. Johnson, No. M2014-01205-SC-R11-CV Filed September 2, 2016

Will Cartwright

Cartwright Law, LLC