Promoter, Manager, and Members in a Startup LLC
In January, Priya and Marcus agree to launch a coffee-roasting business. Before any entity exists, Priya signs a two-year lease for a roasting space in her own name, telling the landlord, "We're starting RoastWorks LLC and I'm authorized to sign." RoastWorks LLC is not incorporated until March. Marcus never signs the lease. In April the operating agreement is adopted; members are Priya (60 percent) and Marcus (40 percent), and the LLC is manager-managed with Priya as manager. In June Priya, without member approval, signs a $90,000 contract to buy a used drum roaster. The operating agreement requires member approval for purchases over $50,000. In August the business fails; the LLC holds $12,000 in assets. The landlord and the roaster seller both sue.
1. Who is liable to the landlord on the two-year lease?
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Priya is personally liable; the LLC and Marcus are not automatically liable.
Priya signed as a promoter of a corporation/LLC that did not yet exist. Under the Model Business Corporation Act § 2.04 and general agency principles, a promoter is personally bound on pre-incorporation contracts unless the third party agrees to look solely to the entity. The landlord's knowledge that RoastWorks "will be" formed is not an agreement to exonerate Priya.
Adoption or ratification by the LLC does not release the promoter. Only a novation - an agreement among landlord, promoter, and LLC substituting the LLC - does. The two-year lease is within the Statute of Frauds and is signed, so it is enforceable against Priya for its term, subject to mitigation if the landlord relets.
Priya may seek indemnity from the LLC once formed, but the landlord can still collect from her. Marcus is not liable on the lease: he never signed, never authorized it, and there is no holding out on which the landlord relied, so no partnership by estoppel.
2. Is the LLC bound by the $90,000 roaster contract, and can the seller reach Priya or Marcus personally?
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The LLC is almost certainly bound.
- Actual authority was limited: the operating agreement caps purchases at $50,000 without member approval, and Priya exceeded it.
- But an internal limitation is not automatically effective against third parties. Restatement (Third) of Agency § 3.03 and LLC statutes provide that a manager's power to bind the entity is not restricted by an operating agreement of which the third party has no knowledge.
- Apparent authority: Priya holds the title of manager of a manager-managed LLC. Buying a roaster is exactly the ordinary course of a coffee-roasting business. The seller reasonably relied on the title and the appearance of authority.
Consequences: the LLC owes $90,000. Priya is not personally liable merely for exceeding her authority - that is a breach of the operating agreement, exposing her to an action by the LLC or Marcus. Marcus has no personal exposure absent a personal guarantee or a piercing finding. The seller's remedy is against the LLC's $12,000, which exposes the practical value of the claim.
3. Can the unpaid creditors pierce the LLC veil to reach Priya and Marcus?
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Possible for Priya, unlikely for Marcus, and never automatic.
Limited liability is the default. Courts pierce for something more than debt:
- Alter ego / commingling - paying personal bills from the LLC account, ignoring formalities.
- Fraud or misrepresentation - inducing credit while concealing insolvency.
- Undercapitalization - relevant but rarely sufficient alone; $12,000 of assets against $90,000 of debt is thin, yet many courts hold that a voluntary creditor should have investigated before extending credit.
Creditor type matters. The landlord and seller are voluntary creditors who could have demanded a personal guarantee or financial statements; courts are stingier with them than with involuntary tort creditors.
If Priya treated the LLC as her pocketbook, a court could pierce as to her. Marcus would need to have participated in the misconduct or used the entity to perpetrate a wrong; passive membership is not enough.