10. What is “control” over a business entity?
This questions concerns who has control over operations or authority to act on behalf of the business. Each business entity type has a default control structure and level of authority vested in individuals in those roles. In many cases the owners and managers of the business are the same people. This relationship becomes convoluted when there are owners who act as managers of the business and others who do not. The issue of overlapping ownership and control becomes increasingly important in closely-held business entities. Third parties dealing with a business entity want to be certain about the level of authority of the individual with whom they are dealing. Further, the business entity is concerned about its agents undertaking transactions that obligate the entity, such as taking out loans or entering into purchaser or sales contracts.
- Note: Recall from the chapter discussing agency law, the level of authority of individuals acting on behalf of a business entity affects the potential liability of the business for the acts of those agents. Business owners may undertake procedures to outline the role and authority of each member of the business. This is normally done within the business’s organizational documents. The title attributable to any owner affects the level of control and authority that she has. Failure to follow procedures to document the authority and control within the business can result in a default level of control or authority in a member of the business that is undesirable to the other owners. Further, a lack of formalized organizational structure can cause internal disputes that affect the operational efficiency of the business.
- Example: Owners of an LLC are known as members. I am a member of an LLC. If I am a member-manager of the LLC, I have the authority to carry on all operations and act on behalf of the LLC. If I am a not a manager of a member-managed LLC, I do not have the authority to act on behalf of the business.
- Discussion: Why do you think structure of control is an important characteristic of a business entity? Should business owners be able to change or modify a business’s control structure? Why or why not?
- Practice Question: Can you find a situation where an employee or agent acted on behalf of a business without authority? Can you identify a situation where the business was contractually bound by the actions of the employee that were not authorized?