Key Takeaways

  • A principal of a company is typically an owner, founder, or high-level executive with significant decision-making authority.
  • In LLCs, principals are usually referred to as members but may informally adopt the title "principal" for external communications.
  • Responsibilities of a principal vary widely but often include managing finances, overseeing operations, setting vision and strategy, and building external relationships.
  • The term "principal" can refer to different roles across business structures, including principal investors and managing principals.
  • It's important to define and document the scope of the principal’s authority in operating agreements or other official records.
  • Titles like "president" and "principal" may overlap but differ in focus and organizational use.

A principal of a company is simply another term for a company owner, or member. Another type of principal is a principal investor, or the investor with the most ownership shares. This term is common with limited liability companies, or LLCs. 

LLCs and Principals

LLCs are legally separate entities from their owners, but they offer some of the benefits enjoyed by corporations and partnerships. Because LLCs have a more flexible business structure than corporations, their owners sometimes have a more difficult time deciding what titles to use on legal documents and business cards. Owners sign off on major business decisions and own a significant portion of the company. 

In legal terms, a person or entity that owns a stake in an LLC is called a member. When corresponding with the Secretary of State office, for instance, you'll use member when you refer to the company's owners. On an unofficial basis, however, you can refer to yourself as a principal if you prefer. Some owners like this term better because it has a different association than the term member for the general public.

If you and the other LLC members want to officially title your ownership positions as principals in the company, all members must agree. You'll also have to outline what the title means and the duties, if any, that come along with the title. Ideally, this would be specified in your operating agreement, but if not, any document where all members agree to it and sign is sufficient for the change.

If you're an active managing member in the company and you use principal for your role, either the LLC operating agreement or other agreement must give you authorization to sign paperwork using the term. This helps your company avoid any legal confusion.

You can make things clearer by adopting managing principal as your title if other members also refer to themselves as principals.

Legal and Financial Implications of Being a Principal

Holding the title of "principal of a company" can come with substantial legal and financial responsibilities, especially in small or privately held businesses. A principal often serves as the public face of the company and may be legally liable for certain actions or obligations.

In financial contexts, the term principal may also refer to:

  • Principal Investor: The individual with the largest financial stake or ownership in a company.
  • Loan Principal: The original amount borrowed or invested, not to be confused with the titleholder.

While an LLC protects members (and principals) from personal liability for business debts in most cases, exceptions can arise, especially if a principal personally guarantees a loan or engages in unlawful activities.

Additionally, the IRS or legal authorities may scrutinize principal compensation and tax arrangements, particularly in single-member LLCs or closely held partnerships. Ensuring clarity in the LLC operating agreement about the role and duties of the principal can help avoid tax or compliance issues down the line.

Principal Responsibilities

While principals have various roles depending on the individual business, the general responsibility of a principal is considered a significant influence. Some principals are also company owners, founders, and CEOs. In small businesses, especially, one person may fill all roles. 

Other principals are simply treated as major parties to business transactions. Many legal documents that designate a principal refer to an individual with decision-making authority.

Some companies that identify a specific position as a principal associate it with a key member of the leadership team.

Principals may do the following:

  • Handle client relationships
  • Deal with business relationships
  • Develop the company's strategic vision and mission

Legally, a principal may be one who gives authority for another person — called the "agent" — to act on behalf of the principal.

Key Skills and Qualifications of a Principal

To fulfill their duties effectively, a principal of a company should possess a combination of leadership skills, industry knowledge, and business acumen. While there are no strict legal qualifications required for someone to hold the title of principal, the role typically calls for:

  • Strategic Thinking: Principals are responsible for guiding the company’s vision, making long-term plans, and adjusting strategies based on market changes.
  • Financial Literacy: A principal should understand budgeting, financial statements, and profit/loss analysis.
  • Leadership and Team Management: They often lead teams, set workplace culture, and make key hiring decisions.
  • Communication Skills: Building relationships with stakeholders, partners, clients, and investors is a core part of the role.
  • Decision-Making Ability: Principals are typically the final decision-makers in significant matters.

Experience as an entrepreneur, executive, or subject-matter expert in the company's field is commonly associated with success in this role.

President Vs. Principal

LLC members often create their own titles, and choosing which one to use may depend on how they perceive their roles.

  • Principal: This is often a major investor. He or she may be the largest or possibly the only investor. LLCs may have one owner or multiple owners who equally contribute to the company or not. A principal of the company has the most at stake.
  • President: The president is the head of the company. He or she is often the CEO. Like a ship's captain, the president directs the activities and employees. LLCs don't have to have presidents, unlike corporations, which have a more formal structure. Because LLCs have a more flexible structure, it may name a president if the members agree to do so.

LLCs can name one member to manage the organization. For a single-member LLC, this designation is easy because the principal can also be president. In a multi-member LLC, members may choose the company organization they feel most comfortable with. They may name a managing member as president in order to conform to the titling common with other business structures.

The LLC structure is widely preferred by small business owners because it offers important protections without the rigid structure of corporations. However, members should agree on titles and terms to avoid confusion. They should try and specify these items in their formation documents whenever possible. To make business operations run smoothly, members should also associate specific duties and obligations with each title. This can cut down on conflicts between business owners.

Types of Principals in Business Structures

The title "principal" can vary in meaning depending on the business structure and context. Common types of principals include:

  • Managing Principal: A hybrid between a managing partner and owner, common in professional firms such as law, consulting, or architecture.
  • Principal Officer: Used in regulatory or compliance contexts, such as filings with the SEC or IRS, referring to the top-ranking executive(s).
  • Founding Principal: The original founder who retains ownership and plays a strategic or symbolic role.
  • Silent Principal: An owner or major investor who does not take part in daily operations but retains equity and may influence high-level decisions.

Clarifying the specific role and expectations tied to the title “principal” is essential when there are multiple stakeholders or when dealing with external parties such as investors, clients, or government agencies.

Why the Title Matters

Choosing to adopt the title "principal" is more than a matter of preference—it can affect perceptions, credibility, and legal standing. Here’s why the designation is meaningful:

  • Professionalism: For client-facing professionals, "principal" communicates leadership and ownership without sounding overly corporate.
  • Flexibility: Especially in LLCs, it offers a less rigid title structure compared to "CEO" or "President," making it ideal for smaller or boutique firms.
  • Clarity in Contracts: On legal documents, using “principal” can clearly establish the signatory’s authority to act on behalf of the business.
  • External Communication: The title may help external parties—such as banks, clients, or partners—understand who has decision-making authority.

However, it's critical to ensure the title used aligns with the company’s governing documents and is authorized by the LLC operating agreement or corporate bylaws.

Frequently Asked Questions

What does 'principal of a company' mean? A principal of a company is typically a key owner or executive with significant authority, often involved in major business decisions and strategy.

Is a principal the same as a CEO or president? Not necessarily. A principal may be an owner or investor, while a CEO or president is usually the top manager overseeing day-to-day operations. The roles can overlap in small businesses.

Can an LLC member call themselves a principal? Yes, although the legal term is "member," an LLC owner can use the title "principal" informally or in client-facing settings if it's documented in the operating agreement.

What are the liabilities of a principal in an LLC? In most cases, principals in an LLC are protected from personal liability. However, they may still face legal exposure if they personally guarantee debts or engage in misconduct.

Do all companies have a principal? Not all companies use the title “principal,” but every business has one or more individuals who act in a principal-like capacity—holding ownership or major decision-making power.

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