Principal of a Company: Everything You Need to Know
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. 3 min read
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.
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.
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.
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