Corporations, LLCs and other Non-Individual Legal Entities

Corporate Entities

There are many ways that a person can purchase and hold ownership of real estate and businesses. Which type of entity to use is a decision that has a lot to do with financial needs, the structure of their estate planning and the best way to limit personal debt and liabilities. You may start out holding title as individuals, but as your asset values, number and types grow, much thought has to be given to what will happen to those assets in the future, how to limit personal liabilities while maximizing tax gains and minimizing losses.

A “natural” entity is, like you and me, a living, free-acting individual person.

A “non natural” entity is one that has been structured into “life” by natural persons and is governed by rules, regulations and subject to limitations set in place by the natural persons who gave it birth. For the purposes of distinguishing such entities from natural, living individuals, we are lumping them together in this article and calling them “legal” entities, although there are considerable differences in structure, governance and responsibilities for liabilities incurred.

The purpose of this article is not to expound on the different financial and tax consequences that is inherent in choosing one over the other; this article is set to delineated what governing documents will be necessary to establish the right of this entity to conduct the business on hand, the ownership of the entity, the authority of the persons acting on behalf of the entities, and whether the entity is legal and authorized to do business. When you enter into a purchase/sale transaction, whether it is for real estate or for a business, you will need to provide satisfactory proof.

Here are the types of entities that we most commonly encounter:

Trust Estates
Corporation
Limited Liability Companies
Limited Partnerships
General Partnership

TRUST ESTATES

Trusts are set up by natural persons, usually called “Settlors”, to hold title in trust for Beneficiaries. The Settlors give the authority to act for the Trust to “Trustees”. At the end the Trustees are responsible to the Beneficiaries. The Trust may be in its Revocable stage, in which case the Settlors/Trustees can revoke the Trust at any time or change it through Amendments.

Trusts can also be Irrevocable, in which case the Trustees may no longer revoke or change the Trust and has to act according to the Agreement set forth by the original Settlors.

Signers – Trustees or Successor Trustees as designated and named in the Trust Agreement

Documents required for proof –

Copy of the Trust Agreement – Required are excerpts delineating how to handle the assets, who are the authorized Trustees and Successor Trustees, and what are the powers given to them to act. Unless the originals Trustees have all passed away, a full copy of the Trust is not necessary
Any and all Amendments to the Trust
A Trust Certification (Section 18100.5 of the California Probate Code)outlining the important authority parts of the Trust, signed by the Trustees in the presence of a Notary Public.

Under special circumstances the following might also be necessary:

4. An Affidavit of Death of Trustee – In the event one of the Trustees has passed, the remaining Trustee will act alone as the Surviving Trustee. An Affidavit of Death of Trustee will be required and recorded to establish the death.

5. Written resignation from Trustee – Any resignation by a Trustee will require proof through a written copy of said resignation which is signed in the presence of a Notary Public.

6. Doctors’ Letters – In the event the original Trustee is still alive but mentally incapacitated and unable to perform his duties, the Successor Trustee(s) will take his place and proof of the incapacity shall be given in the form of two doctors’ letters describing the mental capabilities.

In the event all originally designated Trustees have passed or resigned their position, the Successor Trustee(s) will take their place.

Once the Successor Trustee(s) have taken over the responsibilities, the Trust is thereafter considered “Irrevocable”.

CORPORATION

A corporation is a legal entity set up by natural persons which are the shareholders. The shareholders then elect a Board to act on its behalf. The Board can consist of the following corporate officers – President, Vice President, Secretary, Treasurer.

The law views the corporation as a person, albeit not a “natural” person, but with all the rights that a natural person may have. However, its longevity may surpass far beyond the normal lifespan of a natural person, its corporate officers and shareholders. In essence, the corporation may exist indefinitely.

Signers – The signers should be designated members of the corporate Board. At least two members to sign, or one member with the addition of a corporate seal.

Documents required for proof –

Articles of Incorporation – filed with the Secretary of State’s office where the corporation is registered
By Laws – the governing document of the organization, showing its structure and powers
A Statement of Information – a form filed with the Secretary of State which shows the corporate officers on the Board and their positions
A Corporate Resolution signed by the Secretary of the Board – a corporation in compliance with the law should record their intent to transact business by issuing a Corporate Resolution, after a meeting of the directors and shareholders, stating what business the Board is to transact and the names of the corporate officers who are authorized to sign on its behalf.
Proof from the California Secretary of State that the corporation is registered to do business in this state and is in “good standing”. This is particularly important if the corporation is registered in another state.

It should be noted that a corporate officer can not give his authority to sign for the corporation by giving a “Power of Attorney” instruction to another person. If the designated officer cannot act in the capacity required the Board must then nominate another person to act and reflect this in a new Corporate Resolution.

If there is a foreign (non U.S.) corporation involved in the transaction we will require copies of not only the corporate entity documents, we will also need an opinion letter from an attorney who is licensed to practice law in the country where the entity is formed. This foreign entity should also show proof that they are registered with the Secretary of State to conduct business in the State of California.

LIMITED LIABILITY COMPANY (LLC)

A Limited Liability Company (LLC) is a legal entity structured as a combination of a Corporation and a Limited Partnership. It is formed by Members who own percentage interests. The entity must be registered with the Secretary of State. This is the most popular type of legal entity at this time.

Pursuant to their Operating Agreement the members can elect a Board (President, Vice President, Secretary or Treasurer) or Managing Member(s) to transact business for the LLC, or they can manage it themselves.

Signers – Designated officers of the Board or the Managing Member(s) or Members, as designated by the Resolution

Documents required for proof –

Articles of Organization (LLC-1) and any Amended (LLC-11, LLC-2) filings with the Secretary of State where the LLC is registered
Operating Agreement and any Amendments – the governing document of the organization, showing its structure and powers
A Statement of Information form filed with the Secretary of State which shows the authorized Members
A Resolution signed by the Members that formalizes their intent to transact the business and the name(s) of the Board officers or Member(s) who is/are authorized to sign on its behalf.
Proof from the California Secretary of State that the LLC is registered to do business in California and is in “good standing”. This is particularly important if the LLC is registered in another state.

It should be noted that a Corporate Officer or a Member or a Managing Member can not give his authority to sign for the LLC by giving a “Power of Attorney” instruction to another person. If the designated Officer or Member cannot act in the capacity required then the other Members must nominate another person to act and reflect this in a new Resolution.

If there is a foreign (non U.S.) LLC involved in the transaction then we will require copies of not only the LLC corporate entity documents, we will need an opinion letter from an attorney who is licensed to practice law in the country where the entity is formed. This foreign entity should also show proof that they are registered to conduct business with the California Secretary of State (LLC-5).

LIMITED PARTNERSHIPS (LP)

A Limited Partnership (LP) is a partnership that is made of General and Limited Partner(s). The General Partner(s) conduct the partnership business and have unlimited personal responsibility for the liabilities and debts of the partnership. The Limited Partner(s) invest and share in the profits but do not take part in the running of the partnership and their liabilities are limited to how much they contributed to the partnership.

Authorization and scope of the powers of the partners are written in the Partnership Agreement.

Signers – The General Partner(s) sign for the LP

Documents required for proof:

Copy of the Certificate of Limited Partnership (LP-1) and any Amended (LP-2) filings with the Secretary of State where the LP is registered
Partnership Agreement and any Amendments – the governing document of the organization, showing its structure and powers
A Partnership Resolution signed by the Limited Partner(s) that approves the transaction and the authority of the General Partner(s) to act.
If this is an out of state LP, proof from the California Secretary of State that the LP is registered to do business in California and is in “good standing” (LP-5).

It should be noted that a General Partner can not give his authority to sign for the LP by giving a “Power of Attorney” instruction to another person.

If this is a foreign (non U.S.) LP then we will require copies of not only the LP entity documents, we will need an opinion letter from an attorney who is licensed to practice law in the country where the entity is formed. This foreign entity should also show proof that they have are registered with the Secretary of State to conduct business in the State of California (LP-5).

GENERAL PARTNERSHIP (GP)

The General Partnership (GP) is much like the Limited Partnership except there are no Limited Partners in the background. The Partnership is made up of two or more General Partners and each have joint and several unlimited personal liabilities for partnership debts.

Authorization and scope of the powers of the partners are written in the Partnership Agreement.

Signers – All General Partners

Documents required for proof:

Copy of the Statement of Partnership (GP-1) and any Amended (GP-7) filings with the Secretary of State where the GP is registered
Partnership Agreement and any Amendments – the governing document of the organization, showing its structure and powers
A Partnership Resolution signed by all the General Partners that approves the transaction.
If this is an out of state GP, proof from the California Secretary of State that the GP is registered to do business in California and is in “good standing” (GP-5)

It should be noted that a General Partner can not give his authority to sign for the GP by giving a “Power of Attorney” instruction to another person.

If this is a foreign (non U.S.) GP then we will require copies of not only the GP entity documents, we will need an opinion letter from an attorney who is licensed to practice law in the country where the entity is formed. This foreign entity should also show proof that they have are registered with the Secretary of State to conduct business in the State of California (GP-5).

In summary, the 3 important questions to ask when a legal entity is a party to the transaction:

Is it a valid and legal entity within the jurisdiction of the transaction?
Does the entity have the documentation from its owners allowing it to transact business?
Who are the authorized signatories for the entity?

Due to issues regarding tax liabilities, responsibilities for debt, and measure of control, it is not unusual for the same natural persons to set up different types of legal entities to own different parts of the investment. For instance, the real estate could be owned under one type of entity and the business which occupies the real estate under another. This is found most often in the restaurant business. When a restaurant and the real estate on which it is located sells together but is owned by different legal entities, it is normal that two separate and distinct escrow transactions will be opened even though the different legal entities may have the same owners.

We hope this article has given you answers to questions you may have regarding this particularly important but confusing subject matter.

Juliana Tu, CSEO, CEO, CBSS, CEI, SASIP

Disclosure and disclaimer: The information provided herein is given to facilitate the understanding of requirements needed. Viva Escrow provides no legal advice for the type of legal entity best suited for your needs. Please consult with your own legal and financial counsel.

Juliana Tu, CSEO, CEO, CBSS, CEI, SASIP
Escrow Manager