Loaning to Partnerships & LLCs, Part II
By Dan Harkey
Part I
Individuals & family trusts
Part II
Partnerships, LLCs
Part III
LLCs and corporations
Continuation-Part II
Partnership types:
Understanding the Different Partnership Types: there are various types of partnerships, each with unique documentation requirements. This section will delve into the specifics of general and limited partnerships, equipping you with comprehensive knowledge in this area.
·????? General Partnerships.
·????? Limited Partnerships (LPs)
·????? Foreign Limited Partnership
·????? Limited Liability Partnerships (LLPs)
·????? Foreign Limited Liability Partnerships
General Partnerships
General Partnerships: A Closer Look General partnerships are more than just business arrangements. They involve sharing the benefits, rights, responsibilities, assets, profits, and financial and legal liabilities of the jointly owned business. This understanding is crucial for all parties involved.
General partnerships do not require any specific formation documents.? Oral partnership agreements are valid. The shared benefits and responsibilities may differ according to verbal agreements, partnership agreements, and capital contributions.
A general partner’s authority can be classified in one of several ways:
·?????????????? Apparent authority:? any partner acting alone if the transaction is in the “ordinary course” of business (mortgage loan not likely to qualify).? The limitation on authority is not applicable if it is known by reviewing the partnership agreement.
·?????????????? Actual authority:? any one or more partners expressly authorized by all other partners under the partnership agreement or other approval.
·?????????????? Presumptive authority:? any partner(s) named in filed Statement of Partnership Authority (GP-1).? It is not legally required but conclusive if filed with the Secretary of State and recorded in the county, absent actual knowledge to the contrary (Corps. Code §16303(d)(2)
How does a lender establish the partner’s authority to act on behalf of the partnership?
·?????????????? Statement of Partnership Authority (GP-1) if one has been filed with the Secretary of State.? Filing a (GP-1) has become more common in recent years.? If one exists, it can be recorded with the county recorder.
·?????????????? A copy of the General Partnership Agreement. Most real estate ownership and operations borrowers have a written partnership agreement.
·?????????????? An option is to obtain a borrower’s attorney’s legal opinion on the partnership’s validity and formation and the partners' authority to sign.? Details are set out elsewhere.
·?????????????? Obtain a partnership resolution, signed by all general partners, specifying approval of the loan and authorizing and directing a particular general partner(s) to execute all appropriate documents necessary to conclude the loan.
·?????????????? Obtain a notarized Certificate of Incumbency under the penalty of perjury signed by all partners filled out in the hands of the partners, certifying:
·?????????????? The partnership is fully and validly organized, exists, and is in good standing under the laws of California or similar laws in other states.
·?????????????? The partnership agreement attached to the Certificate of Incumbency governs the partnership.
·?????????????? The partnership agreement has not been amended, superseded, or modified in any way, or, if it has, all such changes are attached to the original. For instance, if the partners change the profit-sharing ratio, the original agreement would be amended.
·????? ?????There is no litigation pending or threatened against the partnership;
·????? ????The principal address of the partnership.
·????? ????The telephone number, addresses, and email addresses of all partners.
·?????????????? That the partners listed have full authority and power to encumber the real and personal property of the partnership without any further requirements or consents from any other party or entity (then list the parties with such authority), citing the provisions of the partnership agreement that give them such authority (then, check the section of the partnership agreement giving them such authority and read it to make sure it says what they say it says).
·?????????????? Agreeing that executed loan documents will constitute valid, legally binding obligations of the partnership and will be enforceable against the partnership by their respective terms.
·?????????????? Spousal consent. If one or more partners are married, the partnership agreement should already include a spousal consent form. If not, the lender may consider obtaining spousal consent for the loan.
·?????????????? UCC-1 lien and judgment searches in the names of all general partners and the partnership.?
·?????????????? Personal Guarantees.? General partners are already personally liable and cannot guarantee their debts. Therefore, a guarantee provides minimal protection.
How are the parties to sign?
Standard signature block:?
Bunker & Stivic Partnership
a California general partnership
By:?????????????????????????????????????????
? Archie Bunker?
? General Partner
Is one of the partners an entity?? (If so, verify the formation and authority of the partner entity as you would any other entity.)
Signature block with one of the partners being an entity:
Sanford & Son
a California general partnership,
By:? Sanford & Sons, A California corporation,
Its General Partner
By:?????????????????????????????????????????
Fred Sanford.
Its President
By:?????????????????????????????????????????
Lamont Sanford
Its Secretary
Limited partnerships:
A limited partnership is a form of partnership in which there might be one or two general partners, and the remainder of the partners are considered limited. General partners have the authority to operate the business and act on its behalf, while limited partners have little or no involvement in management.
General partners are liable for their decisions on behalf of the company. Limited partners are not usually responsible for the actions of the general partners.? But, for those who have gone to court enough,? the court system finds some deviation from following written law.
A lender should obtain:
·? ??????Certificate of Limited Partnership (LP-1) should be obtained from the Secretary of State.? Ascertain its good standing with the Secretary of State.
·? ??????The Limited Partnership Agreement should be reviewed for borrowing requirements and limitations.
·?????????????? The names, addresses, phone numbers, and email addresses of all General and Limited Partners should be obtained.
·? ??????The street addresses of the Partnership's business places should be designated.
·?????????????? All partnership documents should be reviewed to determine restrictions on borrowing and procedures the partnership must follow to authorize borrowing.
·?????????????? A resolution of all general partners should authorize the partnership to undertake the borrowing and authorize specific general partners to execute the loan documents. Limited partners usually have no say in managing the limited partnership, but specific restrictions may also require the signatures of all limited partners. For example, some LP limits burden all the assets of the LP without the Limited Partners' permission.?
·? ?A Certificate of Incumbency that identifies all general and limited partners should be obtained. This certificate is crucial as it confirms the partnership's current status and the partners' authority to act on its behalf.
Authorized agents of the limited partnership:
General partners have the sole right and authority to bind a limited partnership.? However, the partnership agreement may include limitations on the power of the general partner.? For example, certain loans may be prohibited.? There may also be limited partner consent rights to specific actions.
How should the signature blocks look?
Standard Signature Block:
The Stivic’s L.P., a California limited partnership
By:????????????????????????????????????????????????????? Gloria Stivic, General Partner
A general partner may be an entity, such as a corporation, LLC, limited partnership, or general partnership.
Verify the formation and authority of the general partner entity.
Non-Standard Signature Block accommodating entity general partners:
The signature block should look something like this:
The Jefferson Family, a California limited partnership
By:? Wezzy Inc., a California corporation, its General Partner
By:????????????????????????????????????????????????????? ??????????? Louise Jefferson
UCC-1 lien and judgment searches are available in the names of all partners and the partnership. They are available on the Secretary of State's website.
Limited liability company (LLC)
Limited liability companies are for-profit entities with ownership divided into types. Like a partnership, the managing members manage the company, and the non-managing members are called members. The rights, responsibilities, title, and interests are defined in an operating agreement.
The California Revised Uniform Limited Liability Company Act (“Act”) (passed January 1, 2014) replaces the Beverly-Killea Act, and all new and existing LLCs are subject to the new Act’s provisions. There was some clean-up legislation effective January 1, 2016, intended to correct problems.? Lenders should familiarize themselves with the act. Other states have similar regulations for LLCs.
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The LLC business structure was created in the U.S. to protect its owners from personal responsibility for its debts and liabilities. It combines the characteristics of a corporation and a partnership, allowing profits to be passed through to the owners' income.?The “protection for debts and liabilities” structure is an illusion when litigation occurs. In a court of law, the plaintiff will portray the wealthy businessperson vs. the exploited.? It is a very successful strategy. Many judges disregard liability protections.
A lender should obtain:
·?????????????? Certified copy of the Articles of Organization (Form LLC-1), including any amendments, from the Secretary of State.??
·????? Request a certified copy of the Articles from the Secretary of State.
·?????????????? The Articles will define, among other things, whether the LLC is single-manager-managed, multiple-managers-managed, or member-managed.? The type of management will determine who must sign loan documents.
A lender may order here:
Request a good-standing letter (Certificate of Status) from the Secretary of State. ?Do not make the loan if the LLC is not in good standing.
The lender can order here:
If the LLC is foreign (from another state), obtain a certified copy of the Certificate of Status from the California Secretary of State showing that the LLC has registered with the State of California and is qualified to do business in the State of California.? If not, do not make the loan.
The lender may order here:
Obtain a certified copy of the current filed Statement of Information from the Secretary of State.? This document will reveal the managers or members of the LLC as of the date the Statement was signed, but it is not conclusive.? Only the complete, as amended, operating agreement can determine who is authorized to sign.
The lender may order here:
?Obtain a copy of the Operating Agreement, certified by the Member(s)/Manager(s), including any amendments.
?
·?????????????? Operating Agreement. The Operating Agreement contains the “rules” of the LLC and how it is to be operated.? It is like the by-laws of a corporation.? A lender will generally find the following information in the Operating Agreement, although, technically, a written operating agreement is not even required:
·???????????????? The management structure of the LLC - whether it is member-managed or manager-managed.
·?????????????? ?Any limitations on borrowing and what steps need to be taken to authorize borrowing.
·????? ???????Any restrictions on pledging collateral.
·???????????????? Designation of the Members and, if it exists, the manager(s) and designation of the ownership interests in the LLC.
·?????????????? Any additional requirements, such as voting requirements, for the LLC to borrow money or convey property.
·????? Delineation of the required persons to execute loan documents.
·?????????????? Obtain a Certificate from ALL Member(s)/Manager(s) that the Operating Agreement is current and complete as attached to the Certificate.
·?????????????? Review the powers and authority sections of the Operating Agreement and the Articles of Organization to determine who is authorized to sign for a loan, whether there are any limitations on the type or amount of loan that can be obtained, and whether additional signatures are required.
·?????????????? Obtain a Borrower's Opinion of Counsel Letter if the loan is significant or complicated.
·?????????????? If the loan is complicated or is in a large enough sum, the lender may want additional assurance, then it may be prudent to obtain the opinion of the borrower's counsel.? This opinion usually discusses and opines as to many things, most often including the legal capacity of an individual and signatories, the proper formation of the entity, authorization and authority to deliver and execute the loan documents, lack of conflict with other contracts, judgments, orders, etc. to which the entity is a party or bound, lack of litigation, "no usury" representation, the enforceability of the loan documents, and many other possible representations.? It should be addressed to the lenders and originating brokers for reliance purposes.??
·?????????????? Obtain a Resolution signed by the appropriate Member(s)/Manager(s).?? Member resolution. A resolution signed by all members of the LLC that authorizes the proposed borrowing or, if the manager-managed, a resolution signed by the manager. ?Read the operating agreement for restrictions.? The borrowing resolution should authorize the LLC to enter into the borrowing transaction and authorize the appropriate members or manager to sign any loan documents on behalf of the LLC.
·?????????????? Federal tax returns (required by institutional lenders but usually not required by private money lenders).
·?????????????? Personal Guarantees.? A borrower cannot guarantee their loan. A separate person or entity must sign the guarantee. Watch the “sham guarantee” issue. An excellent supplement to a loan application package and business purpose declaration will often help distinguish between absolute and “sham” guaranties.
·????? ?Determine which parties must sign the loan documents:
·????? From the documents above, the lender can determine the proper signatories.?
·?????????????? The California Revised Uniform Limited Liability Company Act (the "Act," effective January 1, 2014) contains certain presumptions regarding parties signing on behalf of the LLC. These presumptions are based on similar presumptions regarding corporations. The presumptions validate the authority of the persons or entities listed acting on behalf of the LLC. The actions are valid unless the third party (here, the Lender) knows the signer's lack of authority.
·????? ?These presumptions are found in section 17703.01.? These provisions state:
·?????????????? 17703.01.? (a) Unless the articles of organization indicate the limited liability company is a manager-managed limited liability company, every member is an agent of the limited liability company for its business or affairs. The act of any member, including, but not limited to, the execution in the name of the limited liability company of any instrument, for the apparent purpose of carrying on in the usual way the business or affairs of the limited liability company of which that person is a member, binds the limited liability company in the particular matter unless the member so acting has no authority to act for the limited liability company in the specific matter and the person with whom the member is dealing has actual knowledge of the fact that the member has no such authority.
·???????????? If the articles of organization indicate that the limited liability company is a manager-managed limited liability company, each of the following applies:
·???????????? No member acting solely in the capacity of a member is an agent of the limited liability company, nor can any member bind or execute any instrument on behalf of the limited liability company.
`??·???????????? Every manager is an agent of the limited liability company for its business or affairs. The act of any manager, including, but not limited to, the execution in the name of the limited liability company of any instrument for apparently carrying on in the usual way the business or affairs of the limited liability company of which the person is a manager, binds the limited liability company, unless the manager so acting has no authority to act for the limited liability company in the particular matter and the person with whom the manager is dealing has actual knowledge of the fact that the manager has no such authority.
·???????????? No act of a manager or member in contravention of a restriction on authority shall bind the limited liability company to persons having actual knowledge of the limitation.
·???????????? Notwithstanding the provisions of subdivision (c), any note, mortgage, evidence of indebtedness, contract, certificate, statement, conveyance, or other instrument in writing, and any assignment or endorsement thereof executed or entered into between any limited liability company and any other person, when signed by at least two managers, or by one manager in the case of a limited liability company whose articles of organization state that only one manager manages it, is not invalidated as to the limited liability company by any lack of authority of the signing managers or manager in the absence of actual knowledge on the part of the other person that the signing managers or manager had no authority to execute the same.
·????? Confirm who has authority as presumed under section 17703.01 of the Act.
·?????????????? If a lender decides to confirm the authority of the authorized signators under the Act, the lender should review the following documents after having satisfied yourself to the best of your ability that the records are accurate and current.
·?????????????? Review the Articles of Organization, the Operating Agreement, and the Statement of Information (remember, the SOI is not determinative of who is entitled to sign).? The current organizational documents (Operating Agreement and Articles of Organization) will tell you who has the authority to sign.
·????? Determine what type of LLC it is:
·?????????????? Is the LLC a Sole Member LLC?? (Check the Articles of Organization and the Operating Agreement).
·?????????????? If so, the Sole Member has complete power to take all actions on behalf of the LLC, including signing for loans. You will only need the Sole Member's signature.?
·?????????????? A lender may request appropriate resolutions and a certificate of incumbency.? See below.
?·????? Is the LLC a multi-member managed LLC?
·?????????????? There is a presumption that any managing member can act for the LLC. Absolute authority is defined and limited in the Operating Agreement.? Review the Operating Agreement to determine who is required to sign on behalf of the LLC and for what purpose.? Certain restrictions on real estate loans may exist regarding whether they can be obtained and whether there may be dollar amount limitations.? While not always possible or legally required, the lender/broker may want to consider securing consent from ALL Members for the loan in the form of authorization for the signing Member(s) to sign.? This may help in preventing authority problems down the line.
·????? Is the LLC manager-managed?
The Manager is authorized to sign the loan documents by the operating agreement and is presumed to have authority under the Act, section 17703.01(b) and (d).? “Actual knowledge” that the signator does NOT have authority can invalidate the loan documents.? One must examine the Operating Agreement for restrictions on extraordinary items, such as real estate loans.? There may be restrictions on the amount or type of loan obtained with just the Manager’s signature.? Member consent may be required as well.?? It is a “best practices” idea to have all Member(s) signatures on the resolution authorizing the loan so that no one can challenge it.
·?????????????? If the LLC is Manager Managed:
·?????????????? Is it a multi-manager managed LLC or a sole manager-managed LLC?
·?????????????? If multiple managers manage the LLC, have at least two managers sign. The lender will receive the benefit of the statutory presumption.?
·?????????????? Are there any restrictions on the Manager's ability to sign for loans?? See the Operating Agreement.
·?????????????? If the Manager is an entity (LLC, Corp, Trust, etc.), then a similar vetting of the Manager must occur.? Review the organizational documents, resolutions, and an incumbency certificate showing that the individual(s) signing for the Manager is authorized to be the LLC manager and sign LLC documents as Manager.?
·?????????????? Obtain a notarized Certificate of Incumbency (sample illustrative form attached at the end of this presentation) under the penalty of perjury from all Members and Managers as listed in the Operating Agreement (as it may be amended) filled out in the hand of the Member(s)/Manager(s), certifying that they are the only Member(s) and Manager(s) of the LLC.
· The LLC is fully and validly organized, existing, and in good standing under the laws of the State of California.
· The Operating Agreement attached to the Certificate of Incumbency is the agreement currently in effect and governing the LLC.
·?????????????? The Operating Agreement has not been amended, superseded, or modified in any way, or, if it has been, all such changes are attached to the original Operating Agreement.
· There is no litigation pending or threatened against the LLC.
·?????????????? The principal address of the LLC.
·?????????????? The telephone numbers, email addresses, and home and business addresses of all Member(s)/Manager(s).
·?????????????? That the Member(s)/Manager(s) listed have full authority and power to encumber the real and personal property of the LLC without any further requirements or consents from any other party or entity (then list the parties with such authority), citing the provisions of the Operating Agreement that give them such authority (then, check the section of the Operating Agreement giving them such authority and read it to make sure it says what they say it says).
·?????????????? The Loan Documents, when signed, will constitute valid, legally binding obligations of the Borrower and will be enforceable against the Borrower by their respective terms.
How are the parties to sign?
Is the Member an individual?
Archie Bunker Media Company, a California limited liability Company
By:?????????????????????????????????????????????????????
Edith Bunker, Managing Member
(If multiple Members, all should sign):
By:?????????????????????????????????????????????????????
Archie Bunker, Member (etc. for additional members)
·?????????????? Are the Members or the Manager an entity?
·?????????????? If so, the same certificate and resolution process must be followed regarding that entity to ensure that the person signing on behalf of the Member or Manager is appropriately authorized to sign the document.
·?????????????? The signature block should read something like this, modified for the circumstances if the Manager is an entity:
Archie Bunker Media Company, a California limited liability company
By:__________________
By:? Tidbit Corporation,
Archie Bunker, President.
This is the end of Part II.? Advance to part III
Thank You
Dan Harkey
Educator and Private Money Financing Consultant
949 5338315 [email protected]
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Innovative Business Growth Architect | Commercial Software Strategist | Automating Business Growth with Leading Software Solutions
4 个月Your educational overview on loan documentation sounds thorough and informative. It could indeed serve as a valuable reference guide. Dan Harkey
Private Money Lending | Trust Deed Investments
4 个月Great series you got going here Dan!