Now You (LL)C Me, Now You Don't

Thursday, May 12, 2016 by Elliot Schon, Esq.


One of the first things a title agency will do is run searches on the owners of the property in question. With a residential property, the deed will be in the name of the individual who owns the property. The deed will say John Smith, and all we need is the photo ID of John Smith to verify that he is the owner. We will run searches and check to ensure that the individual is the legitimate owner, and determine if there are title issues, such as judgments, mortgages or any other liens against them.

Commercially owned properties tend to have title vested in an entity rather than an individual, such as a Corporation or LLC.

There are many legitimate reasons for creating a Corportion. or LLC to take ownership of commercial real estate. The entity offers privacy in that it is not public knowledge as to who the shareholders or members are that make up the ownership of the entity. The main reason for forming a Corp. or LLC is the protection they offer from lawsuits. They will protect the building owners from losing personal assets in case of bankruptcy or judgement against the entity.

When a Corp. or LLC is the the seller of a property, the privacy it offers obscures the identity of the owners. Therefore, the title company needs to ascertain who the entity's actual shareholders or members are.

Typically, we will ask for the operating agreement of the LLC or the bylaws for the corporation to determine who the members or shareholders of the entity are. However, the operating agreement is a document that can be pulled off the internet and modified to list the correct entity name within a very short period of time. If the operating agreement has been drafted by a legitimate law firm, that would give it more credence to take it at face value.

At Riverside, our highly skilled staff are trained to see beyond the paper and to be alert for red flags that may indicate fraud. There are instances where the operating agreement seems off or is presented by a law firm or individual that we are not familiar with. In that case, we will take a deeper dive into the identity of the LLC.

The next step would be to ask for the Corp. or LLC’s tax documents. The most common form is the K-1’s. The K-1 will verify who the shareholders and members are, with their percent of ownership in the entity. It is an official tax document that must be filed with the EIN or Social Security number of the taxpayer.

We recently had a story where the seller was an LLC. The seller’s attorney submitted an operating agreement that indicated that the LLC had one sole member. Someone involved in the deal mentioned that they were doubtful that the sale would go through, as the partners on the seller’s side were involved in dispute. That immediately triggered a red flag, since the operating agreement that we received indicated that there was only one member of the LLC!

We requested the K-1’s or an affidavit from the seller’s attorney stating that he had knowledge that there was only one member of the LLC.

The buyer's attorney spoke at length with the seller's attorney, and was satisfied that there was truly only one member of the LLC. He was quite upset that we were putting the deal at risk by demanding additional paperwork.

Riverside staff were adamant that we would not insure unless we received the affidavit or the K-1. The seller’s attorney refused to give an affidavit or the K-1. After repeatedly pressuring the seller's attorney, he finally submitted K-1’s for the previous years which positively identified an additional member of the LLC!

Apparently, the seller was trying to ram through the sale of the property without his partner’s knowledge. Had we allowed this to go through, it would have resulted in a title claim, possible litigation and a great deal of aggravation for our buyer. The buyer's attorney was ultimately very grateful that we pressed on the matter and saved his client the hassle.

Working with Riverside means you don't have to worry about your deal. Our skilled staff are committed to ensuring your deal closes smoothly, and more importantly, that there are no open issues.

P.S. The deal eventually closed with both partners on the seller’s side bringing their own attorneys to the closing table.

Got questions about "LLC’s" or other Title topics? Click here to ask an expert and get the answers you need.

The materials on this website are provided for informational purposes only and do not constitute legal advice. These materials are intended, but not promised or guaranteed to be current, complete, or up-to-date and should in no way be taken as an indication of future results. Transmission of the information is not intended to create, and the receipt does not constitute, an attorney-client relationship between sender and receiver. The newsletters and articles on this website are offered only for general informational and educational purposes. They are not offered as and do not constitute legal advice or legal opinions. You should not act or rely on any information contained in this website without first seeking the advice of an attorney.