Operating LLCs

Question:  My LLC is to be the tenant on a real property lease.  The landlord’s lease has a signature block that indicates I will sign the lease as the manager and as a member of the LLC.  The signature block looks like this:

World Wide Widgets, LLC, an Arizona limited liability company

By:_______________________________
Homer Simpson, Manager and Member

If I sign the contract will I be personally liable under the lease in addition to the LLC?

Answer:  Probably.  If you sign the contract with the signature block as indicated above the landlord will claim you signed the contract in your capacity as the manager of the LLC AND in your individual capacity as a member.  A court might agree because that is the strict reading of the text under your signature.  Arizona LLC law says that a member does have have the legal power to sign a contract and bind the Arizona LLC on legal obligations.  Therefore the text “and Member” can only mean the signer is signing in his or her individual capacity.

Bottom Line:  If you do not want to be liable for obligations under a contract, make sure the signature line/block shows that you are signing only on behalf of the LLC.  The signature block should be one of the following:

If the LLC is member managed:

World Wide Widgets, LLC, an Arizona limited liability company

By:_______________________________
Homer Simpson, Member

If the LLC is manager managed:

World Wide Widgets, LLC, an Arizona limited liability company

By:_______________________________
Homer Simpson, Manager

Question:  I am completing the Arizona Joint Tax Application (the sales tax license application) for my Arizona limited liability company that is owned by my Confidential Trust.  How do I answer question 18 that asks for the social security number of the owner?

Answer: Because your Confidential Trust owns your LLC so that your name does not appear on the public records of the Arizona Corporation Commission for confidentiality purposes, the answers to question 18 may not be obvious.  The trust owns the LLC so put the trust’s name in question 18.A. The trust is a revocable living trust, which means the IRS treats the trust as if it does not exist so for federal income tax purposes the trust uses the social security number of the trustmaker. Put the SSAN of the trustmaker in question 18.B. In question 18.C put the word “member.”

To learn more about the LLC owned by a Confidential Trust read my article called “How to Form an Arizona LLC without Disclosing Its Ultimate Owner(s).”

Question:  I want to loan money to my Arizona limited liability company.  How do I document the loan so it will stand up to a challenge by the IRS, another member of the LLC or a creditor?

Answer:  The lender must take care to prepare and have the appropriate parties sign the following documents:

• A Promissory Note:  The promissory note must be signed by at least one member of a member managed LLC or one manager of a manager managed LLC.  The promissory note should state the principal amount of the loan, the lender to whom payments will be made, where payments are to be sent, the date of the loan, no interest will accrue or interest will accrue at a specified rate, the repayment terms and a maturity date by which the loan must be repaid in full.

• Resolutions or Action by Unanimous Consent:  This is a document that shows that the members of the LLC authorize the company to borrow the money on the terms set forth in the promissory note and that specifies which member or manager has the authority to sign the promissory note on behalf of the LLC.

Action by Unanimous Consent:  This is the simplest and easiest way for members to approve the loan.  If all members of the LLC  agree to the loan and its terms, they can sign an Action by Unanimous Consent that contains the resolutions adopted by the members.

Resolutions:  If any member refuses to sign the Action by Unanimous Consent, the members must call a special meeting of the members to consider and vote on the loan and give appropriate notice of the date and time of the meeting to all the members.  The special meeting must be held, the loan discussed, a motion must be made and seconded that the members authorize the company to borrow $X,XXX from <name of lender> on the following terms <state the terms referred to above in the discussion of the Promissory Note> and that <name of member or manager> is authorized to sign the Promissory Note and related documents on behalf of the company.

• Security Agreement and / or Deed of Trust:  If the lender insists that the Promissory Note be secured by a lien on the LLC’s personal property and/or real property then this is done by having the LLC’s authorized signer sign a Security Agreement (for personal property) and/or a Deed of Trust (for real property).  If the lender gets a Security Agreement the lender must also file a UCC-1 Financing Statement with the Arizona Secretary of State.  If the lender gets a Deed of Trust, the original document must be recorded with the county recorder of the county in which the encumbered property is located.

In addition to the above documents, the lender must write a check payable to the LLC or wire the funds to the LLC’s bank account and the LLC must indicate in its books that it borrowed the funds from the lender.

Purchase Our Do It Yourself Loan Documents

• Promissory Note – Do-It-Yourself for $47:  A Promissory Note is the legal document signed by a borrower that evidences a promise to repay and the payment terms and conditions.  It specifies the amount owed, if interest will be charged, the interest rate, when payments are due, the amount of payments and the maturity date.  It contains other important terms such as events that can cause a default and allow the holder of the Note to accelerate the entire balance due after a default, late payment charges and increased interest rate after a default.  The Promissory Note is the fundamental loan document, i.e., it is the primary document that evidences the borrower’s legally enforceable promise to repay.  If you are owed money and you do not have a Promissory Note signed by the borrower(s), you are at a great disadvantage if you have to sue to collect the debt.  Suing to collect a debt evidenced by a Promissory Note is one of the easiest types of lawsuits because you only have to prove the borrower gave you a note and didn’t pay in full.  Related Documents:  A Promissory Note can be secured by a lien on personal property (use our Security Agreement for personal property in Arizona) and by a lien on real property (use our Deed of Trust for real property located in Arizona).

• Limited Liability Company Borrowing Resolution – Do-It-Yourself for $47:  If the borrower or signer on a Promissory Note is limited liability company, the lender must obtain a borrowing resolution from the members of an limited liability company to prevent the company from claiming that the person who signed the Promissory Note or other loan documents did not have the authority to sign for the company and therefore the company is not obligated.  It is prudent business practice to obtain a borrowing resolution.  Commercial lenders almost always require a borrowing resolution as a condition to making a loan.

• Security Agreement – Do-It-Yourself for $47: If a lender wants to secure payment of a Promissory Note with a lien on personal property located in Arizona, the lender must obtain the borrower’s signature on a document that creates the lien. When the lender has a lien on personal property and the borrower defaults under the Promissory Note, the lender can foreclose on the personal property and sell the encumbered property at an auction and apply the proceeds to the debt. The Security Agreement is the document that when signed by a borrower or a guarantor creates a lien on the signer’s personal property that is described in the Security Agreement. My Security Agreement gives you the option to describe specific items of personal property to be encumbered or you can use the all encompassing language that gives the lender a lien on all of the borrower’s personal property. Note: The Security Agreement is not a stand-alone document. This document is intended to be used with a Promissory Note. There must be a debt or obligation created to which the Security Agreement creates a lien. No debt, no lien. Additional Required Document: The lender/secured party must immediately file a UCC-1 Financing Statement with the Arizona Secretary of State to perfect notice to the world that the lender/secured party has a lien on the collateral described in the UCC-1. For more about the UCC-1 and a link to the form, see Richard Keyt’s article that explains the UCC-1 Financing Statement.

• Deed of Trust – Do-It-Yourself for $47: The Deed of Trust is the document that creates a lien on Arizona real property to secure payment of a debt or satisfaction of an obligation. It must be signed by a person, people, entity and/or entities that own the real property to be encumbered. The Deed of Trust is the preferred method of obtaining a lien on Arizona real property. Mortgages can also be used to create a lien on Arizona real property, but the Mortgage is rarely used in Arizona. Common Usage: When a borrower gives a lender a Promissory Note to evidence a promise to pay money to the lender and the lender wants security for the loan, the Deed of Trust is used frequently to create a lien on Arizona real property to secure the obligations contained in the Promissory Note. If the borrower / debtor defaults on the Promissory Note or other contractual obligation secured by a Deed of Trust, the lender / creditor can foreclose the Deed of Trust and cause the real property that is encumbered by the Deed of Trust to be sold at an auction to the highest bidder for cash.

Caution #1: A lender does not have a lien on any of the borrower’s real property simply because the borrower signs a Promissory Note or other document that creates a legal obligation that the lender may enforce. If the lender wants a lien on Arizona real property, the lender must get the owner(s) of the Arizona real property to sign a Deed of Trust (best type of lien) or a Mortgage (rarely used in Arizona).

Caution #2: The lender must record the properly signed and notarized Deed of Trust with the County Recorder of the Arizona county in which the encumbered real property is located.

Caution #3: The Deed of Trust will not be valid unless the owner(s) of the Arizona real property owe a debt or other obligation to the lender / secured party. For example, if Bart Simpson borrows $10,000 to buy a car and Homer and Marge give the lender a Deed of Trust on their home, the Deed of Trust will not be valid because Homer and Marge do not owe money or any obligation to the lender. If the lender wants to be able to foreclose on Homer and Marge’s home if Bart defaults on the loan, the lender must have Homer and Marge sign a Personal Guaranty by which they guaranty Bart’s debt and then the Deed of Trust would secure the satisfaction of Homer and Marge’s obligations under the Personal Guaranty, not under the Promissory Note because they did not sign it.