What Are Entity Documents & Why Does Blueprint Need Them?
Real estate investors often form Limited Liability Companies (LLCs) to buy, sell, and hold real estate. When a buyer or seller of a property is an LLC, title companies request documentation related to the LLC. These documents help establish the identity of individuals authorized to do business on behalf of the LLC, prevent business fraud, and legally secure the LLC’s interest in a property.
Entity Documents Required for Real Estate Transactions
Articles of Organization
There is some variance from state to state, but generally, LLCs must file Articles of Organization (the “Articles”) to create an LLC. The Articles establish the rights, powers, duties, liabilities, and other obligations of each member of the LLC. This document is typically filed with the relevant Secretary of State.
The Operating Agreement sets forth, among other things, rights of individual members and their abilities to make decisions for the LLC. More specifically, the Operating Agreement specifies who has the authority to sign documents on behalf of the LLC. Not all states require an operating agreement; however, it is a best practice to have one, especially when there is more than one member of the company.
If you don’t have an operating agreement, please see the “What If I Don’t Have an Operating Agreement” section below.
Certificate of Good Standing
A Certificate of Good Standing confirms that the LLC is in good standing with the state of registration or incorporation at the time of the document’s issuance. An entity must be in good standing in its state of organization in order to complete a transaction. Certificates of Good Standing can be ordered online at the Secretary of State (SOS) website in which the LLC is registered/incorporated.
Visit https://www.e-secretaryofstate.com/ for a list of SOS websites.
Corporate Resolution or Affidavit
Most often referred to as a Corporate Resolution of the member authorizing a specific transaction, this document is used to provide signing authority to individual(s) who are not specifically listed in the Operating Agreement. When members of an LLC wish to designate additional signatories, the Corporate Resolution is often the vehicle for doing so. Corporate Resolutions are also necessary when the company’s Operating Agreement does not provide general authorization to buy and sell real property.
In the case of a single-member LLC without an operating agreement, an affidavit is generally sufficient to achieve this.
Additionally, an affidavit is often necessary to prove that there have been no amendments or modifications to the company’s operating agreement, specifically modifications that affect who has signing authority on the company’s behalf. If the list of members of the company has changed since the most recent version of the Operating Agreement was signed, an affidavit is needed to confirm the information Blueprint is provided is current.
Why Does the Title Company Need These Entity Documents?
Title agencies work on behalf of underwriters to protect lenders and buyers from unknown title defects. At the end of a real estate transaction, a title insurance policy is issued to either an individual or an entity or both. This means that title agencies must ensure that any entities involved in a transaction are registered and that any person signing on behalf of an entity has the proper authority to do so. To help establish a binding transaction, title agencies require entity documents so that they can evaluate the basic linkages between the property, any LLCs that are party to the transaction, and the signers in a transaction.
The collection of required documents from the LLC is like a form of verifying identification. Just as a title agency requests a copy of photo identification from an individual to confirm that individual’s identity, the entity documents establish which individuals are part of the LLC, which helps to limit fraud or mistakes that impact ownership of property. For example, if a deed from an LLC is signed by an individual that has not been granted the authority to sign that deed on behalf of the LLC, then the deed is potentially void, resulting in the buyer not legally owning the property that was purchased.
What If I Don’t Have an Operating Agreement?
In some states, operating agreements are not required. This is often the case for single-member LLCs. In these instances, LLCs may be able to provide an affidavit in lieu of an Operating Agreement. Such an affidavit would include all of the information that would otherwise be disclosed in an Operating Agreement and accompanying corporate resolution. Title agencies, including Blueprint, will generally have these types of affidavits on file and can provide them to clients as needed.
At Blueprint, we rely on entity documentation to help protect the interests and intentions of all parties to a transaction. If you have any questions about the best practices with respect to entity documentation, please contact your Blueprint Account Manager or reach out to email@example.com.