A colleague recently asked me what I thought about the proposition that the attempted conveyance of real estate to a non-existing entity (the “owners” holding themselves out to the world as having organized an LLC) would be void. I shared with him my thought that Arizona LLCs fundamentally are “incorporated partnerships.” Besides the fact that the same agency governs the two forms of entities in Arizona, and that many of the organizational statutes in the two schemes (corporations and limited companies) are parallel, I observed that the same ‘sanction’ exists against those faking their “organization” as either entity type.

A.R.S. §10-146 (the Corporation Code) provides:

“All persons who assume to act as a corporation without authority so to do . . . shall be jointly and severally liable for all debts and liabilities incurred or arising as a result thereof.”

A.R.S. §29-652 (the Limited Liability Company Act) provides:

“All persons who assume to act as a limited liability company without authority so to do are jointly and severally liable for all debts and liabilities incurred by the persons so acting.”

Since the de facto incorporation doctrine in Arizona was abolished by A.R.S. §§10-056 and -146, according to Booker Custom Packing Co. v. Sallomi, 716 P2d 1061, 1063 (App. 1986), it’s hard to imagine that our courts would support the idea of a de facto organization of a limited company, especially when the threshold for getting organized is so low. An LLC is formed in Arizona when the articles of organization are delivered to our corporation commission for filing (A.R.S. §29-635); they don’t even have to be processed or approved by the government for the company to exist—and the form at the counter of the corporation commission is a whole page long. (Now the “existence” could be short-lived if there’s no compliance, post-filing, with the statutes, but I’m talking here about the ease of preparing for the “opportune moment” even in a few hours time.)

Do not accept title to, lease or mortgage property, grant an easement or do anything else—at least, not with realty, until you’ve filed your organizational papers, no matter what a rush you feel you’re facing. Your deal will be dead, I predict, with respect to the fictional “entity.” I doubt the argument that the LLC’s management can resuscitate the deal by ratifying the prior act after its formation can succeed. Why? Another state that abolished its de facto incorporation doctrine, Minnesota, recently had its Court of Appeals trash a conveyance of real estate to a pseudo-LLC. In Stone v. Jetmar Properties, LLC, 733 N.W.2d 480, 486-87 (2007), the court said that deeds cannot be delivered to non-existent entities, so it voided a deed purporting to convey property to an “unregistered” LLC. That Court of Appeals would not allow the wannabe conveyance to be characterized as a future interest, either; so the grantor continued to be the owner of the property. Minnesota’s courts aren’t alone in its conviction. See, for example, Kiamesha Dev. Corp. v. Guild Props., 4 NY2d 378, 389; Belcher Ctr., LLC v. Belcher Ctr., Inc., 883 So 2d 338 (Fla. App 2004); Julian v. Peterson, 966 P2d 878 (Utah App 1998), cert denied, 982 P2d 88 (Utah 1999); Roeckl v. Federal Deposit Ins. Corp., 885 P2d 1067 (Alaska 1994). If all these courts don’t approve an attempted pre-formation transfer of assets, I don’t like the odds that Arizona will, either, when the time to rule on this issue arrives.

– MNW