When a real estate investor thinks of asset protection the LLC is the first entity that typically comes to mind. As it should because the LLC is the primary defense for investors from lawsuits stemming from harm associated with real estate. State LLC Acts routinely provide that a member in a LLC is not labile for the debts or obligations of the LLC solely by reason of being a member. This liability shield is fairly strong unless a member gives it up either intentionally in a contract or by mistake.
An easy way to mistakenly give up your protection is by not properly signing agreements with the appropriate signature block that designates your representative capacity. When signing a LLC the signature block should contain the LLC’s name and the title of the signing member, or manager. Mishandle this important step and the courts may not be so forgiving.
In Hazer v. Zabala, 26 A.3d 1166, 2011 Pa. Super. LEXIS 2227 (Pa. Super. Ct. Aug. 11, 2011), Juan Zabala signed his name to a lease, and underneath printed “DBA/ZABALA BROKER, LLC.” The landlord sued Zabala when the rent was not paid, and Zabala defended on the ground that the LLC, not Zabala, was the party to the lease.
The court disagreed. It found the “DBA” was an abbreviation for “doing business as” and saw Zabala’s signature and an indication that Zabala Broker LLC was just another name for Juan Zabala. The problem for Mr. Zabala is his signature did not identify his representative capacity in the LLC. Without such a designation Mr. Zabala obligated himself personally under the lease. Here are some common errors I have come across:
John Doe on behalf of ABC, LLC — (John has not indicated his position)
John Doe, ABC LLC — (John has not indicated his position or representative capacity)
John Doe Manager — (John has indicated his position but not his representative capacity)
John Doe President — (LLCs do not typically appoint officers)
When signing on behalf of you LLC you should sign as follow:
John Doe on behalf of ABC, LLC as its Manager (in the case of a member managed LLC you would use Member/Manager) or in the case of a Corporate Manager – John Doe, President of XYZ, Inc, on behalf of ABC, LLC as its Manager.
Another issue in Zabala the court recognized was Zabala Broker LLC was not in existence at the time Mr. Zabala signed the lease. Thus, by not forming your entity prior to entering into a contract no signature block, no matter how correct, will save you from personal liability.
This should serve as a reminder that it is the details that matter. The weakest link in your asset protection planning is also the strongest because it can break your protection.