Have you ever referred to your business as an LLC, before getting around to forming the entity? Rational reasons could exist – maybe you intend to form the entity after making a few sales, but you wanted to lock down the domain first; or perhaps you believe including “, LLC” in your name makes you appear more established and professional. Either way, if you hold yourself out in business as being a limited liability company (or corporation), when you are in fact a sole proprietor, there can be devastating real-world consequences.
It is very simple to confirm the status of any corporation or LLC in California. Click here to check the status of any registered business in the state. Assuming you entered the name correctly, if someone is holding themselves out as being a corporate entity in California, and they do not appear on the Secretary of State database, then this person has a big problem. If you are contemplating doing business with any company, I strongly recommend looking them up before getting too involved.
Below are examples of faux LLCs I’ve encountered. Litigation battle stories incoming!
Non-existent llc on a purchase agreement
When I was a new lawyer fresh out of law school a client hired me to file suit on a failed real estate transaction in which he was the buyer. The buyer executed a purchase agreement in the name of his LLC, but the seller refused to perform. I drafted a complaint seeking a remedy called specific performance and attached the contract as an exhibit. I confirmed on the Secretary of State website that the LLC existed before filing suit.
The defense immediately served discovery asking the buyer to admit the LLC did not exist at the time of contracting, and that the contract contained a non-entity. This tipped me off that we had a major problem, and I looked up the entity again, this time comparing the date of the entity formation with the date on the contract.
Sure enough, the buyer created the entity months after the contract was formed, just before we filed suit. At the time the contract was formed, the buyer did not exist; it was a non-entity. You might think the member/owner of the LLC could just sue in its stead, but the contract contained a fictitious name, meaning the name was something other than the legal name of the buyer. The fictitious name was not registered with the county recorder, and contracts with non-registered fictitious names are voidable by the other party. The seller opted to void the contract. Had the seller communicated his intention we may have avoided litigation altogether, but that is a separate article.
I realized the case had no merit and we had to cut our losses and dismiss. I learned to always and immediately confirm the legal status of any company within whom I deal, whether it’s my client or the other side. This lesson stuck with me throughout my career.
You should never execute a contract on behalf of a non-existent entity because you’ll lack standing to sue if you should ever become a plaintiff.
non-existent llc on a lease
The next scenario is the converse of the first. Now I represented the defendants. The case involved a commercial lease where the tenant executed the lease as an LLC, and the parties went to litigation.
The complaint named both the LLC and the individual members as defendants. My first instinct was to complain that the landlord improperly sued the individuals, as members of an LLC are generally not liable for company debts. However, I recalled the lesson from the early real estate case, so I checked my client’s status on the Secretary of State website.
I learned my client signed a commercial lease on behalf of a non-entity. The principals of the company erroneously thought they had formed the LLC. They claim to have paid a lawyer to file papers with the state to create the entity, but somehow it never happened.
I wanted to assert that the individual members were subject to dismissal, but they were in fact personally liable for the company’s debts because there was no company! I had plenty of substantive grounds to defend the case, but their personal assets were exposed because they contracted in the name of a non-entity.
Even worse, the owners were operating under a fictitious name, which was not registered with the county. This means if a client refused to pay them for their work, they would have been barred as a matter of law from being a plaintiff!
The landlord dismissed the case after I served discovery that went to the heart of the dispute, so my clients dodged a bullet.
I represented a client, an actual LLC, who was being sued on a bogus fraudulent transfer case. The plaintiff corporation contended a third party owed it money, and that the third party conspired with my client to frustrate collection, fraudulently transferring assets to my client.
The allegations were meritless, but I immediately looked up the plaintiff corporation on the Secretary of State website. The plaintiff entity was never formed. The lawsuit alleged the plaintiff got a judgment in another case, and he was seeking to hold my client liable for the judgment. Nobody in the prior case noticed the plaintiff was a non-entity, and that the judgment was invalid! Compounding the problem, the plaintiff lacked standing to sue in the second case.
I had to bring a motion to change venue before asserting the standing defense, and the motion was granted. Before the case was transferred I notified counsel, as a professional courtesy and in an effort to save my client on defense fees, of my intention to bring a motion to dismiss on the standing issue. Counsel realized his blunder and could not deny his client was a non-entity. He therefore responded that his client was just a fictitious business name (even though the complaint alleged it was a corporation), and that the “true” plaintiff was an individual named Jose.
Counsel presented a fictitious business name certificate to me, but FBN certificates expire after five years. I notified counsel of this defect, and he quietly dismissed the case. I was in his shoes when I was a new lawyer, so I can’t be too judgmental, but this guy had been practicing law much longer than me.
fake llcs on social media
I have seen several people promoting business pages on Facebook with names ending with “LLC”. Curiosity sometimes causes me to casually look them up, and on multiple occasions I have found these “LLCs” to not exist at all. As I said at the beginning of the article, rational reasons could exist but my perspective is these people are holding themselves out as something they are not.
Be very cautious about transacting business with someone willing to cut corners and be disingenuous. I personally believe these people know better, but they lack the resources or know-how to form their own entity, so they take the shortcut and slap "LLC" or "Inc." at the end of their name, hoping nobody notices. These are not the traits of someone with whom I would transact business.
But Tom, what if they just formed the entity outside California? Great question! I have written in the past about the wisdom of forming out of state entities (click here), but here’s the real problem: if you are doing business in California and formed a foreign entity (meaning out of state), you still have to register the entity in California. You have to file papers and pay fees, just like any other California entity.
In closing, if you are contemplating a business transaction with someone holding themselves out as an LLC or corporation, take a moment to check their legal status. Use this link right here. Send me a note if you'd like me to check it for you (no charge!), and let me know if you have any questions.