Verifying that the right person signs your loan documents is not a technicality; it is a fundamental requirement that determines whether your loan is enforceable. When a borrower is an individual, the process is straightforward. However, the vast majority of private lending transactions involve entity borrowers: LLCs, corporations, trusts, and partnerships. Each entity type carries its own rules about who has authority to bind the organization, and getting this wrong can render your entire loan package unenforceable.
This guide walks private lenders through the signature authority requirements for each major entity type, helping you identify the correct signatory and avoid costly mistakes.
Why Signature Authority Verification Matters
The consequences of accepting a signature from an unauthorized party are severe. If the person who signed your loan documents lacked proper authority, the borrower entity may later argue that the loan is not binding. This can result in an inability to enforce the note, foreclose on the property, or collect under a guaranty. In the worst-case scenario, your entire secured position could be at risk.
Diligent verification of signature authority before closing protects your investment and provides a defensible position if disputes arise down the line.
Limited Liability Companies (LLCs)
LLCs represent the most common borrower entity type in private lending, and they are generally the most straightforward when it comes to determining who should sign.
Determining the Authorized Signatory
The first step is to identify whether the LLC is manager-managed or member-managed. This distinction determines who has the inherent authority to act on behalf of the entity:
- Manager-managed LLCs: The designated manager holds signing authority. The manager may be an individual or another entity.
- Member-managed LLCs: The managing member or members hold signing authority.
Essential Documents to Review
- The management structure (manager-managed vs. member-managed)
- Who is designated as the manager or managing member
- Whether borrowing money or encumbering property requires member consent or approval beyond the manager’s unilateral authority
Common LLC Issues
Watch for these scenarios that require additional scrutiny:
- Multiple managers or managing members with shared authority
- Nested entities where the manager or member is itself an LLC or corporation
- Operating Agreements that restrict the manager’s borrowing authority
- Discrepancies between the Operating Agreement and state filings
When any of these situations arise, the fix is often straightforward: an amendment to the Operating Agreement or a member resolution authorizing the specific transaction. However, consulting experienced legal counsel is advisable when the path forward is not immediately clear.
Corporations
Corporate borrowers typically involve more documentation and a more layered authority structure than LLCs. Understanding the corporate hierarchy is essential to identifying the proper signatories.
The Corporate Authority Chain
Authority in a corporation flows downward through three levels:
1. Shareholders elect the directors 2. Directors appoint the officers and set corporate policy 3. Officers handle day-to-day operations and execute documents
The standard practice is to have the President and Secretary sign loan documents on behalf of a corporate borrower. The President may also hold the title of CEO, but the official designation in the bylaws typically remains “President.”
Required Corporate Documentation
Collect and review the following:
- Articles of Incorporation: Confirm the entity’s legal name and active status
- Bylaws: Identify the officers, their roles, and the scope of their authority
- Board resolutions or meeting minutes: Verify that the directors have elected the officers who are signing and have authorized the specific transaction
Verifying the Authority Chain
Because corporate authority flows through a hierarchy, you must confirm that each link in the chain is properly documented. Specifically:
- Shareholders elected the current directors (or directors were properly appointed)
- Directors appointed the officers who will sign
- Directors (or shareholders, depending on the bylaws) authorized the corporation to borrow money and encumber property
If documentation gaps exist, a corporate resolution can often fill the gap by formally authorizing the transaction and confirming the signing officers’ authority. Given the complexity of corporate governance, engaging an attorney with entity experience is strongly recommended.
Trusts
Trust borrowers can be among the most complex entities to evaluate for signature authority. The terms of every trust are unique, and amendments or changes in circumstances can significantly alter the analysis.
Identifying the Proper Signatory
The trustee is generally the party with authority to sign on behalf of a trust. However, several complications can arise:
- Multiple trustees: The trust agreement must be reviewed to determine whether one trustee can act alone or whether a majority or all trustees must sign
- Successor trustees: If the original trustee has resigned, become incapacitated, or passed away, identify who has assumed the trustee role
- Limited trustee powers: Some trust agreements restrict the trustee’s ability to borrow money or encumber trust property
Critical Considerations
Unlike LLCs and corporations, trusts have no state filings to verify against. The trust agreement and its amendments are your sole source of authority information. Review these documents with particular attention to:
- The identity and powers of the current trustee
- Any restrictions on borrowing or encumbering trust assets
- Provisions addressing the death or incapacity of a trustor or trustee
- Whether the trust has split into sub-trusts following the death of a party
The death of a party to a trust can trigger significant changes, ranging from a simple succession to a complete distribution of trust assets that effectively dissolves the trust. If a trust involves the death of any party, legal counsel should review the documents before proceeding.
Limited Liability Partnerships (LLPs)
LLPs tend to have the least documentation among common entity types, but the signature authority analysis can still be straightforward.
Typical Authority Structure
LLPs are generally managed by their partners. The relevant documents include:
- Partnership agreement: If one exists, it should identify the managing partner and define the scope of their authority
- Secretary of state filings: The formation filing may be the only available documentation in some cases
When Documentation Is Limited
If the LLP lacks a partnership agreement or the agreement does not address signing authority, state default provisions typically govern. Under most state laws, any partner can bind the partnership in the ordinary course of business. The safest approach for lenders when authority is unclear is to require all partners to sign the loan documents.
As with all entity types, verify the LLP’s active status with the secretary of state and obtain a certificate of good standing when practical.
Best Practices for Lenders
Regardless of entity type, follow these practices to protect your investment:
1. Request all governing documents early in the loan process to allow adequate review time 2. Compare state filings against internal governance documents to identify discrepancies 3. Verify active status with the secretary of state before closing 4. Document any authority gaps and address them with resolutions or amendments before closing 5. Consult legal counsel whenever the authority analysis involves complexity, ambiguity, or nested entities
The transactional team at Geraci LLP regularly advises private lenders on entity review, loan documentation, and signature authority issues. If you have questions about a specific transaction or want to ensure your documentation processes are sound, contact us today at (949) 403-3488 or visit us at 90 Discovery, Irvine, CA 92618.
