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July 2007

Form Your Company First and Then Buy the Property, or Risk Not Owning the Property

Form Your Company First and Then Buy the Property, or Risk Not Owning the Property.

The Court of Appeals recently clarified that a limited liability company attempting to purchase real property before the company had filed its articles of organization did not exist and therefore never came into title on the property in question--despite a recorded quit claim deed purporting to convey title to the company.[1] Although Minnesota once followed the de facto corporation doctrine, the court held that doctrine has been abolished.[2] The court reasoned that the process for incorporating is so simple that no one could ever make a colorable attempt to incorporate and fail.[3] The same rationale applies whether the court is dealing with an alleged corporation or an alleged limited liability company. The court further held that under Minnesota law "deeds cannot be delivered to nonexistent entities."[4] The court held out hope that the corporation-by-estoppel doctrine might nonetheless provide some relief, but given the unique circumstances of the case, which included fraud, declined to provide the requested relief.

While certain limited exceptions exist, Stone v. Jetmar Properties, LLC serves as a reminder that in order to gain the advantages of conducting business through a corporate entity, the entity must be formally filed and established with the state before business operations begin. Putting the cart-before-the-horse only causes difficulties and can deprive parties of the benefits from business transactions that otherwise could be quite lucrative.

[1] Stone v. Jetmar Properties, LLC, A06-851 (Minn. Ct. App., June 12, 2007).

[2] Id.

[3] Id.

[4] Id.


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